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Old 08-18-2009, 04:26 PM
 
Location: in my mind
2,745 posts, read 13,229,243 times
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Just curious about a possible scenario.

I've read that if someone has credit or other issues, a larger down payment can help compensate when it comes to getting a mortgage loan.

My question is, how large is "large"? Or does it all depend too much on other factors to answer that? Is there some magic percentage?

Let's say you have someone wanting to buy a small, starter home priced at 70k and they have between 25 to 30 percent to put down. However, their credit is iffy and they've been a student for the past year and have only recently started a new job.

Would they be able to get a loan?

What if their credit was good, still the same down payment, but again the new job factor and an income history problem? If not, how long would one need to be in that job for it to be okay?

We are looking to move to another state, we are currently both FT students. Neither of us is currently working but we may or may not be getting part time work study jobs this year. Or other PT work. We have newly opened student loans, still in deferment obviously since we're still in school.

I am on the deed to the house I live in, but not on the loan. When we sell it, any money made from the sale will go to me (I put about 10k down at time of purchase), but I don't have any credit benefits from having made all the payments over the past 3 years, since I'm not on the loan. It's in a relative's name solely. At the time it was that, or put me on the loan and pay out the nose (due to my credit). Originally it was just going to be a co-sign deal but after we realized how much my credit would hurt we just left me off entirely.

I have made every payment on the note and all of the down payment and closing cost money was mine. Unfortunately I didn't know what to do to have proof of those payments and sometimes I paid through my bank, other times in person in cash, other times with a money order in the mail... from here on out I'll be paying via check but the first 3 years of payments won't be something I can "prove".

We will have all of that plus other savings for a down payment though, roughly 25 to 30 percent depending on what house we want to buy.

My partner is guaranteed a good job in the state (through family) we planning on moving to. We plan on spending the next year or so working on credit issues before we move and sell the house here. So that would be our scenario; good down payment, credit ? (hopefully improved a lot by the time we move but probably still in the iffy category), and a good income for at least one of us but without income history. I will most likely still be in school.

Oh, and I almost forgot; will the student loans count in debt ratios if they are still in deferment? If whoever is getting the loan is still in school enough to defer?

Just playing around with possibilities to see if we'll be able to buy relatively soon after moving, or if we'll have to sit on the down payment money and work on other things for a couple years...

thanks. Hope this wasn't too convoluted.
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Old 08-18-2009, 04:55 PM
 
28,450 posts, read 72,365,747 times
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Messy but not a deal killer. You should produce some legal document that shows you have an agreement to pay for the house you currently live in, and if the relative has a mortgage and took the income tax deductions for the interest you might want to go back and amend the returns so that you were taking the deduction. Further there might be some gift issues.

I would definitely recommend working very hard to fix your credit very fast, and that is a tricky thing to do. There is a fine line between having "enough" entries on your credit to move you into the "uses credit wisely" category and "too many" so you end up in the "uses credit recklessly" category. If you have existing accounts you should try to get the limits on them increased, and of course NEVER be late. Further you should USE the credit and then pay it back ahead of schedule. The ideal is lots of credit available, used wisely, for a long time, with no payments missed.

The total debt-to-income ratio WILL include your student loans, as you WILL have to pay them back when you are earning an income and no longer a student, and if you are NOT earning an income you will NOT be able to get a loan. That should be simple...

The fact that you will be able to but a large down payment into a new home is a bit tricky, as firstly you have to sell the existing house, so it is NOT THE SAME as having a large asset base that lender will use to offset a poor debt-to-income ratio. I suppose if you could put the money in the bank and rent for a year of so that would sufficiently 'age' the money, but again if you plan on having no income you would really not be helping all that much...
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Old 08-18-2009, 05:11 PM
 
Location: in my mind
2,745 posts, read 13,229,243 times
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Quote:
Originally Posted by chet everett View Post
Messy but not a deal killer. You should produce some legal document that shows you have an agreement to pay for the house you currently live in, and if the relative has a mortgage and took the income tax deductions for the interest you might want to go back and amend the returns so that you were taking the deduction. Further there might be some gift issues.

I didn't even know I could do that?? I thought that since I am not on the note, I couldn't deduct the mortgage interest and as far as I know my relative didn't deduct it either. No one did. Not sure what you mean by gift issues?


