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Thursday, November 30, 2017

Should I Buy A House For My College Student?

This year my oldest child Jacob left home to attend a university in a different town. His school requires that he live on campus for the first year but, after year one, he's allowed to live anywhere he chooses.

Many of my friends with college aged kids have asked if we're going to have him rent a place after this year or if we're going to have him buy a house. I have been a mortgage lender for fifteen years and a real estate investor for twelve so I have a unique understanding of finances and housing. They're curious about whether I feel buying is worth it for such a short term. 

Will MYCollege Student Rent Or Buy?

So...knowing what I know about the industry, will I have my college student buy or rent? 

Buy. We definitely plan on having him buy. Because he will only be living in the home for a short period, though, we will be strategic with his buying. Here are the key pieces to make this work.

Making the Student The Buyer

Our family is anti-debt but I've seen enough young people who want to buy a home but can't qualify or get good terms because they didn't build the necessary credit history. To keep that from happening here, Jacob opened a credit card the week after his eighteenth birthday and another about six months later. He barely uses them (gas only, paid off each month) but now, at nineteen, he has a solid credit score which will help him qualify for a mortgage.

Why does this matter? Two reasons. First, if he can qualify as the primary buyer, the terms of the loan will be better. He can put less down (as low as 3% sometimes) and the interest rate and mortgage insurance cost will be less because he is an owner-occupant.

If the parent buys a home for the student to live in and the student is not on the loan, the house is viewed as in investment property for the parents. Investment properties require a 20% down payment and have a higher interest rate than an owner-occupant loan has.

The second reason that it's good to have the student on the loan is because of the way property taxes work. In our state, property taxes are lower for an owner-occupant than they are for an investor. They tend to be about double for investors which increases the housing cost.

But wait...what about income? Many students have little to no income so they wouldn't qualify for a mortgage, would they?  

That's where the parents come in. There are many loan options today that would allow the student to buy as the primary borrower with the parent(s) as a non-occupying co-borrower. The student has to qualify credit wise (that's why building that credit score was important) but the actual approval is based on the parent's income, not the student's.

Consider the Sale When You Buy

Even with the lower monthly payment that comes with an owner-occupant, it still may not make sense to buy and sell in a short period of time though. When a person gets a mortgage to buy a house, there are costs involved which are referred to as closing costs. Those costs are different in different places but tend to run around $2,000 in my market.

Those closing costs need covered upfront. When the time comes to sell the house, there will be even more costs that need covered. Jacob will likely have $1,000ish of closing costs at the time of sale and a 6% Realtor commission that needs paid from his profits.

People get burned when they buy a house for a short period of time and don't take these costs into consideration upfront. It's important to make sure you're buying in an area that appreciates at a rate that lets you cover those costs without losing money.

In Jacob's case, he should be ok. If he bought a house for $150,000 and it went up in value 3.5% each year (a normal appreciation level in his college town), the house should be worth $166,000 after three years. If it cost 8% of the price to cover his Realtor and closing costs, he would net $153,000 at sale time so he would come out slightly ahead.

Another option would be to arrange for lender paid costs at the front end to further reduce the fixed costs. Lenders sometimes have the ability to charge a buyer a slightly higher interest rate over the life of the loan and, in exchange, cover the upfront closing costs. Seeing this is going to be a relatively short-term loan, that option likely will make good financial sense.

Living Rent Free

If our student is going to buy a house and potentially make no money when he sells it, though, why would we even bother? The advantage of owning during college is typically not in the profit at sale. The advantage is in the monthly cost for housing.  

Here is what we're planning on for Jake. He is looking for a three bedroom house near campus.  He will take one bedroom and rent out the two others to other students. If he bought a $150,000 home and put 5% down, his monthly payment would likely be around $1,000 per month with taxes and insurance included. If he charged $500 per room per month, that would cover the full mortgage, essentially letting him live rent free.

Plus...Loan Amortization!

