A First-Time Buyer’s Guide

A First-Time Buyer’s Guide

/6 Comments/in /by

Next to having a child or getting married, buying a house might be the biggest event in most people’s lives. Purchasing a home is an exhilarating symbol of independence. It is the embodiment of the American Dream.

For first-time buyers, the home buying process can seem daunting. Thankfully, Michigan Mortgage is here to help. We assembled this 10-step home buying guide to help first-timers understand the home-buying process.

  • Buying a homeStep 1: Check Your Credit Score
  • Step 2: Save for a Down Payment
  • Step 3: Calculate What You Can Afford
  • Step 4: Choose a Mortgage Lender
  • Step 5: Get Preapproved
  • Step 6: Find a Real Estate Agent
  • Step 7: Find a House
  • Step 8: Make an Offer
  • Step 9: Get an Inspection
  • Step 10: Closing

Step 1: Check Your Credit Score

Your credit score is critical to determining whether you will be approved for a mortgage, as well as the rate you will pay, so it is worth checking your credit score and taking steps to improve it.  Buyers with higher credit scores usually get better interest rates. To obtain a conventional mortgage, you’ll need a credit score of 620 or higher. For FHA loans, the minimum credit score requirement is 580.

Step 2: Save for a Down Payment

When it comes to a down payment, the general rule of thumb is that the down payment on a mortgage should be 20 percent of the home’s price. Putting 20 percent down helps you avoid extra fees such as mortgage insurance.

If you can’t put 20 percent down, don’t worry. A mortgage down payment can be as low as 10 percent, 5 percent, or even 0 percent for certain types of mortgages, such as VA loans or USDA loans.

In addition to the down payment, you will need to save money for closing costs. These are fees related to the processing of your loan. You can expect closing costs to be 3 and 6 percent of the home purchase price.

Step 3: Calculate What You Can Afford

Your mortgage lender will ultimately tell you how much money you qualify for. But even before you speak with a mortgage lender, you can calculate how much house you can afford to make sure you don’t overextend yourself.

When calculating how much house you can afford, use the 28/36 percent rule, which says:

  • Do not not spend more than 28 percent of your gross monthly income (your salary before taxes) on housing expenses
  • Do not spend more than 36 percent of your gross monthly income on monthly debt payments (mortgage, car payments, subscription services, credit cards, etc.)

The calculations are as follows:

  • Maximum Monthly Housing Expenses = (Gross Monthly Income X 28) / 100
  • Maximum Total Monthly Debt Payments = (Gross Monthly Income X 36) / 100

Step 4: Choose a Mortgage Lender

Just as you choose your own real estate agent, you choose your own mortgage lender. Many buyers use lenders based upon the recommendations of their real estate agents, but you can choose whichever lender you want.

When comparing lenders, each one will provide you a Loan Estimate, which defines the loan terms, expected payments, and closing costs for your mortgage. You will be able to compare the estimates to see the differences between what each lender offers.

Step 5: Get Preapproved

Getting preapproved by a lender can be helpful when you are putting in offers on houses. When you are preapproved, sellers will have more confidence that your offer on their house will pass final approval.

Preapproval involves a lender pulling your credit information and assessing your financial situation. The lender will provide you with a letter that indicates the amount the lender is willing to lend you.

Step 6: Find a Real Estate Agent

Real estate agents take the stress out of the home buying experience. Your agent is your chief advocate, confidante and hand-holder in the process, so you want to find a good fit. Agents provide knowledge of the housing market and they have skills in the negotiation process. A real estate agent will represent you throughout the home buying process to ensure that you find the right home, ask the right questions and make the right offer. Agents have the power to negotiate on your behalf and serve as your buyer. Agents are only paid a commission if you close on a new home. The commission they receive is paid by the seller through the purchasing price of the house.

Step 7: Find a House

As you shop for houses, you’ll find that the more houses you see, the more they all start to blend together. So, try to be organized and make sure that you talk to your agent about your likes and dislikes about each one.

When visiting each listing, pay attention to the neighborhood that the home is in, as well as the home itself. Drive around the area. Consider what your commute will be like. Research the schools your kids would go to and figure out how long it would take them to get there. Find out where the closest grocery store and pharmacy is located. Make sure the area fits your style.

