Fannie Mae Easing DTI Standards Impacts Your Ability To Get a Mortgage

Gentle Readers,
Remember when I learned that FHA guidance would make it much harder for me to get a mortgage any time soon? Things are changing, potentially.
Fannie Mae is changing their debt-to-income (DTI) formula. This will allow some folks to qualify for a mortgage who could not under the old standards.  The old DTI maximum was 45%, but at the end of July, it will be 50%.

What is the DTI Formula?

The DTI is simple to calculate. All of your debts go on the left of the colon and your income goes on the right. Then divide your debt by your income and multiple by 100.  That is your DTI percentage.
  • If I make $4000 a month, and have debt obligations of $2000, I have a DTI of 50% and am just barely eligible.  2000:4000  (2000/4000)100=50%
  • If I make $4000 a month, and have debt obligations of $1800, I have a DTI of 45% and am eligible.  (1800/4000)100=45%
This applicable DTI seems to be for Fannie Mae mortgages and not Freddie Mac or Federal Housing Administration mortgages. Their standards may or may not change to fall in line.

What does this DTI standard mean for me?

I’m not sure that this is a good move. The more debt you have relative to your income, the harder it is to pay for everything you need. This is true even without emergencies cropping up. Perhaps if the rent in your market is outrageous in comparison to your potential mortgage + insurance + maintenance, then this could be a boon for you.

 

This change still seems risky. Everything in the US market seems frothy right now. Real estate and other investment prices do not seem to correspond to the underlying asset values in a lot of markets. It does not seem like now should be the time for loosening our standards. Just because you can receive a mortgage, that does not mean it is financially responsible.

 

The next thing I need to research on my quest to own a condo is the Fannie Mae Homepath program.

 

What do you think of the new DTI requirement? Good for the market or for individuals? 

Trump’s First Executive Order and Your Mortgage

Gentle Readers,

You remember when I learned last summer that changes in FHA Mortgage Guidance would alter my ability to acquire a mortgage. My debt to income ratio has not improved significantly in the past 6 months, as anticipated. I did not think I would be able to pay off $45000, commonly referred to as SL2.

One of Trump’s first acts as the new President of the United States was to make mortgages harder to acquire for middle class folks.

The previous administration had a policy that Trump’s Administration blocked immediately upon assuming office. The policy was on track to reduce the cost of mortgages slightly for many home buyers. The policy was not yet in effect, but was imminently going to impact folks.

What policy are we talking about?

HUD sent a letter suspending the 0.25 % point premium rate cut for FHA-backed loans.  Nearly 20% of mortgages are FHA-backed. The beauty of the FHA is that their criteria make it accessible for more people to access capital necessary to buy a home and enjoy the tax benefits of home ownership. Their most-touted benefit is the significantly lower down-payment. As low as 3.5% of the purchase price. Homes in my high COL area regularly go for over $400,000. A standard 20% down payment is $80,000. A 3.5% down payment is $14,000. It is not hard to see why so many Americans need the help afforded by FHA.

How big is this impact?

Frankly, not big at all. The cut Obama attempted to enact would have saved homeowners with a $400,000 mortgage $58 per month.  Not insignificant, but not overwhelming for most people shopping for a mortgage.

The housing market in parts of the country, mine included, have been on fire lately. The prices are sky-rocketing. Some folks look at high prices and want in. It is unclear if this action will throw water on the housing bubble, but it might.

The most fascinating part for me is that Trump has re-made the fortune he was gifted by understanding the benefits our tax code gives to real estate. Having learned every trick in the book, is he going to encourage the IRS to re-write the book? May the US end a half-century long policy of encouraging home ownership through the tax code? If they did, would that be a bad thing necessarily?

A lot remains to be seen, but I think these tea leaves are impossible to read just yet.

Would you be happy to amend US tax code and move away from a home ownership model?

 

The Downsides of Co-ops

Gentle Readers,

While I am nowhere near ready to begin my home-search in earnest, since my current net worth has been hovering around the -$146,500 mark for the summer, I did check out my first open-house this weekend. It’s a cooperative I’ve been watching on Zillow and I had the time for a small trek.

I walked the 20 minutes from my current home, which also gave me another look at the neighborhood I’m considering. Before I was in such pain, I used to be a marathon runner and would run through that neighborhood as part of my training. Walking a neighborhood is very different from running in a neighborhood. As a woman in a city, I expect street harassment in both scenarios, but it is different when you are in running clothes. During that time of day, the walk felt safe. Good perk to feel first hand.

