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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Do’s and Do Not’s of the Mortgage Process [Video]

In our last Seattle Real Estate Chat, Jim Reppond and I discuss what home buyers need to while in the mortgage process or considering buying a home.

Tune if for our next Seattle Real Estate Chat via our live Google Hangout on Tuesday, September 17, 2013 at 10:00 am Seattle time.
You can follow Seattle Real Estate Chat on Twitter at @SeattleREchat or #SeattleREchat

The ABC’s of Preparing to Buy Your First Home

Borrowers getting ready to buy their first home are often surprised…for different reasons. I find that some are surprised to learn that they do qualify for a home in their price range and some are disappointed to learn that they have a little work to do before they can buy a home. Getting preapproved with a mortgage professional helps take some of the “surprise” out of the process.

Here are some of the bare minimum “basics” that we look for qualifying a home buyer.

Assets: If you have a 401k, retirement or stock accounts that you’re not planning on using for down payment, often times these accounts are great to have on your application to show that you have “reserves” after savings. Additional assets add financial strength to your application.

Bank statements: Be prepared to provide all pages of your bank statements (even if the last page is blank) and to document any large deposits that are on your statements. Lenders want to know where your funds came from.

Credit history: It’s ideal to have three to four lines of credit in good standing for two years or more. Your credit lines should be used once a month with less than 30% of the credit line in use for revolving debt. New credit lowers scores and old established credit that is paid on time raises credit scores.

Credit scores: Most lenders that we work with currently have a minimum credit score requirement of 640. Lenders use the lowest “middle score” of all borrowers applying for the loan.

Debt-to-income ratios: Lenders like to see your back end ratio no higher than 45%. This is calculated by dividing all of your monthly debts plus the proposed total mortgage insurance payment by your gross monthly income.

Down payment: Currently (as of the publishing of this post) FHA allows a 3.5% minimum down payment; Fannie Mae Homepath allows for 3% down; VA and USDA are still zero down payment. Conforming loans will allow for a minimum down payment of 3% with private mortgage insurance. Some programs will allow gifts from family for your down payment and/or closing cost. These funds do need to be documented and “paper-trailed” with the donor providing a written letter stating no repayment is expected.

Employment: Lenders need to see a two year job history in the same line of work. Good news if you went to school for your field, this may factor into your job history with supporting documentation (transcripts, diploma, etc.).  Gaps in employment over the past 24 months will need to be explained and second jobs are often not be factored if they have not been held for 24 months or more. 

Income: How you are paid (your pay structure) will impact what lenders can use for qualifying. Those paid an annual salary are the easiest to calculate. Borrowers who are paid hourly with hours varying will probably find their income averaged over the last two years. Self employed or commissioned borrowers will also find their net income averaged over the last two years. If a borrower receives annual bonuses, they will probably need to be received by that employer over the last two years and will be averaged.

You may have strong employment or assets and your credit is “shallow” causing you to have a lower credit score. Or perhaps you need to work on saving up for a down payment and delay buying that new car. This is why it’s important to meet with a mortgage professional as soon as possible. I often help clients who aren’t planning to buy a home for six months or even longer – they want to be prepared to put their best foot forward.

If you’re considering buying your first home, I’m happy to help you! I have been helping first time home buyers at Mortgage Master Service Corporation since April 2000 buy homes in Renton, West Seattle, Redmond, Bainbridge Island and all over Washington state, where I’m licensed to originate mortgages. If you would like me to provide you with a rate quote, click here.

How soon can you buy a home after a Short Sale?

A Short Sale, also referred to as a pre-foreclosure, is when a home owner sells their home for a lower amount than what is owed on the property with mortgages (deeds of trust). In order for a short sale to take place, the lien holders on the property agree to being “shorted” on the amount owed to them for the deed of trust or mortgage. Short sales became more common over the past few years following the mortgage crisis. Washington state home owners hoping to avoid a foreclosure, opted to try the short sale route.

A question I am being asked more and more is: “Who soon can we buy our next home after having a short sale?”  The answer depends on a few factors. 

FHA has a three year wait period for borrowers who were in default at the time of the short sale (or pre-foreclosure sale). If the borrower was not behind on mortgage payments and installment debts at the time of the short sale and for 12 months preceeding the short sale, there may be no waiting period.

FHA tends to be a popular option as the minimum down payment is currently 3.5% and FHA is more forgiving with credit than Fannie or Freddie.

Fannie Mae has various wait periods depending on loan to value:

  • 2 years with a minimum 20% down payment
  • 4 years with a  down payment of at least 10%
  • 7 years with standard down payment guidelines (varies depending on credit scores)

Freddie Mac has a 4 year waiting period.

