How Much Income and Down Payment do You *Really* Need to Buy a Home in Seattle?

The local media is picking up on an article written by HSH.com that could depress Seattle area home buyers regarding how much income is needed to buy a home in various metropolitan cities. The report relies on data provided by NAR and… ready for this… claims that you need to have an income of $73,851.06 in order to buy a home in the Emerald City.

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How much income do you need to buy a home in Seattle?

Young Couple With New HouseAn article (hat tip to Julie Hall) caught my eye in my Facebook stream regarding how much income a household needs in order to be able to buy a home in various metropolitan cities. According to New York Smash, if you’re going to buy a home in Seattle, you’re going to need an annual income of at least $63,145.41.  There’s more to just how much income one makes when it comes to determining “how much” home someone can qualify for. The article does not mention how much down payment a person will need. Let’s run some figures to see just how much income one needs to buy a home in Seattle.

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Quick mortgage tip for self-employed and commissioned paid individuals

Earlier today I was having a conversation with a self-employed woman who just filed her 2011 taxes prior to the October extension deadline. She’s eager to buy a home in the greater Seattle area and her 2012 income shows a continued trend higher. She’s curious as to how quickly she can use her 2012 income for qualifying.

Typically for a self-employed or commissioned paid borrower,lenders want to see the last two years complete tax returns and will basically average the last two years net income assuming their income is steady or improving.

I advised her to file her 2012 taxes as soon as possible if she’s planning on using her 2012 income for qualifying. Not only will the 2012 tax returns need to be filed before a lender can use the income, most lenders will require a the tax returns to also be verified by the IRS.

Lenders use Form 4506 to obtain a tax transcript for several reasons, in addition to verifying taxes have been filed. The tax transcripts are a summary of the tax returns which reveal items such as income and deductions for a specific year. W2 salaried employees may be caught off guard if they claim a lot of work related deductions as an underwriter will most likely deduct those “expenses” from their gross income. Any conflicts between the what has been provided to the lender and what the IRS is reported must be addressed. 

During busier times for the IRS, such as April when income tax is due, it may take several weeks to obtain tax transcripts for that year. Even if the earliest my Seattle home buyer can file is at the beginning of February, she’ll at least have a beat the April rush.

So if you’re planning on buying a home in the beginning of the year and you need your 2012 income to qualify, file your taxes early. Chances are, your lender may not be able to close without being able to obtain your transcripts. 

If you’re considering buying or refinancing your home located in Washington state, I’m happy to help you!

Changing jobs during the mortgage process

Sometimes an employment opportunity may become available while you’re in the process of buying a home or refinancing. Lenders are looking at a borrowers employment and income stability so depending on the type of field you’re in, a change of employment may or may not impact your loan approval. 

As long as you’re staying in the same line of work and if you have an annual salary, it probably won’t be an issue. The lender will probably require at least one pay stub (possibly more to document your income) from your new employer as well as a verification of income. If you have an employment letter or contract from the new employer, this can be helpful to provide the lender as well. With new employment, signing bonuses are not factored into the annual income however, they may be used towards the down payment or closing cost as your seasoned funds. 

If the new employment is not related to the same line of work, this may cause an issue with the loan approval as lenders are looking for two years of employment in the same or related field. If the income structure has changed, this may cause an issue as well unless it is to an annual salary. The underwriter may require a written letter explaining your employment history.

Moving from annual salaried income to a potentially flexible type of income may derail your loan approval. Self-employed, hourly income, bonus or commissioned income requires a two year history before a lender can use it for qualifying purposes.

Sometimes a promotion can impact loan approval if pay structure changes. For example, if a borrower was paid an annual salary and then receives a promotion which reduces the annual salary in exchange for a higher bonus or commission structure, the bonus or commission income cannot be used unless the borrower has been receiving that type of income for a minimum of two years. In this case, the new lower base salary (the “guaranteed” portion of the income) can be used, but not the “flexible” bonus type income. 

If you are considering a job change during the mortgage process, it’s crucial to inform your mortgage originator as soon as possible. Your loan application needs to be updated and the lender will be doing a verification of employment prior to funding your mortgage.  

If you’re considering buying or refinancing a home anywhere in Washington, I’m happy to help you!

FHA Streamlined Refinance: Credit vs Non-Credit Qualifying

With an FHA streamlined refi, most folks have the misconception due to the program name “streamlined” that the refinances are close very quickly and are a slam dunk with little to no paperwork. While they do close quicker than a typical refinance since more often than not, you’re not waiting on an appraisal, if you’re going for a lower cost or better rate, you’re probably opting for a “credit qualifying” FHA streamlined refi. What’s the difference?

FHA streamlined credit qualifying basically means that the borrower is providing income and asset documents, just like a regular refinance. By providing documentation that shows they actually qualify for the new mortgage, lenders provide preferred pricing. Since it is a “manual” underwrite (a real human is underwriting the loan and not a computer program) the debt to income ratio is limited to 45%.

FHA streamlined non-credit qualifying is when income documentation is not provided and not stated on the loan application. The borrower’s income is not a consideration. Because of the higher risk, the rate or pricing is often slightly higher.

Right now (July 25, 2012 at 11:00 am) I’m working on a quote for an FHA streamlined refinance for a home located in Seattle. The rates quoted below are based on mid credit scores of 680 –  720 with no appraisal and the base loan amount is $289,000.

FHA credit qualifying 30 year fixed: 3.375% (apr 4.548) priced with just over 1 point in rebate credit which will cover closing cost and some of the prepaids/reserves. Principal and interest payment is $1300.01.

