Buying the Home You Rent 2014


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Tips and Advice for those who want to buy the house they are currently renting. Mistakes to avoid, First Time Home Buyer programs to consider.

Buying your first home is an important step - but it's equally important to be sure you are getting a good deal. If you've had credit issues, that forced you to rent when you moved to NC - how long do you have to wait before your can buy after a foreclosure or bankruptcy?

Will your deferred student loans count in your ratios? What are the minimum credit score requirements for a mortgage in NC? All of this information and more!

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Buying the Home You Rent 2014

  1. 1. Buy The House You’re Renting Tips and Advice From Top NC Real Estate and Mortgage Professionals Steve Thorne, NC Mortgage Experts 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC
  2. 2. Paying Market Rent An Appraiser is required to determine Market Rent if you are buying the house you are renting Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC We recently had someone leave a comment that said they were renting a home that they wanted to buy, but they had not been paying rent. The buyer went on to say that in exchange for rent, they’d spent many hours making repairs to the home, cleaning out the previous owner’s things, and hauling off discarded items from the property. While these activities certainly have “value” to them – do they add up to the “Fair Market Rent” that the Appraiser sets for the home? That is a big factor for getting loan approval if you are buying the home you are renting. HOW YOU WRITE THE CONTRACT in this situation, both for the RENTAL Agreement and the PURCHASE agreement will determine if you can actually use that money for down payment! There are limits, based upon the type of mortgage you apply for, regarding Allowable Seller Contributions!
  3. 3. How Long Have You Been There? If you have been renting the home for less than 6 months, FHA limits you to 85% of the Value Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC Trying to buy the home you are living in? If you are getting a FHA Loan, you need to wait and apply for a mortgage after you’ve lived in the home 6 months. It’s just a weird rule. It’s one of those rules to keep people from “flipping” houses / but NOW it seems like FHA LIKES people to fix up houses and fix them? We think it’s a rule that needs to change.
  4. 4. Tired of Having A Roommate? ● Rent Versus Own? Might be cheaper to BUY a House! ● How is Your Credit? Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC Mortgage rates are low, and the cost of renting an apartment or home - is going up. So it might be cheaper to Buy a home, as opposed to Renting this summer! Remember, you can’t really compare a Rent payment to a house payment - it’s kind of like comparing apples to oranges. The first question a home buyer usually asks us is “What are Mortgage Interest Rates?” That’s a great question, but it’s not necessarily the ONLY thing you should focus on when you are talking to mortgage companies. The First question the MORTGAGE COMPANY is going to ask is: “How is your Credit?” We really can’t tell you if you qualify unless we view your credit file. If you are calling around to companies, be sure one of them sends you your credit file! Minimum Credit Score Requirements for a mortgage at most banks are 640, however, we are allowed to go lower with manual underwriting guidelines. In general, we can make loans to folks with relatively few hoops to jump through, as long as you have 2 credit scores over 600 - that will be a FHA loan, which requires a down payment, or a VA Loan - for qualified Veterans. For a USDA Home Loan, the minimum credit score is 620 for a manually underwritten loan. After a Foreclosure or Short Sale VA Loan guidelines are the least waiting period of any loan program. USDA Home Loans are the longest Government Loan waiting periods after a financial hardship. FHA Home Loans do have some “special Circumstance” situations that can cut the waiting periods to buy a home.
  5. 5. Rent To Own Agreements We generally discourage these types of agreements, although locking in a sales price might make sense? Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC One option that some landlords offer to folks with low credit scores in North Carolina is “rent to own.” “In a nutshell, when you sign a lease or rental agreement, you are committing to pay higher rents on the home for a period of years, at which point you have an option to buy the home at the end of the lease.” Obviously, if you are one of those folks who went through a rough patch, this might sound like an easy way to let time pass - and still be able to provide the stability you so desperately want for your family. For many potential homebuyers, the reason to enter into a rent to own arrangement boils down to having a “forced savings plan.” With a Rent To Own, the excessive portion of the rent is applied toward the down payment of the home. This is one of those situations where you DEFINITELY want someone with EXPERIENCE helping you. Especially if you are negotiating a sales price for a future date, and you are giving the Owner a pot full of cash, payments in advance, etc. There are MULTIPLE things that could go WRONG with a Rent to Own Agreement.