When touring each house, take photos and make notes. Make sure each home meets your needs. Think about the style of the home: Does it fit your lifestyle? Are there enough bedrooms? Enough bathrooms? A big enough garage and yard?

Step 8: Make an Offer

For most buyers, this is when the excitement peaks. Once you’ve found a home you want, your agent will work with you to write a purchase offer. The listing price is only a starting point. Your agent will understand the market and help guide you to make the best offer. Once you’ve submitted the offer, the seller will respond with a yes or no or a counteroffer. If your offer is accepted – congratulations, you are one your way to becoming a homeowner!

Step 9: Get an Inspection

If your offer is accepted, you have the right to have the home inspected. Your real estate agent can recommend a professional home inspector. The home inspection will identify areas where repairs or renovations are needed. If significant repairs are needed, you can request that the seller complete them before the closing. If the seller declines or you feel uncomfortable purchasing the house because of what the inspection found, you can most likely withdraw your offer.

Step 10: Closing

This is the big day. The closing is when you gather around a table with the seller and their agent, your agent, and representatives from the title company. You’ll read and sign a slew of papers that finalize your home purchase. It’s an exciting experience, especially for first-time buyers. Once the closing is done, you are now, officially, a proud homeowner!

At Michigan Mortgage, we specialize in helping first-time buyers navigate the mortgage process. We guide you along the way and work to get you the best rate and terms possible.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

The Benefits of Working with a Local Mortgage Lender

/5 Comments/in /by

Buying a home might be the single biggest purchase you make in your life. You want it to go right. That is why the mortgage lender you choose is critical to making sure your homeownership dreams come true and the experience is hassle-free.

Whether you are a first-time buyer needing assistance through the lending process or you are an existing homeowner seeking to refinance or purchase a vacation home, it pays to go with a local lender as opposed to a big-name national bank or brand.

Here’s how a local mortgage lender can help guide you home.

1. Personalized Service

A local mortgage lender gives you the chance to to work face-to-face with an expert, if need be. The growth of digital mortgages, like our Home Snap app, has eliminated the need for as much face-to-face meeting in the past, but as a home buyer it can be reassuring to know that your loan officer is right around the corner as opposed to across the country or overseas.

A local lender gets to know you. Your messages won’t sit in a voicemail box unanswered for weeks on end. With Michigan Mortgage, you’ll get a cell number for your loan officer and can call or text them at a moment’s notice to get your questions answered.

Local Loan Officers have an incentive to provide you with excellent service because they want you to be a source of referrals for future business. Our loan officers know that whether you have a great experience or a bad one, your friends and relatives are going to hear about it. Our loan officers live and work in your neighborhood. They want the best for you and the community. They have a vested interest in having each and every loan close as smoothly and efficiently as possible.

2. Local Expertise

Another advantage of local lenders is their familiarity with local market conditions. Local lenders know their local neighborhoods, so they know what’s going, what the trends are, and they use that knowledge when helping buyers obtain mortgages.

For example, a national lender with no roots in the local community may be reluctant to approve a mortgage for an atypical property, such as an original farmhouse on acreage that’s now covered by a subdivision. A local lender will know the history of the area and the changing demographics and economic trends and may be more comfortable underwriting such a loan.

Local lenders also have their finger on the pulse of the local or regional economy, and have a better sense of the lending risks in the area. What looks to a big lender like a dilapidated section of town might actually be an up-and-coming area where properties re increasing in value. Local lenders will know this.

Local lenders may also be more attractive to some home sellers and real estate agents who want an efficient and timely closing. Reputation matters. In situations where several offers are on the table, having a local, trusted lender could be the difference between closing or not closing.

3. Realtor Relationships

Local lenders invest a lot of time and effort building relationships with local Realtors. Realtors and lenders are the yin and yang of real estate. Michigan Mortgage Loan Officers are on a first-name basis with most of the real estate agents in their local areas.

Many local loan officers have extended hours, allowing borrowers and Realtors to contact them during the evenings and weekends. If you see a house you love on a weekend, chance are you can reach your loan officer and get an approval quickly.

