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? 

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?

 

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?