  6. 6. Qualifying For Your New Home ● Government Loan Limits ● Mortgage Tax Credits Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC Each Government Program Mortgage Loan Program in NC has maximum program Sales Price, Income or Loan Limits that can vary by county. For Veterans, the limit for a no down payment loan in NC is $417,000. If you make a down payment, or need to use your VA Benefits to buy a second home - that’s okay too. It’s still likely to be the cheapest program available for a Veteran, and you do NOT have to be a First Time Home Buyer to use your VA Home Loan Benefits. The FHA Home Loan in NC has maximum loan limits which change on an annual basis. The maximum loan amount for a FHA Loan can vary WIDELY in NC. For instance, in the Raleigh Area - the 2014 FHA Loan Limits for Wake, Franklin and Johnston County are currently 280,600 - Harnett and Granville County $271,050 and Durham / Chapel Hill are 2014 $334,650. USDA Home Loans do not have maximum loan limits - but they set Household Income Limits (and again the 2014 USDA Loan Income LImits for NC vary widely by County). In the Charlotte area, the USDA Loan maximum household income for a family of 4 is $78,800 in 2014 - it’s more for a family of 5. In 2014 - there are First Time Home Buyer Mortgage Tax Credits available. For most folks we talk to, this Mortgage Tax credit can reduce your mortgage payment by about $160 a month!
  7. 7. Co-Borrowers Allowed For Purchase ● Family can Co-Sign ● One Spouse has income the other has good credit Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC With a Conventional and FHA Loans, allow non-occupying family members to co-sign for a mortgage. The home buyer does not have to provide evidence of stable employment, the program works well for college students. For a Conventional Loan, the program requires that the person living in the home have a middle credit score of at least 640. For the FHA Loan, you can have a lower score - but you WILL need to have some credit reporting to the credit agencies. Having a co-signor will NOT help us if the co-borrower has BAD credit. In a situation where one person living in the home has good credit, but not enough income to buy the house - we normally add a non-occupying co-borrower.
  8. 8. Documenting Funds To Close ● Paper Trail Requirements ○ What Delays Closings ● Who Can Give A Gift ○ Documentation Required ● First Time Home Buyer Grants Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC When you make an offer to purchase a house, you will be asked to pay the Seller an “Earnest Money Deposit.” A little later, after inspections, and so forth, you will be asked to give them a check for “Due Diligence.” One of the things that HOLDS UP CLOSINGS is the inability to “source” where the money for the Earnest Money came from. If you are pulling money from various accounts - do it BEFORE you apply for a mortgage. Family members, and folks who come to your wedding (for instance) can give you gifts to pay off debt, cover closing costs, or help you with the down payment. It must be documented, and sometimes, that gift money documentation can be tough to understand. Spouses ARE allowed to give gifts to their spouse on a FHA loan, however, they are NOT allowed to do that on a USDA Home Loan. On USDA Loans, we generally have to add the spouse to the account with the funds we need to close. There’s a NC Housing Program that awards GRANTS for down Payment. That program has a Sales Price limit for the whole state of $240,000 - the income limits vary, for the NCHFA program by county. This program works especially well for Single Parents, and first time home buyers - however you do NOT have to be a first time home buyer to qualify for the grant program.
  9. 9. Sweat Equity / 203K ● Home Inspections ○ POC Items ● Condition of the Home ○ Before Closing Issues ○ Escrows For Repairs Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC If you have a home inspection done (and we HIGHLY RECOMMEND THAT YOU DO) it’s important to remember that they are TRYING to find something wrong with the home you are buying. So you can expect there to be a laundry list. Most of the items we see on a home inspection report fall into the “good to know” - stuff you might want to address later. In the situations where there are items you find items that you need the Seller to correct, or you negotiate a lower sales price to accommodate the issue, that you will fix yourself - be aware of the fact this could be an issue for closing too. In the “old days” we could put Seller repairs as an INVOICE or payment to the Roofing Guy (for instance) on a closing statement. We might also see a “credit” to the Buyer for “roofing” on the closing statement… but in TODAY’s lending environment - that is not allowed. Items like that need to be POC, or Paid Outside of Closing… because if the Bank sees those items on a closing statement - they are going to need evidence that it’s all been fixed. If it has - great! Along those same lines, if the appraiser notices an issue with the home, we will have to have it fixed prior to closing. Sometimes we can use the Home Inspection report, to satisfy the Underwriter, but usually Appraiser noted issues require an Engineer or Licensed Contractor statement. We are not allowed (in MOST CASES) to escrow for repairs, although we have seen a few (read VERY FEW) exceptions regarding repairs that were documented. The