Also, with everyone on your team – the Realtor, the lender, you– working in proximity, a closing can happen quickly and without hassle. The final stage of home buying is sometimes the most stressful. Having a unified team that is familiar and comfortable with each other can make the process quick and painless.

4. Varied and Specialized Products

Local lenders have a better understanding of property values and the local economy. When you work with Michigan Mortgage, you’re paired with a licensed loan officer and team of professionals who are experts in your region. Our loan officers help you choose the right type of loan for your circumstance and we keep you updated along the way. We have in-house tools and resources to expedite a loan, ensuring everything is taken care of in a timely manner.

Local lenders are where you’ll find the specialized loans the big lenders won’t bother with. Maybe you want an adjustable-rate mortgage with a 15-year lock? Or you want to buy a vacation property that lacks a furnace? Or you want to buy or refinance a home for less than $100,000, an amount too small to be of interest most lenders? Or you want a jumbo loan?

Local lenders are have more flexibility. Big banks need process large numbers of loan applications. To do that, they have rigid guidelines about who they will and won’t lend to. Big banks are more about volume than customer service.

At Michigan Mortgage, we have been Michigan’s leading MSHDA first-time buyer lender for 7 straight years. We are also a recognized USDA rural development leader.

5. Reliable, Responsive & Flexible

Local lenders are better at closing loans on a timely basis. If the closing of a loan has to be extended by a week, local lenders are more flexible than big banks who have corporate mandates to crank out the volume.

Local lenders, along with local real estate agents, have an incentive to provide you with excellent service because they want you to be a referral source for future business. They stake their reputation on each and every customer.

With a local lenders, you are much closer to the decision makers with the authority to approve your mortgage. You aren’t dealing with a corporate bureaucracy.

Local loan officers are more likely to get personally involved in qualifying you for a mortgage, as opposed to big banks.  Often, it’s a matter of the getting to know you. Perhaps you are self-employed with irregular income. Or you have poor credit due to a financial crisis, but have good income and low debt.

Michigan Mortgage Loan Officers are better suited to be responsible and flexible for borrowers like these.

At Michigan Mortgage, you will never be just a name or number on a loan application. We manage every step of the mortgage process, from application to underwriting to closing, to make the process easy. We have been financing the American homeownership dream for nearly 25 years. We can do the same for you.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Doctor Loans: What You Need to Know

/0 Comments/in /by

The Doctor Loan has a long history in the United States. First offered to attract new physicians to growing towns in the Wild West, they have evolved over the year. Today, 18,000 new physicians graduate from medical school every year. New physicians can have very specific credit and income profiles that represent a different kind of risk, not reflected in a normal borrower profile.

Image of a doctor reading someone's blood pressureWhat Is a Physician Mortgage Loan?

A physician mortgage loan is a low down payment mortgage available to physicians, dentists and other eligible medical professionals. They do not require mortgage insurance and are often considered jumbo mortgages as they allow higher loan balances than conventional and FHA mortgage loans. These doctor home loans have fewer restrictions for borrowers than conventional loans because lenders generally trust doctors to be responsible borrowers.

At Michigan Mortgage, we’ve made it easy for doctors to get a physician mortgage.

The Michigan Mortgage Physician Mortgage Loan Program

That is why Michigan Mortgage has a very specific program designed for that type of individual. Physicians of all types can benefit from our “Doctor Loans.” Features of the program include:

  • Available for new residents, new attending (7-10 years out of residency), or to physicians at any stage of their career.
  • Flexible down payment options.
  • Private mortgage insurance (PMI) is not required.
  • Rather than looking for past income, we will consider an employment contract as documentation of future earnings (instead of pay stubs.
  • The loan amount can go all the way up to $2 Million.
  • Can be used for primary or second home.
  • Certain programs allow new Physicians to use gift money for a down payment, for required reserves, or for closing costs.
  • Often doesn’t calculate student loans the same way as standard underwriting. Student loans are not counted as part of debt-to-income ratio (DTI).

Other than a doctor loan, physicians are also available for other loan types.

Conventional Mortgage: Often this is the best choice for borrowers. Conventional loans generally offer the most term options and lowest fees, with the lowest rates. Conventional loans do require proof of earnings and a substantial sum of money (20% of mortgage amount) to put down.

