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Assess Your Financial Situation: Step 3 to Homeownership

Assess Your Financial Situation

Hey, it’s Treasure Valley Dave here in Nampa, Idaho. Do you need help assessing your financial situation to buy a home? Explore Step 3 to Homeownership and learn more about your buying power. We are speaking with Darin, our fabulous lender, and he will answer some questions about getting pre-approved and how to maintain that pre-approval.

Explore TVD’s Financial Situation Worksheet

We’re going through our different steps to home ownership, and today, we’re on step number three, our Financial Situation Worksheet. You can download it here if you still need to get your copy. It’s packed with some great questions you must ask your lender and things to consider yourself. You must figure out your monthly budget when you start this home-buying process.

How Much Do You Need?

To get into a house, a down payment, earnest money, closing costs, etc., 20% would get you away from the mortgage insurance. You can have as little as half a percent of your purchase price, so $500 on $100,000. There is also down payment assistance depending on the loan type you’ll get.

How Much Do Closing Costs Run?

Closing costs are 2.5% to 3% of your purchase price or loan amount, depending on the purchase price or refinance. 

Can You Put Some Closing Costs into the Mortgage?

Yes, closing costs can be wrapped into the price of the home. This way, you can come up with the cash later. Having the seller pay them – and then they would credit you. However, this will affect how much you need to save to get into a house.

Why Is It Important to Talk to a Lender?

When you start this process, even as you’re putting together your budget, having the right lender on your side will be hugely important. We have a list of questions you could ask your lender. Let’s identify important but overlooked questions.

What Is the Process?

How long does it take? What do they need to provide? Even though it’s pretty upfront, you might feel that lenders are intrusive or they are asking for a lot. That all comes down from the investors who purchase these loans on the secondary market. It’s not the lender’s rules. The rules lenders follow are dictated by several different things – including the investors. If it’s a government-backed loan, then there’s government regulations.

Can Your Lender Get in a Zoom Call?

One of the questions we still need to get on our list is whether the lender you’re talking with will be able to get on a Zoom call with you or meet you in person and find out what’s important to you. Is it not just one who responds to your questions, but one who is proactive and comes up with other things that you probably need to know that you don’t even know you need to know?

How Can Income Be Averaged?

Many people think they make x amount of dollars an hour, then they work this many hours a week, and that’s how it should be averaged. There’s a lot of things that come into play. Bonus income, a little commission income, or self-employment changes the dynamic of qualifying income.

What Are the Documents Needed for the Pre-Approval Process?

If you’re W-2ed, lenders would need two years of W-2s from all of your positions. If you switch jobs towards the end of the year and lead into the following year, they’ll want that last pay stub from the previous employer. Then, 30 days of most recent pay stubs are the basics for the W-2 income. Self-employment gets more complicated.

How Long Must You Be a W-2 Employee to Qualify for a Mortgage?

If you’re a W-2 employee with job gaps, we must consider that. It can be as long as a year or as short as the first pay stub. It depends on the previous employment history.

How Much Experience Do You Need to Have in a Small Business Role?

If you’re a small business person, you’ll want to have two years if you move and move a business. Suppose you’re clientele-based, like construction. They will look into where your clientele will come from when you start your business in Idaho. If you can do it remotely and it’s all computer-based, you can move wherever you want because you’re remote. It’s the same with a W-2 employee if you’re remote.

How Do You Know What Loan Type a Person Is Good for?

Lenders know what type of loan will suit you by looking at your debt-to-income ratio, credit score, and credit history. Can you use the conventional loan if you have a good credit history and income?

Do You Need to Have 20% to Put Down?

No. There’s mortgage insurance we can get, and there are things we can do to help that are manageable.

What’s the Minimum Amount One Has to Put Down?

With a conventional loan, you can do 3%. The minimum down for conventional is 3%. FHA’s 3.5%. We can go less than that if we go with down payment assistance.

What Does Down Payment Assistance Mean?

These local agencies have funds available; they offer it in a second mortgage or a forgivable grant. There’s also free grant money if your income qualifies for that. Those are a few options where you can do closing costs and down payments if you’re in a situation where the seller won’t pay closing costs. You can get that financed as well. You don’t have to be a first-time home buyer for most programs now. Even if you owned a home four years ago, came back into the market, and have been renting for four years, you want to buy another house; you’re a first-time home buyer.

Why Would People Want to Use Either VA or RD?