Another important piece to consider is that the mortgage loan is getting paid down each month with that payment. If Jacob used a 30 year loan and borrowed $142,500 upfront (95% of the $150,000 price), his balance would be about $135,000 when he went to sell the house three years later. This extra $7,500 cushion will either cover him if the market didn't appreciate as well as expected or it will be a profit for him at sale time.

What I Would Tweak

So...does it make sense to buy?  Yes, in our case it does. If your student hasn't been able to build a credit score, if your market has higher costs at the front or back end, if you don't think you can find good roommates to cover the payment, yada yada then maybe it wouldn't for you. For Jacob though, it makes financial sense.

There is one thing we're going to tweak though. Jacob will not be having a 30 year mortgage.  Instead, he'll be having a 15 year one.

The Beauty Of The 15 Year Mortgage

A 15 year term is a better option for three reasons. First, the interest rate is lower. Right now, the interest rate is about 0.5% lower when you choose the shorter term.  Secondly, the mortgage insurance is cheaper.  Mortgage insurance is something you typically pay as part of your loan payment if you don't put 20% down. With a shorter term, the cost for it drops.

Lastly, the loan gets paid down ALOT faster with a 15 year term.  While I estimated the balance owed at $135,000 after three years with a 30 year loan, it's only $120,800 with a 15 year loan.  That's over $14,000 more that will go in our student's pocket when he sells the house.

But won't a 15 year term make the payment higher? Yes, it will. In this scenario, the mortgage payment will be about $300 more per month. That adds up to less than the increased profit at sales time though ($300 per month x 36 months=$10,800) so it financially just makes sense.

Again, buying makes financial sense in our situation. It may not in yours. How do you know if you don't check though? If you're considering your options in Indiana or Michigan, I'd be happy to help you crunch the numbers. Just give me a call or drop me a line at lori.hiscock@ruoff.com.




Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182





Wednesday, March 29, 2017

How To Win In A Bidding War

It's practically an epidemic in our current housing market.  A buyer finds a house they really like - one that's only been on the market for a couple of days many times - and they make an offer only to find out that there are other offers on the table and theirs isn't the winning one.

It's a rotten situation.  It's even worse when it happens multiple times, which has been the case for a lot of potential home buyers in Michiana.

What if I told you there was a mortgage loan option that would make your offer better and help you to win in this tight market?  There is, and it's called the Ruoff 3 for 1 Program.

What is the Ruoff 3 for 1 Program?

You're going to love this loan option.  The Ruoff 3 for 1 Program is a conventional mortgage that eligible buyers can use and only put 1% down on the purchase of their home.  That's right.  Just 1% of the price is needed for the down payment.




Tell me more.  But first, what do you mean by 'Conventional Mortgage'?

Before I break down the details of the 3 for 1 and how it will make your offer better, let me clarify what I mean by 'conventional mortgage'. In a nutshell, there are two basic types of mortgage loans, government insured loans and conventional loans.  Government insured loans typically offer extra flexibility so they're a good fit for some people but that flexibility comes at a cost of higher fees and/or mortgage insurance being charged for the life of the loan.

If you don't need the flexibility they offer, it's better to skip the extra costs and just go with the plain-vanilla conventional loan.  To learn more about why I prefer conventional for most buyers, click here - Why I (almost) Always Recommend Conventional.

So Who Can Buy With 1% Down?

Conventional loans typically require 5% down but we've had an increase in 3% down options coming on the market lately.  The Ruoff 3 for 1 Program technically is a 3% down option too.  In this case, though, 2% of that 3% down payment is paid by Ruoff, leaving only 1% to be paid by the home buyer.