FHA Loan: This loan can have higher fees and rates than a conventional mortgage. FHA mortgages can have a smaller required down payment, and a monthly mortgage insurance premium. This loan requires the lender to use the credit report amount of the student loan payment, or if none listed, 1 percent of the outstanding balance unless the borrower can provide documentation that the loan is in deferral. The interest rate could be slightly lower than a Doctor Loan but could wind up costing more because of PMI costs.

VA Loan: This loan requires that you qualify for VA benefits. There is no down payment or mortgage insurance requirement. Rates are similar to FHA rates, but the funding fee is slightly higher.

Ready to get started with a Doctor Loan? Give us a call and we will guide you through the process!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Buying a Home with Zero Down

/0 Comments/in /by

What is a “Zero-Down” Loan?

A zero-down home loan is a no-down-payment mortgage offered by the United States Department of Agriculture (USDA) for eligible rural and suburban home buyers.

You might be thinking, “but I don’t live in a rural area.” That’s OK. While the purpose of the USDA loan program is to boost home ownership in rural areas, the USDA’s definition of “rural” is wide ranging and includes many villages, small towns, suburbs and exurbs of major U.S. cities.

These loans are issued through the USDA Rural Development Guaranteed Housing Loan Program. USDA loans have been available since 2007. They are generally intended for low- or moderate-income borrowers.

What Are the Benefits of a USDA Loan?

USDA loans offer many benefits over traditional mortgage loans.

  • $0 down payment. This is the obvious benefit.
  • Competitive interest rates. USDA loans typically offer some of the lowest interest rates on the market. Interest rates on USDA loans are determined by several contributing factors, however the primary factor is your credit profile, as is the case with all mortgage options. Those with higher credit scores often receive the most competitive rates, although borrowers with less than stellar credit may still qualify for a low rate due to the USDA guarantee.
  • Low monthly mortgage insurance
  • Lenient requirements. USDA loans are designed to provide homebuyers with lenient eligibility requirements that help low-to-moderate income purchasers obtain a home.

USDA Loan Eligibility

At a minimum, USDA loan program guidelines require:

  • U.S. citizenship or permanent residency
  • Ability to prove creditworthiness, typically with a credit score of at least 640
  • Stable and dependable income
  • A willingness to repay the mortgage, as indicated by at least 12 months of no late payments or collections
  • Adjusted household income is equal to or less than 115% of the area median income. See here for income guidelines.

A credit score of 640 or above usually helps eligible borrowers secure the best rates for a guaranteed USDA loan with zero down payment. Such a score also rewards you with a streamlined or automated application process.

You can still qualify for a USDA loan if your credit score falls below the margin or if you have no credit history at all. However, the interest rates may not be as favorable. In addition, applicants with no traditional credit history may still qualify for these loans. However, you’ll need to show a reliable financial standing through evidence like timely utility or tuition payments.

How Do I Apply?

Applying for a USDA loan is pretty straightforward.

The first step is to choose a USDA lender, such as Michigan Mortgage. We specialize in USDA loans. Once you are working with us, we’ll find out what home you are interested in, where it’s located, your asset and debt situation, and how much you need to borrow. We will conduct a credit check to assess your credit score, just as we do with a traditional mortgage.

Once all that is done, we’ll ask you to provide documentation, including:

  • Government-issued ID
  • W-2 statements
  • Recent pay stubs
  • Bank statements

The application process is pretty easy, really. Our loan officers are skilled at making everything go smoothly and helping you navigate the process and get you in your home as soon as possible.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Image showing a graph being analyzed

Conventional, FHA or VA: Which Loan is Right for You?

/0 Comments/in /by

When it comes to getting a home loan, there are a number of options available to U.S. home buyers, but there are three programs that seem to be the most requested.

  • Conventional
  • FHA
  • VA

What are the differences in these loan types, and which is right for you? We’ve got the answers.

No matter which loan type you are considering, get started fast with Home Snap.

Image showing a graph being analyzedConventional Loan

Conventional loans are the most popular mortgage loan in the US. Conventional loans make up nearly three quarters of all home loans in the country. At Mortgage 1, this percentage holds true, also, according to Mortgage 1 CEO Mark Workens. Michigan Mortgage is a DBA of Mortgage 1.

