[???] Looking into a mortgage loan ... what should I know?

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O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 7:23 PM
It's a tough spot not knowing what you don't know, so I figured I'd ask the people here with the life experience I lack.

My wife and I are looking to buy a very affordable home. It's small, but it needs very little work, which is why we're opting for it. Everything is new and energy efficient, so costs like replacing the windows, water heater, or furnace won't be an issue for awhile.

The house is being listed for $35,000. We went over with the realtor to check it out today and were very happy with it.

Now comes the fun part: We know very little about getting a loan. Here's what we do know: My wife has a pretty bad credit score, but where should I look to see if it's bad enough to keep her off a loan? Also, what should I count on needing to make in order to be approved for such a loan myself?

Are there good deals on loans at the moment? Fixed over variable interest a big issue? Are certain banks better than others? FHA is probably our only option, so how significantly does that affect the monthly payment? Other costs to watch for?

I quite literally know almost nothing about home buying because ... well ... I've never done it.

Any real estate savants on here that can offer some insight? Any home owners with any nuggets of wisdom? It's all appreciated.

Thanks!
Dec 14, 2012 7:23pm
W

WebFire

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14,779 posts
Dec 14, 2012 7:49 PM
FHA will add PMI, but with small loan amount, I don't think that's a big deal. How is your credit?
Dec 14, 2012 7:49pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 7:50 PM
WebFire;1343248 wrote:FHA will add PMI, but with small loan amount, I don't think that's a big deal. How is your credit?
Mine's in the 720-730 range.
Dec 14, 2012 7:50pm
W

WebFire

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14,779 posts
Dec 14, 2012 7:59 PM
I would just leave her off then, unless you need her income to get it done. Which I assume you don't.
Dec 14, 2012 7:59pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Dec 14, 2012 8:05 PM
Honestly, I would leave her off. Your credit score is pretty good and you will get approved. How much are you able to put down?

Also, what kind of debt payments do you have? Other loans, credit cards, etc??


You will need to be under 43% Debt to income ratio to get better loans. So unless you have a lot of debt, you were income would probably be fine. This isn't always true but you can kind of use the 2.5 x income rule and that is what you might get approved for.
Dec 14, 2012 8:05pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 8:59 PM
pmoney25;1343256 wrote:Honestly, I would leave her off. Your credit score is pretty good and you will get approved. How much are you able to put down?
Not much. Just about what is required for an FHA loan.
pmoney25;1343256 wrote:Also, what kind of debt payments do you have? Other loans, credit cards, etc??
Not much Credit Card debt at all, but I do have an installment agreement that accounts for about 12% each month. Other than that, it's the standard stuff. Car loans and school loans.

Any idea how to incorporate fluctuating income? My business's income spans a pretty wide range over the last three years. Because of that, I wasn't including it into this discussion, as I'd prefer to not budget any of it toward the house if possible.
pmoney25;1343256 wrote:You will need to be under 43% Debt to income ratio to get better loans. So unless you have a lot of debt, you were income would probably be fine. This isn't always true but you can kind of use the 2.5 x income rule and that is what you might get approved for.
With just my day job, I'm probably just over that ... 50% or so.

It's WAY under 2.5x my income. It's actually almost 1-to-1.
Dec 14, 2012 8:59pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Dec 14, 2012 9:11 PM
Is your wife's credit above 580 or do you know? If you are around 720 and your wife is in the 600's at least, you should be alright honestly for an fha loan.
Dec 14, 2012 9:11pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 9:11 PM
pmoney25;1343286 wrote:Is your wife's credit above 580 or do you know? If you are around 720 and your wife is in the 600's at least, you should be alright honestly for an fha loan.
She's near that. Maybe a little above.
Dec 14, 2012 9:11pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Dec 14, 2012 9:13 PM
O-Trap;1343288 wrote:She's near that. Maybe a little above.
Who makes more minus your business?
Dec 14, 2012 9:13pm
G

gut

Senior Member

15,058 posts
Dec 14, 2012 9:21 PM
O-Trap;1343249 wrote:Mine's in the 720-730 range.
That should work. Scrape-up the 20% down (+ closing costs, maybe another $1k for you?) and avoid PMI. Know what the a good rate is - shop around yourself you don't need a broker.

