Before you Buy the Car, Buy the House!

If you’re planning to buy a new home this year, this is NOT the time to buy a new car, unless you can pay cash, of course.  While the mortgage industry has tightened up considerably since the recent recession, it appears the auto financing industry still subscribes to the fog-a-mirror standard in lending, that is, if you can fog a mirror, you qualify for a car loan.  As a result, it is too easy for would-be homeowners to buy a new car while they may be house hunting.   

Car paymentsvillage-house-800px often represent one of the largest liabilities of a borrower.   The new monthly payment significantly increases their debt-to-income ratio (DTI).  DTI is an important factor in qualifying a borrower for a loan.  If DTI is excessive, it can disqualify a borrower.

There are two types of DTI, the non-mortgage liabilities, referred to as front-end DTI, and total liabilities (non-mortgage obligations plus housing expense), referred to as back-end DTI.  Front-end DTI consists of liabilities such as credit cards and lines of credit (revolving accounts) and installment accounts, such as car loans.  Housing expense includes the principal and interest portion of the mortgage payment, in addition to real estate taxes, hazard insurance, mortgage insurance, and HOA dues. 

While many loan products consider only the back-end DTI, some also have maximums on the front-end.  Exceeding either the front-end or back-end DTI could disqualify the borrower for the loan amount they need.  Although there are exceptions, 43% as a maximum total DTI is a good rule-of-thumb.  So, let me give you an example of how adding a monthly car payment affects your borrowing power:

Assume a borrower has monthly gross income of $3,000.  Her total debt, including the proposed mortgage, should not exceed $1,290 ($3,000 x .43).  Her non-mortgage debt amounts to $350, consisting of a car payment of $275, and balance of $75 in credit card payments.  That means, she would qualify for a total mortgage payment of $940 ($1,290 – $350). 

That $940 must include principal and interest (PI), real estate taxes, and home insurance, plus any mortgage insurance (MI) and HOA dues.  If we assume no MI or HOA fees and estimated real estate taxes and home insurance are $150/month, that means the mortgage PI payment cannot exceed $790 ($940 – $150).   A monthly payment of $790 on a 30-year fixed-rate conventional loan at 4.5% interest results in a loan amount of $155,915, for which she would qualify.   

Now, let’s assume the same as the latter case, but this borrower does not have a car payment of $275.  In this case, her PI payment could be as much as $1,065 ($1090 – $75 – $150).  And that qualifies her for a loan amount of $210,190.  That is a difference $54,280 in the amount of the loan for which she would qualify.   That $275 car payment reduces her home buying power by over $50,000!  And the kicker?  In all likelihood,  she would still be able to buy that new car worth about $15,000 after she bought her new home.

The moral of the story—buy the house before the car!!

Seven Things Your Agent Should Know that May Affect Your Mortgage Loan Approval

While many experienced real estate agents have a general understanding of the loan approval process, there are a few important factors that frequently get overlooked, which may cause a purchase to be delayed or denied.

New regulation, updated disclosures, appraisal guidelines, mortgage rate pricing premiums, credit score, secondary market or investor overlays, rescission deadlines, property type, occupancy type, HOA insurance requirements, title and property flipping rules are just a few of the ongoing changes that can have a serious impact on a borrower’s home loan options and qualifications.

With today’s volatile lending environment, it is crucial for home buyers to get a full loan approval specifying all conditions that pertain to each individual home buyer’s scenario before spending any time looking at new homes with an agent.  Most experienced buyer’s agents will require such conditional pre-approval before showing a buyer properties, as will a listing agent before presenting an offer to the seller.

Below are a few of the most important things you and your agent should keep in mind while showing you new properties:

Caution – Agents Beware:

1.  Property Type –

High-Rise, Condo, Town House, Single Family Residence, Dome Home or Shoe House… all have specific lending guidelines that can influence down payment, credit score and mortgage insurance requirements.

2.  Residence Type

Need to sell one home before moving into another?  Is a property considered a second home if it’s in the same city?  If you are buying a home for your children to live in, it is still considered an investment property?

These are just a few of several possible residence-related questions that need to be addressed by your agent and loan officer at the initial loan application.

3.  Rates / Locks

Mortgage Rates are typically locked for 25 – 40 day period.  A fee, and sometimes a substantial one, will be required to extend the lock period.  Thus, one of the only ways to get a new rate is to switch mortgage lenders, which causes an undue delay.  Rates also have certain adjustments for property type, occupancy type, credit score, down payment, DTI (debt-to-income), all of which could have a big impact on monthly payments and therefore approvals.

Even 0.25% increase in rate for some borrowers could literally mean the difference between an approval or denial.

4.  Headline News / Employment

Underwriters watch the news as well.  Borrowers who work in a volatile industry during hard economic times may have to jump through a few extra hoops to prove that their employment and income is secure.

Job changes, gaps in employment, seasonal employment, self-employment, second jobs, property location and comparable sales or lack thereof relative to the subject property, are other things to consider that may cause a hiccup in the approval process.

5.  Title / Property Flip –

A Flip is considered a property that has been purchased by an investor and quickly sold to a new buyer within a 30-90 day period.  Generally, the investor seller will do a little rehab work, fresh paint, landscaping…. and try to re-sell the property for a significant profit margin.

While it seems like a perfectly fair transaction, many lenders have strict guidelines in place that prevent borrowers from obtaining financing on properties that have a previous owner with less than 90 days of documented ownership.

These rules change frequently, and are specific to particular property types.  So, make sure your agent is aware of all the parameters associated with your pre-approval letter.

6.  Homeowner’s Association Insurance

Some lenders require Condos and Town House communities to have sufficient insurance and reserves coverage pertaining to specific ratios on units that are owner occupied vs rented.

It may also take a few weeks and cost up to $300 to receive an HOA Certification.  So, make sure your Due-Diligence period is set accordingly in the purchase contract.

7.  Appraisal Ordering Procedures

Appraisal ordering guidelines are changing quite frequently as regulators implement many new consumer protection laws created to prevent future foreclosure epidemics.

Unfortunately, some of the new appraisal regulations have proven to make the ordering and oversight of the appraisal process less efficient and more expensive, delaying loan approval.  It is important for your agent to  check with your lender for the estimated time for delivery of an appraisal for the house you want to buy before setting contract deadlines for appraisal delivery and approval.

VA, FHA and Conventional loan programs all have separate appraisal ordering policies and appraisal forms, for which appraisers need to be certified.  An initial appraisal may result in certain things that have to be repaired or addressed before finalizing the appraisal, which requires a second inspection by the appraiser.   Make sure your agent is aware of which loan you’re approved for so they can cover any delays in the purchase contract.

For example, if an appraisal takes three weeks and the average time for an approval is two weeks, then it probably isn’t smart to write a purchase contract with a four week close of escrow.

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