What is a conventional loan?

A conventional loan is a mortgage that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders. With a conventional loan, insurance, if there is any, is paid by the borrower.

Why do so many home buyers go with a conventional loan?

One reason is flexibility. Conventional loans can be obtained for a variety of lengths and for a wide range of terms. Provided you put down at least 20 perfecnt, conventional loans don’t require any mortgage insurance. And conventional loans can be used for second homes or vacation properties.

Here’s a summary of conventional loan pros and cons and who they are best suited for.

Pros of conventional loans:
  • Low interest rates
  • Fast loan processing
  • Variety of down payment options, starting as low as 3% of the home’s sale price
  • Various term lengths, ranging from 10 to 30 years
  • Reduced private mortgage insurance (PMI), if needed
Cons of conventional loans:
  • Require good credit score
  • Require 20% down payment to avoid insurance
  • More stringent eligibility requirements
Conventional loans are good if:
  • You have a good or excellent credit score and can qualify for a low interest rate.
  • You’re purchasing a second home or a vacation home.
  • You’re purchasing a property you plan to fix up and flip or rent.
  • You will make a 20 percent down payment and won’t need PMI.
  • You want a shorter loan term or flexible terms, (e.g., a variable-rate mortgage).

FHA Loan

An FHA loan is issued by a federally approved bank or financial institution that is insured by the Federal Housing Administration. The FHA is the largest mortgage insurer in the world. It has insured more than 47.5 million properties since 1934.

With an FHA loan, the FHA isn’t lending you the money. Instead, the FHA insures the loan, which means if you fail to make payments and the house is foreclosed, the FHA absorbs the cost.

Pros of FHA loans:
  • Minimized credit qualifications
  • Reduced down payment requirements
  • Lower closing costs
Cons of FHA loans:
  • 75 percent upfront mortgage insurance premium required at closing, regardless of down payment amount
  • Monthly mortgage insurance payments for the life of the FHA loan if the down payment is less than 10 percent. It can be canceled after 11 years if the down payment is 10 percent or more.
  • Limited to owner-occupied properties
  • Loan limits are lower than those of conventional mortgages
FHA loans are good if:
  • People whose house payments will be a big chunk of take-home pay.
  • You have a lower credit score.
  • You will be making a smaller down payment
  • The purchase price meets FHA mortgage limits

VA Loan

A VA loan is a mortgage loan that’s issued by private lenders and backed by the U.S. Department of Veterans Affairs. It helps U.S. veterans, active duty service members, and widowed military spouses buy a home. To qualify for a VA loan, you must meet one of the following criteria:

  • Be an active duty service member or an honorably discharged veteran who has 90 consecutive days of active service during wartime or 181 days of active service during peacetime.
  • Have served more than six years in the National Guard or the Selected Reserve.
  • Are the spouse of a service member who died in the line of duty.
Pros of VA loans:
  • No down payment
  • No minimum credit score requirement
  • No limit to the amount you can borrow
  • No PMI insurance requirements
  • Don’t need to be a first-time home buyer
Cons of VA loans:
  • Must be military member or veteran
  • Required to pay a VA loan funding fee between 1.25% and 3.3% of the loan amount
  • Can only be used for primary residences
VA loans are good if:
  • You or your spouse are military service members or veterans
  • You don’t have money for a down payment.
  • Your credit score is fair or poor
  • You plan to occupy the home

If you have questions about a loan program listed above, please reach out. We’re here to help in any way we can.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Home Snap

The COVID-Compliant Way to Refinance or Purchase a New Home

/0 Comments/in /by

With all that is taking place around us, purchasing a home may not be top-of-mind for most people.

But then again, maybe it is. Before this crisis hit, the spring home buying season was just getting started. And the reality is, many families do need to sell and buy homes, even during a pandemic.

Home SnapOnce the crisis passes, there will be even more buyers and sellers. Some mortgage forecasters are predicting a pent-up demand of buyers flooding the market.

If you anticipate house shopping once the all-clear is given and social distancing rules are eased, now is the time to get ready.

Those who are pre-approved will be in a better position to have their offers accepted once the real estate market gets back into full or partial stride.