If you’re a veteran, it’s one of the best loans out there because of the things you can do with it, and the ease of getting a VA loan if you’re a veteran is good. Credit score and debt to income, as I mentioned on conventional, you can stretch those limits a lot more than you can with that.

Can You Have Two VA Loans?

If you’re a veteran and used your VA eligibility on your current home, you can still buy another home with a VA. That’s something to discuss with your lender because some calculations are involved, depending on your scenario. You can have two VA loans.

What’s This RD Loan?

It’s a USDA loan. It’s for homes in rural areas. It’s 100% financing. It’s a little trickier because you must fit into their little box, but it is an option. Suppose you’re looking to move out of the metro area into a small town 15-20 minutes away. It could be in the Boise area, about 15 minutes from Boise.

Reverse Mortgages

The economy has changed slightly, so more people are asking about reverse mortgages. Is that an option for people who have been in a home for a while? Yes, it goes off the equity that you have in the house. You have to be of age to qualify for it, and there are a few other stipulations in there, but you can buy a house with no payment. You can get into a home with a down payment and then not have an amount to pay afterward.

Do You Have to Have Upfront Cash to Pay the Contractor?

We have a construction loan for somebody who wants a house built. It’s a longer, lengthier process, a lot more planning. If you own a lot and want a builder to build on it but want to avoid financing the costs to make that home, that’s just an easy construction loan. You can do it where you buy the lot, do the construction loan, and have a builder do all that. If you have the resources to build your own home, it’s a great way.

Are There Some Programs That Cover Construction Costs?

Yes, the one-time close loan is definitely available, and then you can also do a construction and then an end loan. There are benefits to both and pros and cons to both.

Rapid Rescore

Start the mortgage process as soon as possible to know what programs are out there and have a firm plan. It would also help if you polish up your credit rating. We can do what’s called a rapid rescore. If it makes sense to get you to a 750 versus a 700, we have tools and resources to help do that.

What to Do If You Have Different Income Sources?

Suppose you have all these different kinds of income and are wondering if lenders need to see how to use that income when it comes time to calculate. Well, these days, it’s all that you report to the government.

What you say to the IRS is what we can use. If you have a side hustle that puts cash in your pocket, it doesn’t mean anything. But you can hustle money for your down payment if it’s seasoned. When it’s seasoned, it’s been in your bank account for two months or more.

Can a Family Member Help You Out With a Down Payment?

You can use gift funds from church work, any non-profit, family, close family, or a distant third cousin.

What Hurts Credit Scores?

Our booklet has a long list of don’ts you’re not supposed to do because it could jeopardize your application. Rapid rescoring is only sometimes helpful. I will pay this off, and my credit score will increase.

Different factors go into that. Paying something down to a certain amount versus paying it off could boost your scores more. Paying something off can hurt your credit scores because you have that trend, that history built up with that creditor, and if that goes away, that can harm your scores.

Will Career Change Affect Results in the Pre-Approval Process?

Yes, that can hurt things depending on the career change. If it’s a W-2, we could be okay. Going from 1099 construction to something different or vice versa, W-2 to 1099 contractor, can hurt you, and your waiting period could be two years, just like starting your own business.

Is It True That You Can’t Shift Around Your Finances?

You need just to let it sit, or if we have time, it depends on how much time we have. You get it into one account if you are 2.5 to 3 months. Figure out how much you need and what you will use, and get that into one account. Last-minute transfers are a pain for everybody because lenders need that documentation immediately.

If money was moved around, they could be up against a tight timeline where they have to come up with two months of bank statements for multiple accounts. It just makes it difficult to go through line for line every transaction on a bank statement, especially if there are multiple ones. Planning upfront and having more time is beneficial.

How Early Is Too Early to Start Talking With Your Lender?

No time is too early.

Do you know anybody that knows what interest rates are going to do? We know they will come down, but when and how much is the question. If we knew, then, you know, we’d be able to control everything.

Sample Scenario of Cost of Waiting For One Year

Let’s say we take a sample house of $400,000 and put 10% down. Your monthly principal and interest payments will be ~$2,400 at 7% interest. If we waited a year, it’s still 7%.

With just inflation, the cost of houses has increased 60% every decade for over 50 years, which means 6% a year. That house of $400,000 will be $424,000 out of the get-go. You’ll get a bigger loan because the house is more expensive, so your monthly payments will increase slightly.