Fannie Mae and Freddie Mac may consider “extenuating circumstances” which would allow a buyer to be considered eligible at 2 years. 

VA currently does not offer guidance. Most underwriters may treat it as a foreclosure, which has a 2 year waiting period. Like FHA, if the borrower was on time with mortgage payments and other debts at the time of the sale and for 12 months proceeding, there may be no wait period.

USDA has a 3 year wait period.

NOTE: banks and lenders may have their own time frames that are longer than what is referenced than above. For example, many of the lenders we work with are not yet accepting buyers who have had a short sale two years ago. However, we do work with lenders who follow Fannie Mae’s guidelines.

The date of the short sale is based off of the date closed as disclosed on the final HUD-1 Settlement Statement from the closing of that sale. Potential home buyers should until three years have passed from that date before entering a purchase and sales agreement or a bona fide loan application.

Underwriters will scrutinize a borrowers credit history following a “derogatory” event, such as a short sale. Late payments on a credit report following a short sale and low credit scores will impact a borrowers odds of becoming “approved” with a lender. Lenders will want to see that the credit has been re-established with three to four credit lines in good standing with a two year history.

If you’ve had a short sale in the past few years and are considering buying your next home. I recommend contacting a local mortgage professional to review your credit report as soon as possible. There could be items disclosed on your credit report that you may want to deal with or perhaps you need to work on re-establishing credit. Starting early will help make sure that once your waiting period is over, you’re in a better position to become preapproved to buy your next home.

Please keep in mind that the information in this post are based on guidelines as of the date this article was published. Fannie Mae, Freddie Mac and FHA guidelines change often as do lender’s underwriting overlays.

If you are considering buying a home located any where in Washington state, I’m happy to help you. Click here if you would like me to provide you with a mortgage rate quote.

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!

Should I refinance my car before buying a home?

Short answer: probably not. 

Why? The refinance of the car will impact your credit score as if you have purchased a new car. Credit scoring favors established older debt over new debt. Once you have that new loan, even if the payment is lower and interest rate is lower, the established old debt is paid off and eventually loses the positive impact to your credit scores.

Your new refinanced loan will also impact your credit as it will be considered 100% financed of the new loan amount. You don’t receive any boost to your credit for if your car is valued at $20,000 and new your loan amount is $10,000. Credit scores improve once your debt is at 50% of the debt amount and an additional improvement to credit scoring once the debt reaches 30% of the new loan amount.

If you’re refinancing for purposes of qualifying, do check with your licensed mortgage originator first. It’s possible that if you have 10 payments or less remaining, the car payment may not need to be factored into your debt-to-income ratios.

If you can qualify with the current car payment and are considering buying a home, you may be better off delaying the refinance until after your new home purchase has closed.

Do check with your mortgage professional before taking my advice as your financial scenario may call for different actions.

If you are interested in refinancing your home located anywhere in Washington state, I’m happy to help you! 

How Disputes on Your Credit Report May Impact Obtaining a Mortgage

Reviewing your credit report and disputing information that is being wrongly reported about you is your right under the Fair Credit Reporting Act. Obtaining your credit report and making sure that it’s accurate is financially responsible and your duty to protect your credit. And the Federal Trade Commission provides you tips on how to dispute items on your credit report.  Did you know that lenders may not accept a credit report where it indicates there is a disputed item? 

It doesn’t matter if you have perfect credit or a low loan to value, Fannie Mae and Freddie Mac guidelines are forcing lenders to provide a credit report without disputes. I’ve recently had transactions where the borrower doesn’t recall disputing anything and the debtor doesn’t have record of the dispute yet this “dispute” needs to be removed from the credit report or the lender/bank will not accept the loan. This is one reason why anyone considering a mortgage for refinancing or purchasing a home should obtain a copy of their credit report very early on. It can take a great deal of time to have disputes removed if a borrower does this on their own.  

The other option is for a “rapid rescore” which whittles down the process to days. The irony in this is that rapid rescore is not free and it is the credit bureaus and reporting agencies who profit when this service is done – I really have a problem with this when my client and the creditor state there are no disputes of record yet somebody has to pay to have these items quickly removed to accommodate a closing date. Often times, the lender absorbs the cost of the rapid rescore however this eventually drives up the overall cost of doing business and eventually, the consumer pays.

In my opinion, this is something that Fannie Mae and Freddie Mac need to change pronto. Well qualified borrowers should not have to go through these hoops or have their mortgage denied. A simple written letter of explanation signed by the borrowers and possibly the creditor *should* suffice instead of requiring the credit report not show any sign of a dispute. Apparently back in 2009, Fannie was reviewing their policy however, I’m not aware of any significant changes.  

If our government wants to help the housing industry and our economy, this practice needs to stop now.