Another way home owners are taking advantage is by refinancing. Mortgage rates are still historically low. Many consumers are enjoying big savings by refinancing.

Many of you might be thinking, “how can I get a mortgage with social distancing rules in place and me stuck at home?”

The answer is: with the Home Snap mobile app from Michigan Mortgage.

Even in normal times, Home Snap offers convenience for getting a new home loan or refinancing. The app lets you do everything from the convenience of your home. The app lets you get pre-approved, view your progress, securely upload documents, digitally sign documents, and easily message your loan officer.

In these restricted times, Home SNAP is a necessity. Like workers at many companies, Michigan Mortgage loan officers are working from home for the time being. But that doesn’t mean the mortgage services we provide have stopped.

Using Home Snap, you can:

  • Start the Application Process
  • Calculate Payments Easily
  • Securely Scan and Upload Documents From Your Phone
  • Digitally Sign Documents
  • Message Your Loan Officer and Realtor Instantly
  • See Your Progress
  • Get Updates as You Go

With mortgage rates at record lows, many homeowners are taking advantage by refinancing their existing mortgages. Home Snap is ideal for these homeowners as well.

“We have many customers who are using Home Snap to refinance safely and securely while they are sitting at home, all without having to meet face-to-face. Customers love the convenience and safety, as well as the great rates.”says Mortgage 1 CEO Mark Workens.

In pre-coronavirus times, hundreds of Michigan Mortgage customers took advantage of Home Snap to get a new mortgage or to refinance. You can, too. To get started, visit the Home Snap page on our website.

This blog post originally appeared on mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

FICO Credit Score

Five Tips to Improve Your Credit Score

/2 Comments/in /by

Your three-digit credit score can make or break your financial future.

Interested in buying a home? Your credit score will determine whether or not you qualify. Looking to buy a new car or recreational vehicle? Your credit score will determine your interest rate. Hoping to take out a personal loan to invest in your child’s future? You need to have good credit to do so.

If your credit score isn’t up to par, we’re here to help! But before we offer you tips to improve your three-digit score, we want to make sure you understand how your score is calculated.

A combination of five factors determines your FICO credit score; some factors impact the score more than others. Take a look at the graph below to better understand.

FICO Credit Score

FICO scores can range from 300 to 850, but for mortgage purposes, your goal should be 680 or above.

Here are five tips to help you reach that 680 benchmark.

  1. Make sure your credit reports are accurate. Lenders analyze reports from three credit bureaus when you apply for a mortgage – Equifax, TransUnion and Experian. If you don’t have a copy of your reports, you can claim a free report from each bureau once every 12 months at annualcreditreport.com. Mistakes are known to happen, and reporting errors can have a negative impact on your score. If you find a credit reporting error, dispute the mistakes with the appropriate credit reporting agency and your score may improve.
  2. Make your payments on time. According to experts, a large portion of your credit score (35 percent, to be exact) is calculated based on payment history. Making your payments on time, every time can greatly impact your score. This includes credit card bills or any loans you may have, such as auto loans or student loans, your rent, utilities, phone bill and so on.
  3. Reduce the amount you owe. Roughly 30 percent of your credit score is calculated based on the amount of debt you owe. Most loan programs have very specific debt-to-income ratios in place that can keep you from purchasing your dream home. For the ultimate credit score boost, credit experts suggest you pay on time, twice per month, and decrease the amount you owe. This will help control the factors that collectively make up 65 percent of your score.
  4. Become an authorized user on someone else’s credit card account. This is easier said than done, but if your spouse or parent has excellent credit and a perfect payment history, it would benefit you (and improve your credit score) if you were added as an authorized user on their credit card account. Why? The account will show up on your credit report as well as the credit utilization rate and all the on-time payments associated with the account, which will naturally increase your score.
  5. Open a secure credit card. Opening a secure credit card, and using it properly, can help to increase your credit score. You’ll be required to deposit money into a checking account to secure the line of credit. Payments will come directly out of this account, so they will always be on time and will never be missed.

Your credit score won’t improve over night, but with a little hard work and dedication, you’ll be moving into your dream home in no time.