Let's take a minute to hit the high points on what is needed to qualify:

  1. Credit score - A 680 minimum credit score is needed.
  2. No first time buyer requirement - You do NOT need to be first time buyers (yes!). However, you can't own another house at the time of the loan closing and you will need to take an online home buyer education class.  Don't worry.  It's not hard.  
  3. Purchases only - This is for a purchase only (not a refinance of an existing loan) and that purchase has to be of a single family home.  No rental properties, duplexes or manufactured homes are allowed.
  4. No minimum personal investment or savings required - While you need 1% down, it can be a gift from a family member if needed. This loan also doesn't require any level of additional savings like some loans do, making it even easier to qualify.
  5. Some maximum income limits - Some areas have a maximum income limit meaning that you can't make more than the HUD median Income for that area or you won't qualify.  About 1/3 of our market has no income cap while the rest has a current cap of $52,900.  To see if a cap applies to the house you like, go here - Property Lookup.  

One key thing to know about the income cap - it only applies to the borrower on the mortgage and not to the household.  If there are two people buying a home together and combined they make too much money but alone one of them makes less than the cap, we can look to see if that person qualifies alone so they can use the program.  Both people could still be on the deed to the house in this situation.

So How Does This Make My Offer Better?

I'm happy to explain!  First, the fact that this is a conventional loan makes a difference.  All things being equal, most sellers feel more comfortable with a conventional buyer.  The general impression is that a conventional buyer has a stronger financial picture and will be more likely to close.  Also, conventional loans have lighter property requirements which make sellers more comfortable.

The best way to use this program, though, relates to seller concessions.  It's a common thing for buyers to ask a seller to help cover closing costs on a purchase.  Buyers typically ask for this because they are using their savings to cover the down payment and can't cover both.  If you only need 1% of the price for your down payment though, you can likely cover your own closing costs instead of asking the seller to cover them.  This makes your offer look better when compared to another buyer who is asking for seller help.

Interested?

Of course you're interested!  While Ruoff's 3 for 1 Program isn't a fit for everyone, it's a fit for a whoooole lot of people who are ready to buy now and quit playing the 'someone beat us out' game.  If you'd like to dig deeper to see if this program could help make your offer the winning offer, drop me a line at lori.hiscock@ruoff.com or give me a call at 574-234-5201.


To learn more about low down payment options or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  


Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182


Tuesday, January 3, 2017

Can I Buy A House With My Income Tax Refund?

If you're anything like me, you probably start thinking about what you could do with your tax refund months before tax time even hits. Should I pay something off? Take a family trip? Save it for a rainy day?

There are lots of uses for that tax refund money, most of which you'd forget about soon after it was spent.

But...hey, what if you could do something with that money that would change your life?  Is it possible that you could buy a HOUSE with your tax refund?

Yes, you likely could get into a house of your own with your tax refund.

Let's talk about how.

3% Down Conventional

First let me say, there is no 'one size fits all' mortgage type. Some buyers get the most benefit from USDA financing, some from VA, some from FHA and some from conventional. For the majority of my home buyers, though, a conventional mortgage offers the most financial benefits. 

(To learn more about why conventional financing rocks,

In 2016, the requirements for getting a conventional loan lightened with the minimum down payment dropping from 5% of the price to 3% for many buyers, making it an even better option than it was before.  Suddenly a buyer could get all the benefits of a conventional loan (no financed fee, removable PMI, easier home buying process) without having to invest too much upfront.


(To learn about my favorite 3% down conventional option, 

Conventional loans have one unique thing that needs to be considered when trying to buy a house with less money needed upfront, though - the seller concessions cap.

Maximum Seller Concessions

When you're buying a house, you are allowed to ask the seller to help pay for the costs you incur with getting the loan. They can also pay for the items that need covered upfront with a home purchase, like your first year of home insurance and your insurance and tax escrows. Together, these items are typically referred to as 'closing costs and prepaids.'

The seller can't always pay for all of these for you, though. It depends on the price of the home you are buying and the type of loan you are getting. The amount the seller can give is capped as a percentage of the sales price and the percentage allowed is different for different types of loans.

For conventional loans, the most the seller can give is 3% of the price. On lower priced homes (houses under $110,000ish), this will likely not cover all of the costs so you, the buyer, will have to pay for the rest.

