Removing or Adding a Person to a Loan

In divorce it is common, for the spouse who keeps the home to refinance to remove the other spouse from the loan.  Equally as common, first-time buyers who don’t have enough income to qualify may ask a parent to co-sign and must add their name to the mortgage.

Another situation that requires removing or adding a person to a loan could be to qualify for a better interest rate.  The difference in a minimally acceptable credit score and something that might be considered “good” could be as much as a 0.5% higher rate for the term of the mortgage.

Consider that a couple is buying a home with a conventional loan, and they have individual credit scores of 760 and 670.  The underwriters will price the loan based on the lower of the two scores.  A half percent interest on a $400,000 30-year mortgage could have close to $110 a month difference.

A possible solution to this dilemma could be available, assuming the borrower with the higher credit score had enough income to qualify for the mortgage separately.  If so, that person would be eligible for the lower rate. The property could still be titled in both names and if so, both would be liable for the mortgage should the named borrower default on the loan.

Another scenario that may arise is perhaps a couple has enough income to qualify for a mortgage but because one of the parties has a lower credit score, it will be priced higher.  Consider having a parent or relative added to the mortgage as a non-occupying borrower to help with the credit score.  Interest rates are determined on the lowest middle of three scores for the borrowers applying for the loan. Assuming the parent’s score was higher than the lowest score of the couple, it could improve the rate applied to the mortgage loan.

The value of a trusted mortgage professional is very important.  They can offer alternatives to situations that could be worth tens of thousands of dollars over the life of the mortgage and in some cases, can make the difference in being approved at all. If you have questions about real estate finance let us know. We have mortgage professionals that have been part of our team for over 20 years.

Is Now A Good Time For A Cash-Out Refinance?

With the rapid appreciation that homes have had in the last two years, most homeowners have equity.  A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently.

This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner.  Generally, lenders will consider a new mortgage up to a total of 80% of the current value.

Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage.  As is in any lending situation, the rate depends on the borrower’s credit and income.  The best interest rates are available to borrowers with higher credit scores, usually over 740.

Loan-to-value can affect the rate a borrower pays also.  A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk for the lender.

There are no restrictions on how the owner can use the money.  It can be used for home improvements, consolidating debt, other consumer needs or for investment.

Eligibility Requirements as found in FNMA Selling Guide B2-1.3-03 Cash-Out Refinance Transactions

“Cash-out refinance transactions must meet the following requirements: 

  • The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it. 
  • Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan. 
  • The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
    • There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). 
    • The delayed financing requirements are met. See Delayed Financing Exception below.
    • If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B 2-2-01, General Borrower Eligibility Requirements (07/28/2015) for additional details.) 
    • If the property was owned prior to closing by an inter-vivos revocable trust, the time held by the trust may be counted towards meeting the borrower’s six-month ownership requirement if the borrower is the primary beneficiary of the trust. 
  • For DU loan case files, if the DTI ratio exceeds 45%, six months reserves is required.”

If you are are interested in a referral to a great loan officer, give us a call at 206-979-9632 or send me an email to David@TheHarlanTeam.com

Invest in Equity Build-up

Which color do you like the most?

Equity build-up could be one of the biggest advantages to buying a home.  There are two distinct dynamics that take place to make this happen: each house payment applies an amount to reduce the mortgage owed and appreciation causes the value of the home to go up.

It is easy to make a projection based on the type of mortgage you get and your estimation of appreciation over the time you expect to own the home.  Even conservative estimates can produce impressive results.

Let’s look at an example of a home with a $270,000 mortgage at 4.5% for 30 years and a total payment of $2,047.55 payment including principal, interest, taxes and insurance.  The average monthly principal reduction for the first year is $362.98. If you assume a 3% appreciation on the $300,000 home, the average monthly appreciation is $750 a month.

The total payment of $2,047.55 less $1,112.98 for principal reduction and appreciation makes the net monthly cost of housing, excluding tax benefits, $934.57.  If this hypothetical person was paying $2,500 in rent, it would cost them $1,565.43 more to rent than to own.  In the first year, it would cost them over $18,000 more to rent.

Together, the items in this example contribute over $1,100 to the equity in the home .  This is one of the reasons a home is considered forced savings.  By making your house payments and enjoying increases in value, the equity grows and the net cost of housing decreases by the same amount.

In this same example, the $30,000 down payment grows to $133,991 in equity in seven years.  While this is equity build-up, the extraordinary growth is attributed to leverage.  Leverage is an investment principle involving the use of borrowed funds to control an asset.

To see what your net cost of housing and the effect of leverage will have on a home in your price range, see the Rent vs. Own.  If you have questions or need assistance, contact me at (206) 979-9632.

One Loan for Purchase & Renovations

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The FNMA HomeStyle conventional mortgage allows a buyer to purchase a home that needs renovations and include them in the financing.  This facilitates the purchase of the home and the renovations in one loan rather than getting a separate second mortgage or home equity line of credit.

The combination of these loans should save closing costs as well as interest rates which would typically be higher on a home improvement loan.

The borrower will need to have an itemized, written bid from a contractor covering the scope of the improvements.  Any type of renovation or repair is eligible if it is a permanent part of the property.  Improvements must be completed within 12 months from the date the mortgage loan is delivered.

  • 15 and 30-year fixed rate and eligible adjustable rate loans are available.
  • Typical FNMA down payments are available starting as low as 3% for a one-unit principal residence to 25% for three and four-unit principal residence and one-unit investment properties.
  • Borrower must choose his or her own contractor to perform the renovation.
  • Lender must review the contractor hired by the borrower to determine if they are adequately qualified and experienced for the work being performed. The Contractor Profile Report (Form 1202) can be used to assist the lender in making this determination.
  • Borrowers must have a construction contract with their contractor. Fannie Mae has a model Construction Contract (Form 3734) that may be used to document the construction contract between the borrower and the contractor.
  • Plans and specifications must be prepared by a registered, licensed, or certified general contractor, renovation consultant, or architect. The plans and specifications should fully describe all work to be done and provide an indication of when various jobs or stages of completion will be scheduled (including both the start and job completion dates)

Up to 50% of the renovation funds may be advanced for the cost of materials after the closing of the loan.

This mortgage does have a provision for the borrower to do a portion of the work themselves if it doesn’t exceed 10% of the total project and it must pass inspection on completion just as the contractor’s work.

It is recommended that borrowers thoroughly research this program before they commit to a loan.  For detailed information, see FNMA HomeStyle Renovation Mortgage and Selling Guide Announcement SEL-2017-02.   It is important to work with a mortgage officer who is familiar with these loans who can guide you through the process.