FHA non-credit qualifying 30 year fixed: 3.750% (apr 4.934) priced just under 1 point (about 0.25% difference in fee) which covers closing cost and some of the prepaids/reserves. Principal and interest payment is $1361.82.

NOTE: for a current rate quote on a home located anywhere in Washington state, based on today’s pricing and your scenario, click here.

What type of supporting documentation is required?  This is in additional to a complete loan application and credit report.

Non-credit qualifying:

  • Copy of your existing mortgage Note
  • Copy of your mortgage statement (we need to document a “Net Tangible Benefit”)
  • Bank statement (all pages) if funds are due at closing. Large deposits may be required to be documented.
  • Drivers license
  • Social security card
  • Payoff obtained from escrow company documenting that the current month’s mortgage payment has been made

Credit qualifying: all the above, plus…

  • last two years W2s
  • last two years tax returns (if self employed)
  • most recent paystubs documenting 30 days of income
  • most recent bank statements (all pages) documenting at least funds for closing. Large deposits may be required to be documented.

Additional documentation may be required depending on your personal scenario.

Whether you opt for non-credit qualifying or credit qualifying is your choice and depends on your financial scenario. When rates and pricing are the same for both scenarios, most would opt for “non-credit” qualifying. Since recent changes with how HUD prices FHA mortgage insurance for some loans, there has been major changes with which banks are offering FHA streamlines and how they’re pricing them.

If I can help you refinance your FHA loan on your home located anywhere in Washington state, please contact me.

What Do You Need for a Preapproval?

preapprovalIf you’re considering buying a home, many real estate agents and/or sellers will require a preapproval letter. A preapproval letter is different than being “prequalified”. Being prequalifed means that you have provided verbal information to a mortgage originator to get an idea of what you qualify for. Being preapproved means that you are providing documentation that supports the information you have provided. Income, employment, assets and credit are verified for a preapproval.

Some preapproval letters aren’t worth the paper they’re written on. Especially if the mortgage originator you’re working with does not require supporting documentation before preparing the letter. If you have not provided supporting documentation (listed below) to your mortgage originator – you’re probably just prequalified and not actually preapproved.

Here is a list of documents you may be required to provide in order to obtain a preapproval:

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5 Ways to Derail Your Loan Approval

MonorailYou’re getting ready to buy a home or refinance your home with your closing day around the corner when your mortgage originator contacts you to let you know there may be a problem.  Some issues may not revealed until days or sometimes weeks into a transaction.  Anytime documentation is provided to the mortgage company, it has the potential to raise more questions or require more documentation to satisfy underwriting guidelines.   Here are five situations to be aware of that can cause headaches during the loan process.

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Paying Alimony? You May Want to Consider an FHA Insured Mortgage

Most mortgage originators know that if you have less than 10 payments remaining with alimony or child support payments, it may not have to be factored into your qualifying ratios (debt to income) as long as the payment doesn't impact your ability to pay the mortgage following closing.  A borrower needs to be well qualified with plenty of savings for an underwriter to support this guideline. 

But it's a little known nugget that lenders can choose to reduce alimony payments from the borrowers income instead of factoring it into the debt to income ratio utilizing an FHA insured loan.  Of course you would only do this if there is more than 10 alimony payments remaining.

"Since there are tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction from the borrower's gross income when calculating qualifying ratios, rather than treating it as a monthly obligation."

For example, Mr. John Doe has a great job earning $250,000 annually.  Due to his recent divorce, he has reduced savings and is now paying his ex-wife $3,500 per month in alimony.   He has about $1,200 in monthly debt plus his existing house payment of $3,200 per month, which he plans on selling after he settles into his new home.  If you factor in his alimony, this totals $7,900 of monthly obligations.  

He's hoping to use an FHA High Balance mortgage to buy a home in Seattle priced at $585,000 with 5% down payment (he likes that at 5%, vs. the minimum 3.5% down, he receives a slight reduction in the annual mortgage insurance).  

This morning's rate for this scenario is 4.375% (APR 5.001) which would create a total monthly mortgage payment of $3,645.00 (principal and interest 2,837.21, mortgage insurance of 299.83, and taxes and insurance of 577.96).

EDITORS NOTE: The above rate was quoted from July 2010 and is no longer valid. If you would like to have a current rate quote for FHA or any mortgage program for homes located in Washington, please click here.

John's monthly gross income is $20,833 (250,000/12).   His front end ratio is 17.5 (3645/20833) which is perfectly acceptable for qualifying with any mortgage scenario.   However, his back end ratio is 55.4 (7900+3645=11545/20833) if you treat his alimony as traditional debt as a conventional mortgage would.   Ideally, a back end ratio should be around 45, the limits can be pushed depending on the financial strength of the borrower and lender guidelines.

With FHA allowing alimony to be deducted from the gross income, the debt to income ratios are changed dramatically. 

$20,833 monthly gross income less the $3,500 alimony is $17,333. 

3645/17,333 creates a front end ratio (proposed mortgage payment divided by monthly gross income) of 21.03.

Monthly debt is reduced to $4,400 when the $3,500 alimony is not factored.  Add the proposed total monthly mortgage payment of $3,645 and the back end ratio is 46.41 (4,400+3,645=8,045/17,333).

Reducing the alimony from the gross income takes the debt to income ratio from 55.4 to 46.1 with an FHA insured mortgage.

If you need a mortgage for a home located in Washington state, please contact me.  I've been originating FHA, conventional and VA loans since April 2000 and Mortgage Master Service Corporation has been serving the Pacific Northwest for over 30 years!