Next decide if you want to do a 30-yr fixed or a 5/1 ARM. I'm guessing this is a starter home and you probably won't be there over 5 years. Depends on the area, but I think a competitive rate on a 5/1 ARM should be @3.0%

Check out bankrate.com to see what looks competitive (you probably won't do quite that well). Then go get some rough estimates from local banks, credit unions and S&L's. For the amount you are looking at a few tenths probably won't be significant, but $50 a year is $50 a year.

Also, listed at $35k hopefully you or your realtor has a good idea of fair value. I'd maybe offer $32, which is actually pretty steep at 10%...33.5 is 5%. 34 should at least get it done, but it might be priced to sell quick (sounds like it might be).
Dec 14, 2012 9:21pm
G

gut

Senior Member

15,058 posts
Dec 14, 2012 9:24 PM
pmoney25;1343256 wrote: You will need to be under 43% Debt to income ratio to get better loans. So unless you have a lot of debt, you were income would probably be fine. This isn't always true but you can kind of use the 2.5 x income rule and that is what you might get approved for.
I'm not familiar with those numbers. The rule of thumb to me seems to be your debt service should be <25% of your gross. If he keeps the wife off the loan, then he doesn't get to include her income.

So if OTrap has 12% for student loans, he's looking at @13% of his gross for a monthly payment.
Dec 14, 2012 9:24pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Dec 14, 2012 9:49 PM
gut;1343295 wrote:I'm not familiar with those numbers. The rule of thumb to me seems to be your debt service should be <25% of your gross. If he keeps the wife off the loan, then he doesn't get to include her income.

So if OTrap has 12% for student loans, he's looking at @13% of his gross for a monthly payment.
31% for Payment vs income and 43% total debt vs income are the maximum numbers for FHA loans. Ideally you wouldn't want to be at those numbers. To be comfortable I would definitely say be under 25% but FHA will go up higher. It seems that he will need his wife's income included and therefore will need her credit. A lot of lenders will usually take the Higher Earners Credit score and base the loan decision off of that.

http://www.fha.com/fha_requirements_debt.cfm
Dec 14, 2012 9:49pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Dec 14, 2012 9:58 PM
O-Trap;1343280 wrote:Not much. Just about what is required for an FHA loan.



Not much Credit Card debt at all, but I do have an installment agreement that accounts for about 12% each month. Other than that, it's the standard stuff. Car loans and school loans.

Any idea how to incorporate fluctuating income? My business's income spans a pretty wide range over the last three years. Because of that, I wasn't including it into this discussion, as I'd prefer to not budget any of it toward the house if possible.



With just my day job, I'm probably just over that ... 50% or so.

It's WAY under 2.5x my income. It's actually almost 1-to-1.
As for you business. If you did include that, they will need at least 2 years of business tax returns and individual returns. As well as Profit and Loss statements. They would probably use an average but if it fluctuates too much, they may not accept it.
Dec 14, 2012 9:58pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 10:07 PM
pmoney25;1343340 wrote:As for you business. If you did include that, they will need at least 2 years of business tax returns and individual returns. As well as Profit and Loss statements. They would probably use an average but if it fluctuates too much, they may not accept it.
I ran it as a sole proprietor, so the business had no separate return. Is that a problem?
Dec 14, 2012 10:07pm
pmoney25's avatar

pmoney25

Senior Member

1,787 posts
Dec 14, 2012 10:18 PM
O-Trap;1343355 wrote:I ran it as a sole proprietor, so the business had no separate return. Is that a problem?
You file a schedule C Right? If so, they will use that. Will probably use your Net Profit(Line 31 I think).
Dec 14, 2012 10:18pm
S