Image showing a graph being analyzed

The Pros and Cons of a Cash-Out Refinance

/0 Comments/in /by

These are certainly crazy times. The COVID-19 Pandemic has the markets in turmoil. Many states, including Michigan, have issued stay home orders, and people are generally anxious about the future. People are looking for options and smart decisions.

One of the options many people have so that they feel more secure, is to do a cash-out refinance on their home. Let’s take a closer look at some of the benefits and possible downfalls of this.

There are three reasons that I generally advise as sound financial reasons to do a cash-out refinance:

  1. Home Repairs
  2. Pay Off Debt
  3. Conservative Investments with a Financial Advisor

We will Address Each of these reasons in more detail below, but before we can get to the reasons, it is important to determine whether there is enough equity in your home to pull cash out. Equity is the difference between what you owe and what your house is worth. Generally, banks will not allow more than 80 percent of the appraised value to be pulled out in a cash-out refinance. Your lender will most likely need to do an appraisal to determine value; however, you can utilize sites like Zestimate to get a general idea.

Home Repairs

Pulling out equity to do home repairs not only adds value to your life, it oftentimes adds value to your home. If the added value is more than the cost to do the work, you have just made a good investment. So even though you added closing costs and principle to your loan, you could be ahead of the game when you do end up selling.

Paying Off Debt (Debt Consolidation)

Paying off credit card debt and high interest debt is usually met with enthusiasm from the client. This debt is oftentimes weighing heavily on client’s monthly expenditures and is gladly paid off. We will address precautions regarding that below.

Other than paying off credit cards, there are options to pay off other debt. Oftentimes clients balk at adding debt to their mortgage to pay off shorter term installment debt. The argument is that paying off this is unwise because it is added to a longer term on a mortgage. I hear things like “I only owe five years on the car, so I don’t want to add that to a 15-year mortgage.” The problem with this argument is that they are not thinking about what could be done with the money they are freeing up.

Here is the math:

Lets’ say someone has a $20,000 installment loan at 6% interest paying $386/mo. After 5 years they will have paid $23,160. If they were to consolidate that into a 15-year mortgage at 3% they would pay $24,840 in 15 years. But that is $1, 600 more you say? True BUT what if you took that $386 that you freed up and invested conservatively?  Making just 5% compounded annually over the 5 years you would make $25,594! If you kept that up for 15 years you would make $99,951!

Investments

Pulling out equity to make investments is a bit trickier. I do not normally advise this unless it is part of a financial plan overseen by a trusted financial advisor. The argument for investing is similar to the one that I made above. The problem is that investing is not for the weak of heart and hopeful gains can sometimes become devastating losses. If someone is going to pull out equity in their homes to invest, they need to have a CONSERVATIVE plan that has a high likelihood of success. Again, you really should have a financial advisor in on this plan.

Side Benefits of Doing a Cash-Out Refinance

Aside from home improvement, paying off debt and investing, a cash-out refinance might afford you the ability to lower your interest rate or remove mortgage insurance. This is especially true in the current market where interest rates have fallen and values of homes have risen.

Pitfalls to a Cash-Out Refinance

  1. Possible higher rate. As compared to a rate and term refinance (not pulling out extra equity), the interest rates on a cash out can be higher depending on your equity position.
  2. Enabling bad habits. Using them money to pay for vacations or buy non-essential luxury items is not a good idea for obvious reasons. Paying off credit cards can be a great idea as mentioned above, but if you then run up the cards again in a few months you have defeated the purpose. Be smart and don’t succumb to the allure of credit card debt.
  3. Foreclosure risk. Remember that a mortgage is a secured debt. If you don’t pay you can lose your home. Paying off unsecured debt with secured debt can be a risk if you simply cannot afford your debt. Occasionally, I have clients that come to my trying to solve all of their previous bad decisions with a cash-out refinance. Sometimes I can help but oftentimes, doing this is just prolonging the inevitable: they simply have too much debt and not enough equity to save the day.

Bottom Line

Using a cash-out refinance can make sense when interest rates are good and you have a sound use for the money. Do not use it as a rescue maneuver that could cause you to lose your home or to buy something you don’t need. In these trying times, it is imperative that you have good advice. We can guide you and help you make the best decision for your unique situation.

Analyzing Your Current Financial Situation

/0 Comments/in /by

Long before you make an offer on your dream home, it is important to honestly look at your current financial situation.