Sample Scenario of Cost of Waiting For Two Years

Let’s say we waited two years because we want to wait for interest rates to come back down. The interest rates are 6% in two years; then, a person could save $114 monthly on their payment.

But the scenario is that that’s two years away. House prices went up 6% yearly, which went up $50,000. Then, you also spent two years renting, which would be like $2,000 a month, that’s $48,000. So, you spent almost $100,000 to save $114 a month and are still stuck in a house that wasn’t working for you for two more years. Plus, you weren’t building equity.

Lessons Learned

Appreciation is a thing; real estate’s always going up and down, but you’re still building that equity long-term. You’re paying down that balance; hopefully, it always goes up. Even if it comes down a little bit, you’re still okay because you’re still paying down that balance, and it’s yours at the end of the day.

There are ways to accelerate that mortgage to pay it off sooner and all that kind of stuff. Once you own a home, there are lots of tools and resources. You can use that as a vehicle to do many other things, so you’re not paying someone else’s mortgage.

Can You Pay Extra Every Month?

You absolutely can. People do that all the time. You’re canceling your interest rate. You’re paying that off sooner. If you have an extra 100 bucks this month, you can throw it to your principal, accelerating that mortgage. If you make your minimum payment, you’re moving forward and putting yourself in a better situation.

What Is Overbidding?

We have this traditional inflation rate of 6% yearly for housing, and we mentioned inventory’s low. Even at the interest rate level, we’re at right now, people are in multiple offer situations, overbidding for the asking price and paying more for that house just because of the lack of inventory. If someone needs a home today, they must find what they can, which might be limited to what’s out there.

What Will Happen When Interest Rates Come Down?

If interest rates do come down, it is going to be a signal to buyers to giddy up. It will be a race to the one you want, and how much money do you have to go over the asking price? We have low inventory, strong demand now, and multiple offers, and then if you open that floodgate, more buyers come in, it will hurt things. Instead of a 6% higher price for a house in a year, it could be slightly higher because of the low inventory and higher demand.

Appreciation, Amortization Lost, and Appreciation

Here’s a different comparison of appreciation, amortization lost, and appreciation. Amortization is the time you’re paying down that mortgage versus paying someone else’s mortgage. Your landlord’s looking at their amortization schedule; they’re in heaven because you’re paying it for them. That’s why it’s called an investment property. There are different ways of getting into a house. You can get creative and make things work. So, the first step is getting more time to plan and talk to a lender.

When should you hit the pause button?

If there is a job change or you just left school, you must know where you will live. If you just got married and are thinking of having a kid, you may not be 100% certain you’ll have kids, which could change your whole dynamic of where and what you buy. It’s the uncertainty of where you’ll live and your financial future in the immediate future. But once you get settled in, then there’s no reason why.

Who’s the best person to talk with to figure everything out?

The mortgage side would be Darin, and the property side would be Dave.

Final Thoughts

We can’t stress enough the time. We have said it over and over, the time to plan. Plans change, but then we can switch gears and re-adjust our plan. Talking to a lender sooner rather than later to optimize credit scores to get their bills, monthly expenses, and bank account in check. Suppose you have multiple deposits from other sources of income that we can’t use; there’s a multitude of ways to make things work with more time.

What Is the Typical Close Time?

Thirty days is your typical close time. You can hop on our website today and apply, and we can close in 30 days or less. If you do have time, let’s use the time. But if something happens where you accidentally get house fever. Get with Darin right away and start figuring stuff out because he always does it.

What’s Next in the Process?

Depending on your mortgage program, the house has to qualify, meaning you can’t use an FHA to buy a fixer-upper. There are rehab loans out there. There are ways to fix certain little things, but each program — FHA, VA, and conventional — has different guidelines on what they’ll accept for the home’s condition. Conventional is the easiest, VA’s probably the hardest, and FHA is in the middle.

Other Reasons Why You Need to Talk to Your Lender

Another great reason to talk with your lender before we look at houses is to know what kind of house you are looking for. You need to know what the budget is going to be for the home. It’s not just the maximum the lender says you can get, but what you guys are comfortable with, looking at your monthly budget.

Talk to Darin

When you guys reach out to Darin, tell him Treasure Valley Dave sent you.

Contact Us at Treasure Valley Dave

Mind-blowing, knowing your financial situation is just riveting. The Treasure Valley Dave Team is your expert by your side, here to help you solve your real estate problem. You can contact us through our website or call or text us at 208-860-2004.

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