"I Ran the Credit on You and Your Fiancee. Call Me to Discuss."

That was the response I received last week from our loan officer (or loan originator, as his website says). Around July, I started kicking the idea of purchasing a home around in my head. I spoke to my sister and her husband (they own their home) and asked for recommendations and tips about the process. They told me that I should get pre-qualified for a loan to see what I can afford.

I went to my bank's website and filled out the application and waited for a response. About four hours later, I received an email stating that I was qualified for a $200,000 mortgage. Now, from my understanding, a pre-qualification means that based of the information you've provided, you can borrow X amount of dollars. Pre-approval, on the other hand, means after an application fee and the submitting various documents you will be approved for a loan from the institution (provided the appraisal matches the offer). Read more about the difference on investopedia.

My brother-in-law and sister used a realtor named Bob for the purchase and sale of their first condo. They also used him when they purchased their current home. I spoke to him and laid out our strategy for home buying, which I will lay out in another post for you guys. I told him about my pre-qual and he suggested that I should get pre-qualified again with my fiancee to see what we can afford together. He recommended Allen Smith from GuarnteedRate. Allen has been super helpful through the entire process and we will most likely use him and GuarnteedRate as our lender. My fiancee and I submitted the application through his website.

Now, an important component of the home buying process and a successful relationship is communication! We have been open and honest with each other since day one. She explained to me, on our second date (I think), that she ran into a few credit issues because of an unsavory ex who "handled" her finances. She had a few collections on unpaid credit cards, but she had been paying them off and actually finished earlier last year.

It was because of this communication and honesty, that Allen's email was not a shock or a point of discontent. Additionally, my credit score is strong enough to carry us both if necessary. The credit score revealed that my fiancee's credit was not optimal and would only hinder our approval. Allen went through and explained that some of the collectors did not re-report after she paid off her collections. The report also revealed a joint credit card with a high balance. His recommendation was to contact the collectors and have them re-report, or else my fiancee would be on a "credit treadmill" that will not let her credit score "move forward."

As for my credit, Allen explained that my income, savings, and investments qualify me for a $250,000 mortgage. He was prudent to say that the $250,000 approval does not mean I can purchase a home that is valued at $250,000. Rather,  several factors, known as housing expenses, are rolled into that $250K amount and cannot exceed 43% of my monthly income. This is a change coming from government regulation and the number is to help distinguish "Quality Mortgages" so lenders can avoid a second sub-prime lending fiasco. Read more about it here.

After subtracting things like credit card payments, car payments, and student loans, the loan officer will give a number that your monthly mortgage cannot exceed. My monthly mortgage, as of now, cannot be more than $1,678. This number must include PMI, homeowners insurance, property tax, mortgage interest, and the principal. Property tax can be a deal breaker on many homes because a higher the property tax means you will only be able to afford a "cheaper" home. Let's break it down in two scenarios...

Home 1
Price of Home: $200,000  
Down Payment: $10,000 (5%)
Taxes: $2,500

Here is what you would pay per month....

PMI: $80
Home Insurance: $100 (just an estimate, this can be lower after discounts)
Property Taxes: $208
Mortgage Interest: $400
Principal: $527
Total: $1,331 (monthly mortgage)

Home 2
Price of Home: $200,000  
Down Payment: $10,000 (5%)
Taxes: $6,000

PMI: $85
Home Insurance: $100
Property Taxes: $500
Mortgage Interest: $416 (this goes up because of the money you are escrowing for property tax)
Principal: $527
Total: $1,628 (monthly mortgage)

Disclaimer: this is the first time I am making these calculations. My math might be off a bit. Check out bankrate's mortgage calculator to see what your mortgage could look like, please note that their calculation does not include homeowners insurance.

Based on this, someone with my housing expense limit would just barely qualify for the mortgage on the second home and definitely qualify for the first one (an alternative option would be to make an attempt at an 80-10-10 mortgage or increase their down payment). At the end of the day, finding the right home may come down to a balancing act between the factors that determine what you're able to pay monthly.

Next Monday, I'll post about budget management and savings. Stay tuned and feel free to comment or ask questions. 

Max's Center for Kids Who Can't Read Good and Want to Do Other Stuff Good Too: Sites Worth Visiting Before Purchasing a Home

I'm a teacher by trade, so naturally I look to educate myself on anything I do not completely understand. Before I proposed to my fiancee, I understood the basics of buying a home: you search for a home with a realtor, look at houses, make an offer, get the home appraised, get the home inspected, finally attend closing and cry a little as you sign your life away. However, I never actually understood the entire process anymore than your average 4th grader understands where babies come from.

Searching the Internet I came across a few sites that were helpful and others that were not so helpful. I have included three of them below and explain what I learned about the home buying process from each site.

Investopedia: Think wikipedia for investments specifically. I started using this site when I started to invest in stocks a few years back. I like using this site for looking up terms that I don't completely understand. Take for example amortization. This refers to the monthly installments of the loan. They also include clever animated videos that explain basic info like "What's a Mortgage?"

If you're interested in learning how to invest, investopedia has a really great simulator where you can invest $100,000 in fictitious cash and practice your investment strategy.

Mint.com: If you don't use Mint.com, you really should. It is an excellent tool to look at things like gross income, net income, and gain/loss ratio based on your actual accounts. When I first started using this site in 2010, I moved from using credit cards to cash only. The net income trend graph showed me that my finances clearly were not in accord as my net income was in the red for the first three months of 2010 because I was over spending on my credit cards. Even though I paid my credit cards off in full each month, I realized if I lost my job I would be at least a month behind my cash-flow.