I would definitely recommend working very hard to fix your credit very fast, and that is a tricky thing to do. There is a fine line between having "enough" entries on your credit to move you into the "uses credit wisely" category and "too many" so you end up in the "uses credit recklessly" category. If you have existing accounts you should try to get the limits on them increased, and of course NEVER be late. Further you should USE the credit and then pay it back ahead of schedule. The ideal is lots of credit available, used wisely, for a long time, with no payments missed.

The total debt-to-income ratio WILL include your student loans, as you WILL have to pay them back when you are earning an income and no longer a student, and if you are NOT earning an income you will NOT be able to get a loan. That should be simple...


The fact that you will be able to but a large down payment into a new home is a bit tricky, as firstly you have to sell the existing house, so it is NOT THE SAME as having a large asset base that lender will use to offset a poor debt-to-income ratio. I suppose if you could put the money in the bank and rent for a year of so that would sufficiently 'age' the money, but again if you plan on having no income you would really not be helping all that much...
Well yeah, one of us should have an income though. The issue is that my partner's income will be "new". No income history right away, after having been a student and only worked part time if anything prior to the move.
My partner should be finished with school when we move, but I will not be.

I'm kind of lost as to what you're saying about the down payment money coming from the home sale..? We'd sell before moving and have the money in the bank when we moved. You're saying it needs to sit for longer? That's not a huge deal since we need to find out what part of town we want to live in and all that.

This would likely be a smaller loan too, and I know that sometimes that is a bad thing? Like if you put down 25k on a 70k house, isn't it true that trying to get a 45k mortgage can be a hindrance because the loan size is smaller than the norm?
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Old 08-18-2009, 05:36 PM
 
28,450 posts, read 72,365,747 times
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Yes and yes.

Lenders expect the "source of funds" for a down payment to be either savings that has been growing in your accounts for quite some time or the proceeds of a sale that you owned. Since there is no record of you paying the mortgage and you have not had a job that would have allowed to save the money it will LOOK like a gift. When it is a gift lenders use different rules. They will require that the "gifter" has not made you a loan and doesn't want you to pay the money back over time -- that would be another hit against your debt-to-income ratio. Generally you want some sort of "gift letter" that states this. In your case the explanation of the previous mortgage is more than is needed. If the money ages in your accounts for a sufficiently long time (some lenders are OK with six months...) then the lender DOES NOT WANT TO KNOW its source, but in your case there might be a semi-obvious trail back the sale the existing house... Having all your ducks in a row will be needed.

The other thing that you are correct about is that lenders prefer that you borrow a decent sized chunk of money. If you only wanted to borrow such a small amount that the lender would be unhappy writing your a 30 year mortgage, they could simply refuse to make the loan, but more likely they would charge some points either up front or add to the rate to make the loan more profitable. There is a lot of regional variability, and if the $45K is close to the median mortgage amount in the are where you are moving you MIGHT be OK, if it is far below that amount it will likely just cost more.
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Old 08-18-2009, 05:52 PM
 
Location: in my mind
2,745 posts, read 13,229,243 times
Reputation: 1610
Thanks!

On the issue of the gift, if I am on the deed to the house wouldn't that solve it? I am not on the mortgage but I'm still a legal partial owner....?

The homes in this area are much cheaper than in other areas so I am hoping that WILL help. I hope so. The whole point of us buying something at the lower end price wise is so we can make payments with ease. I hate that it can count against you!?
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Old 07-22-2015, 04:54 PM
 
850 posts, read 1,107,006 times
Reputation: 1776
Quote:
Originally Posted by fierce_flawless View Post
The whole point of us buying something at the lower end price wise is so we can make payments with ease. I hate that it can count against you!?
Oh man...this irked me so bad when I was looking at buying a little over a decade ago too. I couldn't get a loan of 100K-120K if my life depended on it, but I could pull 250K loans all day long without issue (although many of these were the interest only loans, and while they meant a considerably smaller monthly payment, the overall terms of the loans were just BAD. Even then, I saw those things causing a problem in the future, lol).

However, what I've found over the past few months is that the higher loan amounts open up more financing flexibility, and I've had several instances where I could buy a home nearly twice as expensive for close to the same monthly outlay as the cheaper property due to more favorable terms on the larger loan.

Of course, the downside to this is that I'd also be paying considerably more to get it paid off sooner as well...which still bugs me, as it largely prices me out of the 15 year loan term as well...
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