Variables such as your credit score, employment history and how much you have saved for a down payment can greatly influence the type of loan that you qualify for. Equally as important, the type of loan you qualify for can impact how viable and attractive your offer is to a potential seller.

It is important for you to analyze your spending habits. If you do not have a budget, you should start one now. This will help you understand you spending habits so that the lifestyle that is important to you will be maintainable as a homeowner.

One of the most important considerations is how comfortable with your monthly payment. For a great app to calculate a payment, click here.

As a rule of thumb, total housing costs should be no more than 25 percent of your net pay. So, if your net monthly household income is $3500 per month, a safe mortgage payment would be $875. No two households have the same expenses, so it is important to honestly look at what your expenditures are when you do a budget.

Note that lenders do not use net income when they calculate your debt to income. They use gross pay.  The formula they use oftentimes (but not always) allows you to borrow more than you may be comfortable with or should spend. I call this giving you enough rope to hang yourself. No one wants to be house poor and feel strapped paying for a mortgage they really can’t afford. That is why knowing your budget, comfort level is so important.

It is also important that you are aware of the expenses prior to closing.

  1. Earnest Money or Good Faith Deposit
  2. Home Inspection
  3. Appraisal Fee
  4. Closing Costs and Pre-Paids

These costs vary and some of them can be paid on your behalf by the seller. Additionally, it is a good idea (and sometimes required by financing) that you have a few months mortgage payments in reserves, any moving costs, furniture, appliances, etc. You can typically estimate how much you will need for these costs by getting pre-approved for a loan by a lender that you trust and is highly recommended to you.

Your credit rating is a primary factor in qualifying for a mortgage.

The type of loan, down payment required and the interest rate you qualify for are all dependent on your credit score. Sometimes you will need funds to pay down credit or pay off derogatory credit.

It is important to  consider all of these variables well in advance of looking for a home to purchase. Make sure you have enlisted a trusted advisor who can guide you through this process so that when the time comes, you will be in tip-top shape to purchase your dream home.

Michigan Tax Tips

Tax Tips for Michigan Residents

/0 Comments/in /by

It’s that time of year again! No, I am not talking about March Madness or the finale of “The Bachelor” … It’s tax time! For some (like self-employed people) that have not been paying quarterly taxes, it is a time to pay the piper. But for the vast majority of us, it is the time of year where we can actually get a tax refund.

Michigan Tax TipsSo, what is the best use of those funds? Like most questions, the answers vary depending on the individual situation. If you are swimming in debt it may be time to pay some of that debt off. If you have not funded your 401(k) for the year, perhaps that money is best used to invest in a tax deferred plan.

If, however, you are not taking advantage of all the benefits, of home ownership, it may be the perfect time to purchase a home. The average tax refund these days is about $2,800. Many loans only require that you put between 1 percent and 3 percent down. This means you may have enough money to close a loan with only the refund.

Did you know that the average monthly rent payment in our area is more than the average monthly mortgage payment?  For example, the average monthly rent in Muskegon (February 2020) is $880. The medium home price is $128,000. After just 3 percent down, the payment with taxes and insurance would be about $830.

So, on average, the monthly expenditure owning a home is less than renting. But even if the payment was higher on the mortgage payment it would most likely still be beneficial to own? Why? Two main reasons: appreciation and amortization.

Appreciation: Appreciation is the rate at which the value of something increases in value. The average appreciation in our area is about 3.8 percent for real estate. For the last five years has been 6.3 percent!  On $128,000, the forecasted appreciation gain in the next nine years (using only 3.4 percent) is $45,466! Compare that to rent where the is obviously $0.

Amortization: The second reason is amortization gain. Remember, while the amount you owe on a mortgage goes down over time and the payment stays the same, on a rental the amount you pay for rent will likely continue to go up.  In 9 years, you’ll pay over $22,000 down on the home. When you rent, you’re just paying down your landlord’s mortgage.

So even assuming the cost of a Real Estate sale’s commission sale of 6 percent, in nine years you are $55,000 richer when you buy a home vs. renting.

Given this, as well as the emotional and text benefits of home ownership, tax time may be a great time to buy.  Call me if you would like to talk further about your specific options.