I will admit, I was a bit skeptical at first because the website asks for you financial account numbers and passwords. However, Mint is quite reputable and the New York Times published an article in 2010 that describes their security process. At the end of the day, it's up to you. If you're proficient at Excel and have a bunch of free time on your hand, you can do it yourself too.

Bankrate.com: I recently discovered this site and find it immensely helpful. The site breaks down each part of the home buying process into "chapters" found in this link. You can learn about things like PMI (Private Mortgage Insurance). This is what you will pay if you can not float the 20% down on a home. Once you accumulate 20% equity (pay off 20% of the home purchase price, not including interest payment), PMI is terminated (PMI varies based on the price of your home and protects the lender in case the buyer (you) defaults.  
Edit: PMI does not self terminate, you need to contact you lender to make this happen.

I also learned about the 80-10-10 plan. This is a good idea if you cannot secure a 20% down payment, but can drop 10%. If you can swing 10%, you can make an attempt at this plan. Discuss this with your loan officer for further details, but you will need to apply for two loans (one 10% loan and one 80% loan). If you do this, you will avoid PMI. The advantage here is that your loan interest is tax deductible, while the monthly PMI payments are NOT tax deductible.

I hope these sites help you and look for my third post about the loan process next week! Thanks for reading!

Disclaimer:
This blog is for informational, educational and discussion purposes only. The author of this blog is not a lawyer, not a registered investment advisor, financial advisor, or mortgage loan officer. Even though topics may be discussed on this blog that involve legal or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice or investment advice. No reader should act in reliance on anything discussed in this blog without prior consultation with a licensed professional who is qualified to evaluate the reader’s individual facts and circumstances and offer an informed professional opinion with respect thereto. If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that the author of this blog shall have no liability resulting from such unilateral action or decisions by the reader.
The author of this blog takes care to see that the information it posts on this blog is accurate and truthful. Nevertheless, the author does not expressly or impliedly warrant or guarantee the accuracy of its postings and the information that others post here.
The author will, on occasion, post links to information on other websites. Such links and the information thereon are not under the author’s control. Merely because a link to a third party site appears in this blog does not mean that the author has reviewed or approved of the link and its content. The reader must treat information from third party links at the reader’s own risk, and the author accepts no liability with respect to such third party information.

So You Want a 30 Year Loan?

In the year 2044, I will be just eight short years from retirement, and I'll be able to submit my final mortgage payment (provided I send minimum payments and purchase by the end of next year).

2044, difficult to fathom, but a reality one must imagine if they wish to enter the realm of homeowner/landowner (I prefer landowner. I picture rolling hills, horses, and bearded men roaring while wielding skull-bashing axes). When I think about the reality of taking a loan out that could potentially take me 30 years to repay, I cringe. The proverbial kick in the gut as picture myself sending monthly payments of my hard earned cash to a fancy cheese eating billionaire. However, what really makes me cringe is how much money I'm "throwing away" every month as I rent my crumby apartment.

Currently, my fiancee and I pay $1050 a month for a decent living space in Albany Park. Our bone-head landlord, ineffective building manager, and the slack-jawed-crayon-eating-door-slamming-loud-music-playing-slob jerk neighbors make me never want to rent an apartment for as long as I live. I do not want to spend my money to help someone pay off their mortgage, even if it means I am not responsible for taxes or repairs.

Logical, calculated, and practical. Each adjective has described me since about the age of 16. I've never borrowed cash from anyone to pay bills and have never paid a bill late. Every nickel and penny is accounted for during my quarterly budgets and I often start budgeting for Christmas in September. However, I was almost dumbstruck when I came across a calculator on NY Times' website that said I would save over $500 a year after year six of landownership. Not a huge chunk of change, but the savings only grow the longer one stays in their purchased home.We plan on staying for at least 10 year. By year ten, our annual savings increases to $2,300.

Additionally, Trulia has an excellent map that displays if it is cheaper to buy or rent state-by-state. Currently, it is 42% cheaper to purchase a home in my state of Illinois than renting an apartment. This is based on averages of course and can vary neighborhood to neighborhood. I can imagine that the $10,000 foreclosures across the various violence-ridden neighborhoods and farming prone areas are included in this average;therefore, the 42% could be a little skewed say you are currently paying $1000/month rent and looking to buy a $400,000 home in Lakeview. The odds are not in your favor in this scenario.

At the end of the day, my fiancee and I have decided that buying a home is our best and most logical move. Anyone who's interested can keep up to date with our adventure as we navigate through the waters of searching, financing, and ultimately purchasing a home. I hope this blog serve to be informative and if you have questions, definitely post them and I will do my best to give me personal advice.

Disclaimer:
This blog is for informational, educational and discussion purposes only. The author of this blog is not a lawyer, not a registered investment advisor, financial advisor, or mortgage loan officer. Even though topics may be discussed on this blog that involve legal or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice or investment advice. No reader should act in reliance on anything discussed in this blog without prior consultation with a licensed professional who is qualified to evaluate the reader’s individual facts and circumstances and offer an informed professional opinion with respect thereto. If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that the author of this blog shall have no liability resulting from such unilateral action or decisions by the reader.
The author of this blog takes care to see that the information it posts on this blog is accurate and truthful. Nevertheless, the author does not expressly or impliedly warrant or guarantee the accuracy of its postings and the information that others post here.
The author will, on occasion, post links to information on other websites. Such links and the information thereon are not under the author’s control. Merely because a link to a third party site appears in this blog does not mean that the author has reviewed or approved of the link and its content. The reader must treat information from third party links at the reader’s own risk, and the author accepts no liability with respect to such third party information.