General Mortgage and Home Buying Questions
In September – October 2015, we asked users of several forums on TexAgs.com to submit their mortgage-related questions. The questions were great, so we thought we’d share a summarized list of the questions (and their answers) on our website. We’ve grouped them into three major categories:
Have questions that aren’t answered here? Send them to us at firstname.lastname@example.org and we’ll get you an answer asap!
Home Buying & General Mortgage Q&A:
How can I evaluate the housing market in a specific area?
Real estate is very local. We believe the best person to help you is a Realtor who is knowledgable about the area you are considering. If you need help finding a great Aggie Realtor, we can help! Click here to learn about our free Aggie Realtor Referral Program. The Texas A&M Real Estate Center also offers a wealth of data on Texas housing markets.
How do you decide between a fixed vs variable rate mortgage?
To me the choice depends on how long you think you will own the home. A classic example of a logical use of an ARM is for parents with kids leaving the house soon. If they don’t intend to keep the big house after the kids leave, the parents can refinance into a 5 or 7 year ARM to lower their payments.
What percentage of my monthly income should my house note be (risky, average, and safe)?
You can qualify for a conventional loan with a debt to income up to 45% of your GROSS income. That is, in most circumstances, the highest you can go. Obviously, this a very large percentage of your GROSS income, which doesn’t leave much left over after paying your taxes. So, I would say being up in that range would be risky. What is safe is very individualized. You know your budget, assets, spending habits, potential monthly ‘emergencies’ and the stability of your income sources far better than any lender or underwriter ever could. You have to be comfortable with your payment, even in the months when everything goes wrong. So, just because you CAN buy the 300k house doesn’t mean you should. Maybe you are more comfortable with a 200k house and a little breathing room – if so, that is what you should buy.
With poor credit what are options in today’s market to secure a home loan?
First and foremost, be sure you are in a position to buy – that you are stable enough financially that you can make the payments even if you have unexpected expenses or your income varies from one month to the next. If you are, you might consider an FHA loan. These loans have low closing costs and lower qualification requirements than many loans, which make them a good option for many first-time buyers or those who’ve had some problems with their credit in the past.
Any tips on the process of selling and buying, specifically coming up with a down payment when most of our money needed is tied up in the house we are living in currently? Or do I simply need to sell my current home then buy?
One option you might consider is a residential bridge loan, which is designed for exactly that purpose. The funds from the bridge loan are used to pay off the mortgage on your existing home, which allows you to get a mortgage on the new home. Then, when your first home sells, you pay off the bridge loan. There are costs associated with a bridge loan, but many buyers find it’s worth it not to incur the cost and inconvenience of moving twice.
What is an “estimated escrow shortage” in new construction?
If a lender uses the “unimproved” tax value to set up your escrow payments, you can be in for a nasty surprise. In that case, you will be paying into the escrow account based on the unimproved value, so there will not be enough money in escrow to pay the entire tax bill. The lender will then often make up the short-fall so that a tax lien isn’t filed ahead of their lien on the property. Then, they will come back to the buyer to reimburse the money they’ve paid out. To avoid this sort of issue, you must be sure your lender is estimating taxes for escrow based on the improved value (we do this as standard practice).
Why isn’t flood insurance covered in standard insurance policies?
We get this question quite a bit! Anytime a flood is involved it goes through FEMA. FEMA is the underwriter and only provider for all flood insurance policies. In the event of a large massive flood, FEMA takes the risk for covering all the homes instead of having all of the insurance companies take the bill. Homeowners policies will cover water damage from pipes, and sewer backup (if endorsed) but no rising flood water.
Should I buy a house now, or wait till I have a 20% down payment?
There are really two parts to this question:
1. Should I buy now or wait?
2. What is the advantage of a 20% vs 10% down payment?
To answer the first part completely requires details of your local real estate market, as well as the time frames involved and the size of the loan you are contemplating
As to the 2nd part of the question – the only “penalty” to having 10% down is that you will either need to pay mortgage insurance or have a second lein. The interest rate on the 90% will be more or less the same as if you were putting down 20%. Mortgage insurance is a commonly misunderstood topic, so we set up a website at NoPMILoan.com where you can learn more about options for buying a home with less than 20% down.
What’s the point of mortgage insurance? Why is it required?
Mortgage insurance protects the lender from the first 20% of a default. Mortgage insurance is not actually required on most types of loans even if you do not put 20% down. There are several common alternatives to mortgage insurance. For instance, you can have a second lien or you can pay a higher rate and buy yourself out of mortgage insurance if your credit is good enough. We actually have a website dedicated to this issue at NoPMILoan.com if you want to learn more.
Can an early inheritance be used for a down-payment?
Assuming this would be your primary residence, a “gift of equity” – such as early inheritance – can be used as down payment for a conventional loan. Again, only if it is your primary residence.
What is the minimum amount of time living in an area that you would consider buying a home a good investment?
The biggest cost in real estate is the cost to sell the property. Assuming the typical full service real estate agent, the cost is about 8% which includes 6% in real estate fees and 2% in typical sellers closing costs. Some of these fees are negotiable of course but that is the traditional costs.
When you buy the home you can estimate 3k or so in one time closing costs. Then you have add the costs of home ownership which are unknown but can be significant.
Typically, you want to look at least 5 years out to break even financially.
Is there a cap to VA Loans?
Not a cap, but there are some limitations. For example, up to $417k there is no down-payment requirement. For any amount over $417k, the borrower has to pay 25% of the purchase price less $417k as a down-payment. Hope that helps.
Is there a limit to how many times you can get a VA loan?
Provided the prior VA loan is paid off, there’s no restriction on the number of times someone can use the VA benefit.