The building was a little more run-down than the photos showed. That was not a surprise. It’s also a bit off the beaten path, which is why it is going for $135,000 for all of its 700 square feet. I live in a group house now and could not really visualize what 700 SF meant and this was a good learning opportunity. It’s a lot of space for one person, but not overwhelming. I am hoping to buy something around that size, because I want the opportunity to live with someone comfortably if that is a possibility in the future. I definitely don’t want a studio, because I want the ability to host people without us all looking at one another’s pajamas.

The layout was a little strange. The kitchen is a good size, but it is currently situated so that you cannot fully open the oven or fridge because they face one another. This seems to be an issue of old outlets, but the room to move the oven over is available. There’ll be a whole in the cabinetry, but you could work with it. Overall, the place was cute and had nice windows and a bathroom of one’s own plus some good closet space.

Not bad as an incentive to keep me working toward my home-buying goal.

What distinguishes a co-op different from a condo?

Co-ops are different from condominiums in very important ways. With a condo, you are buying the unit you live in. With a co-op, you are buying a share of the building’s corporation. This is a huge difference with enormous impacts on you for as long as you own. The corporation/board has a lot of power. You do not.

Co-ops almost always require higher down payments and have higher monthly fees. I cannot find a co-op in my city that requires less than a 10% down payment. FHA loans are a no-go here, which would make it hard on first-time home-buyers.  Co-op and condo buildings both prefer to have relatively high owner-occupancy, which prevents owners from renting their homes out easily or at all. Co-op boards have the power to block potential buyers, which means closing on a co-op is hard when you are buying in and when you are trying to sell. It’s a lot of hassle that could keep you paying on a space you do not want anymore.

Co-ops often have high association fees. Partially, this is because the co-op fee may cover an underlying mortgage on the building and property taxes on top of maintenance and utility costs. The share you live in may sell for lower than a similarly sized condo, but the co-op fee can more than offset that. In some buildings, the fees include all utilities up to wi-fi. It may be a wash. You must look at the bylaws closely.

You also have the problem of finding a real estate agent and mortgage broker who knows what co-ops mean for buyers. At the place I checked out near me on Saturday the agent could not answer any of my questions. She eventually told me that she does not normally do co-ops, and it showed.  A big problem in some cities is the dearth of banks that offer co-op mortgages. Shopping around rates will be hard.

There is one major perk for those of us who would like the safety of stealth-wealth. Co-ops offer privacy. You own a share in a corporation, which does not include a public record of ownership. You can hide your address to people not in the building. This is helpful for folks fleeing abuse or famous people who’d like to be left alone.

The more I learn about co-ops, the less I want them. They feel less free than I’d like in my major purchase, but I am intrigued by the privacy option.

Would you consider a co-op over a condo?

 

What’s a Basis Point and How Will It Impact My Mortgage?

Gentle Readers,

You’ll recall that I want to buy a small place of my own, but that I have a lot of learning to do in the meantime. I understand how mortgages work in general, but a term I didn’t fully understand is Basis Point.

Mortgages are simple.

They are loans that are supported by collateral, ie the building you live in. You don’t make the proper payments, and your home can be returned to the mortgage lender. Your right to “your” home is conditional while there is a mortgage outstanding. Not a good look for you since you would prefer to remain living in the home. The lender makes money off of the loan itself through origination fees and interest payments. The lower the mortgage rate, the lower the cost of the loan for you. There are other parts of the mortgage, ie taxes and insurance, but I’m not going to write about those today.

There are a range of available down payments that are based on percentages of the total house and land value. It used to be standard for a buyer to pay in cash 20% of the value of the home. That standard is less likely these days. Some down payments are 3.5% of the home’s value or lower. I hope to do a 10% down payment for a home that is less than $170,000. My down payment would be $17,000 plus or minus some fees and my mortgage would be for $153,000. When I look at Bankrate’s Mortgage Calculator for those terms with today’s interest rates (3.39%), I would expect to pay $677.68 monthly for 360 months. Roughly equivalent to my current rent, which is why it is the top end of what I’d like to pay. I would actually prefer to pay much less.

Most lenders and buyers will agree to a 15 or 30 year term. That means, if you pay the stated amount every month for 30 years, the mortgage and associated payments will be completely paid off. You’ll actually own the home and not have the risk of a foreclosure from the lender. You will have satisfied the condition of the loan.

The interest rate on your mortgage determines how much you will pay in the long run. A higher interest rate means that the cost of borrowing that money will be greater for you. People with less than stellar credit are penalized by these higher interest rates, because lenders consider them less likely to fulfill their payment obligations. This means you have some control over how much you pay for your house. If you increase your credit score, you will look like less of a risk to lenders.  The less-risky version of you will have a lower interest rate and pay less.