Sonofanump

Dec 14, 2012 10:21 PM
Do you have $7000 down payment to avoid the PMI? For a $35,000 house can you swing a 15 year loan to get a lower rate?
Dec 14, 2012 10:21pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 11:06 PM
Sonofanump;1343369 wrote:Do you have $7000 down payment to avoid the PMI? For a $35,000 house can you swing a 15 year loan to get a lower rate?
We don't have $7K, no. Not sure if a 15-year is doable. Depends on what it would end up costing us. As it currently stands, we have a rent payment of around $770. We can afford to spend about that on the mortgage, the homeowners insurance, the PMI, and the taxes per month.
Dec 14, 2012 11:06pm
W

WebFire

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14,779 posts
Dec 14, 2012 11:18 PM
O-Trap;1343429 wrote:We don't have $7K, no. Not sure if a 15-year is doable. Depends on what it would end up costing us. As it currently stands, we have a rent payment of around $770. We can afford to spend about that on the mortgage, the homeowners insurance, the PMI, and the taxes per month.
You'll do that less than that monthly payment easily, on a 30 year mortgage.
Dec 14, 2012 11:18pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

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Dec 14, 2012 11:25 PM
WebFire;1343440 wrote:You'll do that less than that monthly payment easily, on a 30 year mortgage.
Even if we only put the 3+% down and have the PMI? If so, then I've just gotta get this thing approved.
Dec 14, 2012 11:25pm
W

WebFire

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Dec 14, 2012 11:29 PM
O-Trap;1343453 wrote:Even if we only put the 3+% down and have the PMI? If so, then I've just gotta get this thing approved.
I had an FHA on around $80k with a rate of like 4.9%, nothing down. My payment was around $635, and that included all escrow stuff.
Dec 14, 2012 11:29pm
W

WebFire

Go Bucks!

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Dec 14, 2012 11:32 PM
Quick mortgage calculator, using $35k at 5% for 30 years, show a payment of $187. That's without tax, insurance, etc, but that stuff won't be terrible. Hell even if it doubled you are way under $770.
Dec 14, 2012 11:32pm
O-Trap's avatar

O-Trap

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Dec 14, 2012 11:39 PM
WebFire;1343464 wrote:Quick mortgage calculator, using $35k at 5% for 30 years, show a payment of $187. That's without tax, insurance, etc, but that stuff won't be terrible. Hell even if it doubled you are way under $770.
That's kinda what I thought. Seems like something that low, when we're affording something so much higher now, would be a breeze to be approved for.

Shows what I know. :D
Dec 14, 2012 11:39pm
W

WebFire

Go Bucks!

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Dec 14, 2012 11:50 PM
O-Trap;1343475 wrote:That's kinda what I thought. Seems like something that low, when we're affording something so much higher now, would be a breeze to be approved for.

Shows what I know. :D
Yeah, but there is no risk for the bank when you rent. :D
Dec 14, 2012 11:50pm
O-Trap's avatar

O-Trap

Chief Shenanigans Officer

14,994 posts
Dec 14, 2012 11:55 PM
WebFire;1343491 wrote:Yeah, but there is no risk for the bank when you rent. :D
Sure, I get that part. Just seems like if a person has a good record of paying their rent (haven't missed a payment in the 5 years we've been married), they're pretty dependable.
Dec 14, 2012 11:55pm
S

Sonofanump

Dec 15, 2012 9:08 AM
O-Trap;1343429 wrote:We don't have $7K, no. Not sure if a 15-year is doable. Depends on what it would end up costing us. As it currently stands, we have a rent payment of around $770. We can afford to spend about that on the mortgage, the homeowners insurance, the PMI, and the taxes per month.
Any way to borrow the $7 from another source? That PMI is worthless.
Dec 15, 2012 9:08am