How can a preapproval change?

When someone becomes “preapproved” for a mortgage, it boils down to they qualify for a certain mortgage payment based on their income and debts (DTI aka debt to income ratio).  A home buyer qualifies for the loan amount of the new mortgage and their funds available for down payment and closing cost determine the sales price.

Because mortgage rates are not locked when the home buyer is not yet in contract, the preapproval is subject to change and is only valid if the the information relied on (the application and supporting documents) have not changed. For example, if a home buyer changes employment or buys a new car without consulting their mortgage professional, the preapproval letter may be void.

There are some things that may impact a loan preapproval that are not directly in the home buyer’s control such as the amount of property taxes, home owners insurance and/or home owners association dues.  When I prepare a preapproval letter for my clients, I include the maximum total mortgage payment they are qualified for.

Another variable is, of course, mortgage interest rates. If a borrower is approved at today’s super low rates and makes an offer on a home a month from now and rates are higher, they may not qualify if their debt to income ratios are “pushed” to the limit.

It’s also possible to have loan programs and underwriting guidelines change. Private mortgage insurance fees may adjust as well as the mortgage insurance or funding fees for FHA, VA or USDA mortgages. I’ve seen FHA mortgage insurance premiums adjust high enough to disqualify or reduce the buying power of homebuyers a couple times over this last year!

I strongly encourage home buyers to check in with their mortgage professional before making an offer on a specific home so that everything can be reviewed and the preapproval letter can be updated.  If rates have gone up from the time of the original preapproval, it’s possible you may need to request the seller pay for closing or discount points to bring your rate back down.

When I’m working with a home buyer, it’s not unusual for me to prepare several preapproval letters during their search for their next home.

I have been helping home buyers with their mortgage needs since 2000 at family owned and operated, Mortgage Master Service Corporation. If you’re buying a home in Seattle, Woodinville, Renton or anywhere in Washington, I’m happy to help you!

How co-signing impacts qualifying for a mortgage

As a Licensed Mortgage Originator, I often see credit reports where the borrower has cosigned on a debt for a family member or friend.  You may be a parent co-signing on your child’s student loans to help them get a better rate, helping your brother buy a car by co-signing the lease or auto loan or perhaps co-signed on a family members mortgage so they can buy a home. They’re going to be responsible for the debt and making the payments and you’re helping them out. Often times, folks don’t realize how this good deed may impact them qualifying for a mortgage down the road.

If the debt you have co-signed, is not paid on time, it will impact your credit as if YOU are the one not making the payments. Depending on how recent and how severe the late payments were, this may possibly rule out any chance of you qualifying for a mortgage. Co-signing is a risk. The friend or family member you’ve helped out has no way of knowing in the future what their employment or health situation may be. Worse case scenario, you may find yourself liable for that debt.

If the debt you’ve co-signed is paid on time, the impact may not be as dramatic for qualifying for a mortgage as long as a few requirements can be met:

  • co-signed debt needs to have been made on time for the last 12 months; and
  • the party you co-signed the debt for needs to provide 12 months cancelled checks to document they have personally made the payments.

What if your sister has been giving you cash every month for the debt you co-signed? That debt will be factored into your debt-to-income ratio as your own for qualifying for your new mortgage. If there is not a significant track record (such as 12 months) showing the debt has been paid on time, it will most likely be factored as your debt for qualifying purposes.

If you are considering buying or refinancing a home and you have co-signed for a debt, you may want to:

  • see if your friend or family member can refinance the debt into their name, removing yours from the obligation; or
  • have your friend or family member start making the payments for their debt on their own with a check. Keep copies of the copied checks as you will need to document that the last 12 months of the debt was paid for by them and not by you.

It’s important to meet with a mortgage professional well in advance if you’re considering buying a home. If you’re buying or refinancing a home anywhere in Washington State, I’m happy to help you. 

How Much Home Can I Afford?

This is a common question from first time home buyers.  When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:

  • What type of monthly mortgage payment would you be comfortable making?
  • How much money are you planning on using for a down payment and closing costs.

To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.

For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase.  She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000. 

NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.

Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000.  This is based on a 30 year fixed rate of 4.625%* (apr 4.790).

A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.

The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.

FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000.  This is based on a rate of 4.875% (apr 5.400).

If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.

One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable.  Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher.  If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage.   Once inflation happens, mortgage rates will be much higher.

If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.  

*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher.  Rates can and do change often.  Follow me on Twitter to see live rate quotes.

For your personal rate quote on a home located anywhere in Washington, click here.

Debt to Income Ratios (aka DTI)

This is a follow up to the email I received asking several excellent questions.  I addressed what is required for a full doc loan in my previous post.   Now it’s time to answer Question #2:

  1. What is the debt to income ratio that most lenders are using for loans of this size?
  2. What is the typical interest rate differential for a loan of this size compared to the jumbo rates that you quote on Rain City Guide?”

Let’s begin by addressing what a debt to income ratio is.  It’s pretty much like it sounds.  It’s factoring in your monthly payments plus the proposed mortgage payment (PITI = principal, interest, taxes and insurance) and home owners dues, if any.   Your monthly gross income that is used for qualifying is divided into the monthly debt which produces your DTI (debt to income ratio). 

Borrowers have a front DTI and a back DTI.  It may look something like 28/38.  The front ratio is the proposed PITI (total monthly payment) divided by your gross monthly income.  The back DTI is really the most important and is essentially the bottom line.  It’s factoring in your total monthly debt plus your proposed new PITI (new mortgage payment) divided by your gross monthly income.

For simplicity sake, let’s assume that you have a minimum of two years employment and are paid a salary of $60,000 before the government takes their portion, insurance, 401k, etc.  $60,000 is the figure that we will use for your gross annual income/12 = your gross monthly income.  Your gross monthly income is $5,000.

For our example, let’s say you have the following:

Note:  Installment debts with a term of less than 10 months remaining may not be calculated in your DTI ratio.

We have a sub-total of $500 for monthly debts (300+150+50).

The debts are 10% of this persons gross monthly income.   If the allowed total DTI (as referred to as the back ratio) is 45%; then the most this borrower could have for a mortgage payment is 35% of their gross monthly payment (45 allowed – 10% of their current obligations = 35%); they would qualify for a PITI of $1750 (remember, this is including principal, interest, taxes, insurance and any home owner association dues).

Different programs will allow for different DTI ratios.   And (at this present time, although this could easily change in our current mortgage climate) automated underwriting (AUS) dictates a majority of what is allowed for a DTI ratio based on the other strengths of the borrower (down payment, credit, assets, employment, etc).  For example, the less money you put down towards the property, the lower your DTI will be.

Here are some basic DTI ratio guidelines:

  • VA Loans:  41%
  • FHA Loans: 43-45%
  • Conforming 45% plus (depending on the AUS response).
  • Non-Conforming 45%
  • Second Mortgages 45%

More important than what mortgage guidelines will allow you to have is what is comfortable for you and your household.  Just because you qualify for a higher mortgage payment does not mean that you must have it.   Consider paying yourself first with a monthly allotment going towards funding your retirement or child’s 529 for college tuition.  Leave yourself some wiggle room because life happens when you least expect it.

That New Car Will Cost You

Mpj043319200001If you’re considering buying a home anytime in the near future, please think twice before purchasing your next car. I’ve had a couple different scenarios lately where the car payment has really impacted the home buyers.  Don’t get me wrong, I love cars.  Old and new alike.   Here’s how it impacts your home purchasing power (based on a 6% mortgage interest rate amortized for 30 years):

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