All of that makes sense to me.

Basis Points are strange to me.

I know they exist, but I don’t understand what they have to do with my life. When I googled Basis Point, I got the following result:

“In addition to the interest rate, the lender could also charge you points and additional loan costs. Each point is one percent of the financed amount and is financed along with the principal.”

And also this definition:

“A basis point is a unit of measure used in finance to describe the percentage change  in the value or rate of a financial instrument . One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. In most cases, it refers to changes in interest rates and bond yields.”

Why are mortgages stated this way? Why have an interest rate of 3.375% plus the ability to buy basis points? Why not just state the entire interest rate in one blow? It seems unnecessarily complicated to me.

One example I found explains that a way average consumers encounter basis points is during the lock-in period for a mortgage with your loan officer. She guarantees a certain rate at closing, which will be sometime in the near future, but not today. You are charged 50 basis points to lock in the rate. That is you are charged one-half of 1 percent of your mortgage loan balance to guarantee the interest rate you agreed upon. To me, it looks like an interest rate of 3.50% with fifty basis points ends up being a interest rate of 4.0.%. Am I wrong?

It also looks like a basis point can be known as a discount point. A discount point is a way to pay for a lower interest rate. I don’t really understand how this is different from a higher down payment, even with the following explanation.

“Discount points are a form of prepaid interest by which you pay the bank an upfront fee in exchange for it lowering the rate. The amount you can cut your loan’s rate will vary depending on how many points you pay and on how your bank underwrites it, but assuming that paying one point, or 1 percent of the loan’s balance, will lower the rate by 25 basis points.”

What do you wish you understood about basis points before securing your first mortgage? Is my understanding, or lack of understanding, off?

 

New FHA Mortgage Guidance Will Impact Borrowers With High Student Loan Debt

Gentle Readers,

I was having dinner with Mabel recently and she had some bad news for me. The federal government has issued new guidance for FHA loans. This guidance will make it far more difficult for people with high student loan debt to qualify for a mortgage. Me. It will make it far more difficult for me to qualify for a mortgage.

The Federal Housing Administration insures mortgage lenders as a way to encourage home ownership in the US. The FHA does not issue mortgages, but mortgage lenders use the insurance to stay in business in case too many people enter foreclosure. The FHA has guidance for the type of qualifications a person must meet when applying for a loan. If you are eligible for an FHA approved loan, your down payment can be as low as 3.5% which is far more attainable than the standard 20% necessary to avoid PMI. Not all mortgages meet the qualifications for an FHA loan.

Part of what the FHA measures when determining your loan eligibility is your debt-to-income (DTI) ratio.  Naturally, student debt counts as debt. However, it can be difficult to know exactly how to count this debt. Borrowers are allowed to pay back under a number of different terms and conditions. You may have a 10, 20, or 30 year schedule with or without some forgiveness of the debt itself. It’s complicated.

What concerns me today is the new rules for those of us who are paying back our student loans on an Income Based Repayment (IBR) Schedule. In IBR, you pay a percentage of your income towards your debt each month. This is not an amortizing payment. It is not intended to efficiently wipe out your debt. It is intended to give financial breathing room to people with student loan debt that is high in proportion to their income. I pay roughly $500 a month toward my student loan debt because of IBR. If I was paying an amortizing payment, I would pay closer to $1500 a month.

The FHA has new guidance for mortgages for people under IBR. If I want to use an FHA Loan, they will calculate my monthly debt obligation in a new way now. They no longer consider what my IBR obligation will be each month, which makes sense as the IBR changes yearly based on last year’s income.

The pertinent changes:

FHA 4000.1 Section II. A. 4. B. (H)

(4)  Calculation of Monthly Obligation
Regardless of the payment status, the Mortgagee must use either:

  • the greater of:
    • 1 percent of the outstanding balance on the loan; or
    • the monthly payment reported on the Borrower’s credit report; or
    • the actual documented payment, provided the payment will fully amortize the loan over its term.

What this means for me personally at my current student loan debt levels is that I will likely be ineligible for an FHA loan.

  • If my student debt obligation was calculated as it is now incurred, it would be $500/ month.
  • If my student debt obligation was calculated at 1% of the loan balance it would be $1450/month.
  • If my student debt obligation was calculated as if I were in the process of fully amortizing my loan over a 30 year term, it would be $936/month.

These are very different debt calculations and will absolutely impact my ability to get a loan. The difference between $500 and nearly $1500 will be a killer on my DTI ratio, which must be under 43% in order to qualify for any loan.

If I make $4000 a month, and have a $1500 a month student debt payment and $650 in other obligations, I would have a DTI of 2150:4000. Over 43%.