  10. 10. Attorney ALWAYS charges a fee for handling the Escrow, usually upwards of $500. FHA offers a Rehabilitation loan, called a 203k loan that is great if you have repairs of less than $30,000.
  11. 11. Student Loans USDA Loans have the most stringent Student Loan Requirements. FHA and VA much easier guidelines Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC These days most people who have been in college during the past 10 years have some sort of DEFERRED Student Loans. Those Deferred Student Loans come in two “types” There’s Income Based Repayment (IBR), and these vary each year. Then there’s the ones that you apply to get deferred each year, but they have a fixed payment. The “fixed payment” Deferred Student Loans need to have 12 months of deferment for them to be “left out” of your qualifying ratios for USDA loans, FHA or VA Loans. For FHA and VA Loans, the actual payment of the IBR Student loan is used to qualify you for the mortgage. If the fixed payment deferment is for at least 12 months, we don’t count it for qualify purposes. For USDA Loans, however, the IBR Student Loan Qualifying guidelines read: When an applicant provides documentation of an IBR agreement and payment from the loan servicer the following apply: 1. If the IBR payment is less than $100 and 1% of the total loan balance is more than $100, a minimum payment of $100 must be included in the debt ratios. (READ: Even if you are only being charged $22 a month, we are going to COUNT $100 a month for that debt!) 2. If the current IBR payment is over $100, lenders may use that payment amount in the debt ratios.
  12. 12. This is HUGE! We’ve seen people go OFF of the IBR Deferred payment, and get a fixed payment, just so they can buy a house.
  13. 13. Big Mistakes Home Buyers Make It’s easy to get caught up in the “Dream” of HomeOwnership… ● Work with a Budget ● Check HOA Documents ● You need SOME Cash to be able to buy a house! Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC Figure Out your Budget: Before you start looking for a home, you need to spend a few minutes considering your budget – now and for the next 3 or 4 years. This is more than just talking to a loan officer for 10 minutes at a Realtor’s Sales Office and getting pre-approved for a mortgage. Most of those conversations end with a buyer finding out the maximum loan amount they can qualify for. We are talking about having an in depth financial conversation, that includes your savings plans, and spending habits. Nobody wants to be house poor! If you are interested in buying a home that has a Homeowner’s Association, there’s likely a laundry list of things you can and cannot do at your house. For instance, some Association Covenants restrict the number of cars you can have parked permanently – or weather or not you can park your boat in your driveway. Sometimes, there are Association fees that cover the roof and grounds for a Condominium project or a Townhome Community. In that situation, you also want to read the Budget, and you will want to know if the project is currently approved for FHA or government financing – because again, this could affect future value of the property when you go to sell it. You CAN get into a house with NO money - but it can be a struggle. We would suggest that you have at least $1200 if you want to buy a house. Yes, you can get the seller to pay closing costs (we can help you with no closing cost loans too!) … and yes, you can use you can use the USDA Home Loan, which requires no down payment at all, or your VA Home Loan benefits (if you have them) to buy with no
  14. 14. money down. Realistically though, you’re going to want a Home Inspection, you will have to pay for your Home Owners Insurance, your part of the taxes… you need a LITTLE money! HOWEVER, having said that – we OFTEN have folks who get all of their Earnest Money back. You really (really) can buy a nice house in NC with as little as $1000 (or less) and if you need help with that, we also offer the NCHFA Grant Program, which provides up to 3% to cover down payment assistance and closing costs. It’s a FORGIVABLE loan from the State for folks who have not owned a home in the last three years. Again, not all lenders offer this program – so call us, don’t miss out on this FREE CASH!
  15. 15. Contact Us Steve Thorne Mortgage Team NMLS 60596 111 Corning Road, Suite 230 Cary, NC 27518 Cary: (919) 649 5058 Follow Eleanor on Twitter @isellmoney or find me on G+ Steve Thorne - 919 694 5058 NMLS 60596 River Community Bank, NA Cary, NC You can also leave us comments or questions on any of our posts - we try to answer them daily!