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My boyfriend is planning on selling his house and purchasing a new home and would love some opinions on his best mortgage option. Here's the basics: He would like to qualify for at least $350,000 mortgage to get the house he wants (total price is around $360+, and he will be putting $20-25k down). He has a car payment of $550 a month and student loans of $550 a month. He has an extra $50,000 that can either be used to pay off the student loans or be used as additional downpayment (so he would have 20% down). Additionally, his credit isn't great (middle score around 660), but the home wouldn't be finished/closed on for about 5 months, so I think we could get it up a little between now and then.
Here are the options we are considering:
1) USDA Guaranteed loan. The property qualifies, and so does his income (barely- he's about $200 under the limit). Going this route, he'd use the money to pay off his student loans. The back-end ratio would be fine, but the lender said the front-end was a little higher than they want at 35ish%. The lender seemed to think it might be possible for him to get it approved based on compensating factors (15 years at same job, prior home-owner, etc)
2) Conventional. This route, he'd use the money for the downpayment, resulting in a mortgage of around $290,000. No pmi, which saves a little money. But, the back-end DTI ratio would be high - 48%. Does Conventional allow a DTI this high, especially with his credit score?
Again, these are all theoretical numbers. We haven't run actual numbers with a lender yet since we are trying to figure out the best approach. I'm just wondering if you think he has a chance of being approved in either of these scenarios. Thank you!!
Conventional loans typically max out at a 45% DTI, but higher DTI's are possible with large downpayment and high ficos. Why not have him pay off the car and some of the student loans? Doing that, his dti would fall below 45%. Paying off the car and some of the student loan debt would also boost his FICO score.
Without question, USDA. I would have no problem with that front ratio. Keep your cash, pay down debt if you like, put all of your debt into the house, write off the mortgage interest, and earn interest with the cash on hand.
I would go USDA as last option. USDA will have much higher costs due to the upfront fee and it now has mortgage insurance. USDA charges a 2% upfront fee, so on a $360,000 loan that would be an additional $7200 in costs that you pay. I would go conventional with a first and second, but you would have to get the dti down and fico would have to improve to 680 or higher. Paying off the car and paying off some of the student loan debt would probably have a significant impact on your fico score.
I by no means am knocking a USDA loan, they are great for certain people in certain circumstances.
Thanks for the replies. We really hadn't considered paying off the car- but now that we look at it, it makes the most sense. He can pay it, and 2/3 of the student loans off. That will leave him with a total monthly debt of around $180-$200. I wonder if that would be enough to get his credit score up to 680?
I am with Victor pay off the car and part of the student loan and THEN think about buying the house. Also, previous home owner with low credit score like that tells me ()that it is better to not rush buying the house with all those debt as they are now.
Bernanke no longer has any sway whatsoever on rates, and they will continue to go up. The cost of waiting will likely be a full % point or more. USDA MI is 40 bps.
The aggregate cost of an 80/10/10, with the 2nd likely a balloon around 6-7%, would be quite similar to USDA costs, except you've sunk your cash into the mortgage instead of paying off debts for which you cannot write off the interest paid.
Eliminate non-mortgage debt. Take advantage of rates now, because they are indeed going up even more, and get the house you want.
Doesn't sound like guys don't make enough to afford this house. You will live in a nice house, but you will be miserable. Nice house and no money is not a good plan. No matter what you "qualify" for, you still need to come up with the payment each month. The lender will provide you with free rope to hang yourself with if that's your wish.
Bernanke no longer has any sway whatsoever on rates, and they will continue to go up. The cost of waiting will likely be a full % point or more. USDA MI is 40 bps.
The aggregate cost of an 80/10/10, with the 2nd likely a balloon around 6-7%, would be quite similar to USDA costs, except you've sunk your cash into the mortgage instead of paying off debts for which you cannot write off the interest paid.
Eliminate non-mortgage debt. Take advantage of rates now, because they are indeed going up even more, and get the house you want.
Not sure if you are aware, but you can set up 2nd liens basically 2 ways. A balloon, which is you make a payment as if you will be making it for 30 years but you get a balloon payment in 15 years to pay off the balance. You can also set them up on a straight 15 year term where you make the same payment and it is paid in full in 15 years. Also, when doing a USDA loan, you are required to set up a escrow account for taxes and insurance and you will be paying the MI for many many years.
When doing a first and 2nd lien, you have no mi ever, plus you have the option to not escrow taxes and insurance. I have found that a first and 2nd is in most cases the best way to go and will give you an overall better mortgage. And 2nds right now for an 80/10/10 are under 6%. USDA loans now require you to pay the MI for the life of the loan just like FHA requires now which makes them even less appealing today.
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)that it is better to not rush buying the house with all those debt as they are now.