If I make $4000 a month, and have $500/m student debt payment and $650 in other obligations, my DTI would be 1150:4000. Under 43%

This change is literally the difference between getting a home and not.

With an income of $4000 per month, the highest my debt obligation could be and still leave me eligible for a mortgage is $1720.  After subtracting my other obligations, I would need my other student loan obligation to be less than $1070/m.

To get to $1000 a month in student loan debt obligation, I would need to reduce my student loans to $100,000 from their current high of roughly $145,000.  Alternatively, I could attempt to  increase my earnings to $5000/m and then my 2150:5000 DTI would be 43%.

So, plans must change. I have to kill my student debt.

Previously, my plan of action for when my income doubles was to increase my investment payments at a far greater rate than paying down my student loan debt since I wanted to get the magic of compounding going. My new plan must be to reduce my debt obligation significantly.

When the income doubles, if I make $8000/m, at least $5000 needs to go towards student debt. I have two student loans. One of them is roughly $45000 currently. I will focus all extra payments on that one. In nine months of focused payments, that debt will be almost wiped out.

I would still be left with a student loan obligation that is roughly $100K. 1% of 100,000 is $1000. If I had that $1000 plus $650 in other obligations against an income of $8000/m, my DTI would be 1650:8000. I would be eligible for a loan. With a doubled income, the highest DTI I could have and still be eligible for a loan would be 3440:8000.

Has governmental guidance ever changed your plans in a major way?

 

 

Preparing to Buy a Place – 1 Year Out

Gentle Readers,

In April 2016  – I made the decision to get my financial house in order, because it is time for them to become my erstwhile roommates. This is the true reason I started this blog. I know that I work best under “pressure,” which is where putting my financial mess out in public comes in. This is a space for me to learn and grow.

I know a few things. I need great credit so that I can get a favorable rate on my mortgage and I need a down payment.

My Fico Score was 732 when I made this decision. This is essentially what it was before I opened my business two years ago.  It was great, but not excellent. By most reckonings, the bottom end of excellent is 750. I was close. That 18 point difference will make a difference on the APR I’m offered on my mortgage, and thus on the amount of interest I will pay over the life of my loan.

Once I made this decision I began making calculations.  How long to pay off my CC debt.  How long to save up a deposit. How to get my credit score up.

I’m on track to pay off my credit card debt by October or November, barring new expenses. I have an upcoming dentist visit and I think it will be time for adult braces due to some bad changes in my mouth. Expensive. I’ll see if they have a payment plan.

I’m glad to report that my credit score is now 787 as of May. HAPPY DANCE!

I did this by paying off two of my three credit cards. I took out a loan through earnest to do this.  I learned that the right type of credit (the earnest loan) looks more like a mini-mortgage and makes me look more responsible. I also kept the amount of credit utilized on the other card low because I learned that having less than 30% of your available credit utilized makes a difference in your credit score. This is why I did not close those cards, but continue to use them for tiny purchases each month. 

I did all this in April. More than 6 months before I would approach a lender to see what I could get pre-approved for.  It worked. All of this concentrated effort paid off. I’m firmly in the excellent credit category and can keep improving.

I also put more of my expenses on auto-debit so that I won’t accidentally miss them.

I learned that a mortgage should not be more than 2.5 times your annual salary. I had never heard this rule, but it makes sense to me. Helps me to plan. Thanks to Freedom is Groovy for linking here to Fritz Gilbert’s Retirement Manifesto, which is available here.

I do not consider the place I live to be an investment since I need to live somewhere. I do not want to tie up too much of my capital in my mortgage and other housing costs. That means I’m looking to pay little. I don’t want to live in a dump, but I don’t want something incredibly nice.

Things I need to learn:

  • What the heck is a basis point?
  • Will I even be able to get a mortgage without a cosigner since I have years of contingency work?
  • FHA loan rules.
  • HOA rules.
  • The differences between condos and coops.
  • If I want a coop, learn about the coop mortgage rules.
  • How much of an emergency fund will make me feel secure?

Things I need to do:

  • Pay off the rest of my credit card debt.
  • Get into no more credit card debt
  • Save a down payment.
  • Save enough money to actually move.
  • Prepare my financial documents so I’m ready to talk to a lender.
  • Find a realtor I respect
  • Decide what I want versus what I need in a home.
  • Monitor the local market.
  • Buy a home.
  • Take advantage of my access to a garage to paint and/or build the furniture I want for the new space.
  • Move.
  • Unpack.
  • Not share my shower with people I’m not in love with.

How did you prepare when you wanted to buy a home? Am I missing anything?

 

 

 

Net Worth Week 2

Gentle Readers,

I have made many changes to my finances in the past two years, and have been building up my efforts to achieve financial freedom in earnest in the past six months. These changes will result in my net worth getting closer to zero, but involve a lot of hovering around the negative $150,000 mark for now. It can be discouraging, but I know that progress is happening. Even when it does not appear true.

To show myself that my efforts have value and to encourage myself to keep them up, I am tracking my net worth weekly. I know this is obsessive and do not intend to do it indefinitely, but I think that there is a value in having meticulous attention to these matters for the time being.

The Changes

I started a business from my liquid savings in 2014. In 2015, I opened and fully-funded an IRA. In 2016, I opened a separate brokerage account, paid off (with help explained here) two of my credit cards, and began preparing to purchase a coop or condo.

All of these changes feel big, but my bank account feels small. Hopefully my focus will get me to and beyond zero.

Date 4/1/2016 4/8/2016 4/15/2016 4/24/2016
Joy 1097 1097 1097 1097
Travel  752 322 322 322
Down Payment  284 18 18 18
retirement  221 21 21 21
health  45 45 45 45
Moving  31 31 31 31
EF  9 9 9 9
Business  1 1 1 1
Bed  .29 0.29 0.29 0.29
Life  471 1066 907  963
IRA  6928 6885 7026  7100
Brokerage  220 217 221  222
CC (largest)  -11883.98 -983 0 0
CC (longest)  -567.28 0 0 0
Rewards Card  -2762 -2850 -3000  -3160
SL 1  ?  -101791 -101892 -102041
SL 2  ?  -44970 -45001 -45046
Earnest  -10000 -10009 -100036 -10054
–$151,728 -$150,890.71 -150230.71 -150471.71
-1.0% change .99% change .99% change  -1.0% change

What changes have you made in your finances recently? 

My Current Situation

Gentle Reader,

I am in debt. I do not wish to be. I wish to be able to retire early and only do the type of work that makes me feel better about the world. This blog is a personal attempt to document improving my financial situation while trying to improve the world.

I began life poor. I am now fortunate to be a professional in a city away from my former poverty. Jumping classes means that I look around and see a world I do not know. I am still learning how to navigate and master this new world.

This blog will document my journey to financial freedom, but it is also a place for me to share my plans to make the world more decent and fair. Largely, this will involve my being more decent and fair. A place for me to grow.
Every great journey must have an origin story, and your heroine, ZJ Thorne, has one ready for you.
In the past few weeks, a friend, Mabel, suggested that I buy her coop. I ran the numbers, and realized that even if I wanted her coop, I could not afford it. However, running the numbers made me realize how much I want out of my current living situation. Mabel inspired me to get serious.
Thankfully, my journey is not just my own. I have the pleasure of being in a relationship with The Beautiful One, TBO. She is not at a place where our relationship involves co-habitating, and thus, I decided that I need to focus on getting my financial house in order so that I can buy my way out of living with my PAR, passive-aggressive roommate, in the next year, if possible.
My professional life sees me as a W2 employee who bounces between gigs and the owner of a small business in a niche in the same field. My income varies greatly and feels impossible to predict, which has added that extra kink into planning.
My personal life is that of a young lesbian in a serious relationship with TBO in a major US city.
My hope is to conquer my personal and educational debt and achieve enough passive income to only accept the type of work that brings me joy.
My hope is to live in a place where I share the bathroom with noone I am not in love with.
My hope is to continue growing as a human and to encourage deep thinking about the world, and then seeking to change what can be changed.
My hope is to share that journey with you.
Inspired by J. Money,  I will share my net worth on a regular basis. The situation is dire, my net worth is negative $150,000. A very large, very negative number.
Date 3/28/2016 4/1/2016 4/8/2016 4/15/2016
Joy 1097 1097 1097
Travel 752 322 322
Down Payment 284 18 18
retirement 221 21 21
health 45 45 45
Moving 31 31 31
EF 9 9 9
Business 1 1 1
Bed 0.29 0.29 0.29
Life 471 1066 907
IRA 6928 6885 7026
Brokerage 220 217 221
CC (largest) -11883.98 -983 0
CC (longest) -567.28 0 0
Rewards Card -2762 -2850 -3000
SL 1 -101791 -101892
SL 2 -44970 -45001
Earnest -10000 -10009 -10036
–$151,164.31 -151728 -150890.71 -150230.71
-1.0% change -1.0% change .99% change .99% change
So this is where I begin my journey. Thank you for joining me on it.
I’d love to hear how your Financial Freedom is going.