Show Me The Numbers Please...

Are you a numbers nerd like me who loves a good chart?  If so, I've got your back!  Here's a table showing how much the buyer would need for the down payment and closing costs/prepaids assuming the seller agreed to pay the maximum that is allowed towards the buyer's cost.  As you can see, the amount the buyer needs stays the same even if the price is lower simply because the seller can't cover all the closing costs on a lower priced home.

Home Price 3% Down Payment  Typical Closing Costs/Prepaids  Max Seller Can Contribute (3%) Amount Needed By Buyer
                            75,000                               2,250                               3,300                               2,250                               3,300
                         100,000                            3,000                               3,300                               3,000                               3,300
                         125,000                            3,750                               3,300                               3,300                               3,750
                         150,000                            4,500                               3,300                               3,300                               4,500

3.5% Down FHA

If you're wanting to buy a lower priced house but can't spend as much upfront as the conventional loan needs, a FHA mortgage might be the better fit.

FHA financing only needs 3.5% down, so not much more than the conventional option, and the seller is allowed to give up to 6% of the price towards your closing costs and prepaids. The seller being able to give more can keep the upfront amount needed on the lower priced house to a more affordable range for many buyers:
Home Price 3.5% Down Payment  Typical Closing Costs/Prepaids  Max Seller Can Contribute (6%) Amount Needed By Buyer
                            75,000                               2,625                               3,300                               3,300                               2,625
                         100,000                            3,500                               3,300                               3,300                               3,500
                         125,000                            4,375                               3,300                               3,300                               4,375
                         150,000                            5,250                               3,300                               3,300                               5,250

IHCDA Next Home

If your tax refund still isn't going to cover the amount needed, you aren't out of the home buying game yet. At that point, we'd see if you could qualify for down payment assistance from IHCDA.

IHCDA stands for Indiana Housing and Community Development Authority. It is a department of the Indiana state government that provides eligible home buyers with down payment assistance. Because of the help provided by IHCDA, many buyers can purchase a home needing only $500-$1,000 to cover the upfront earnest money. They often get that earnest money back at closing too, making this a truly zero down home buying option.   


(To learn about the downsides to this down payment assistance program.

Bottom Line

If none of the options above are a fit for you, there still might be other ways to cover your down payment. Gifts from relatives are often allowable sources as are loans against something you own like a 401(k) or a vehicle.  

Bottom line, there's likely a way to cover your down payment at any time of the year. This time of year with that tax refund money flowing in, though, it might be easier than most.

So...are you wondering if this might be the right time for YOU to buy a house?  I'd be happy to help you figure that out!  Just give me a call or drop me a line at lori.hiscock@ruoff.com.  Together, we'll see if 2017 might be your year to own a home of your own.


To learn more about low down payment options or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  


Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182




Monday, December 12, 2016

The Student Loan Problem (And The Fix)

We all know that student loans are a big problem for many Americans.  You may not realize, though, that they became a big problem for many home buyers in 2016 as well.

Why is that, you ask?  I'm happy to explain!

In 2016, the rules for how student loan payments are counted when someone is buying a house got a whole lot tighter.  Previously a lender could work off of the payment showing on the credit report.  If the buyer was on an income based repayment (IBR) plan and the payment was lower because of that, great!  If the student loan was deferred and wasn't going to start repayment for 12 months or more, all the better.

In those cases, a lender was able to count that lower IBR payment or possibly even that zero deferred payment and, because of that, allow the buyer to qualify for a more expensive home than they would otherwise.

In 2016 though, that changed.  Both FHA and Fannie Mae changed their requirements to read that a lender now should count 1% of the student loan's balance in their payments when determining how much they qualify for.

OUCH!  Let me share some math on how much that can hurt a home buyer.  Let's say a buyer works full time making $12.50 an hour which is $2,166 per month pre-tax.  A lender will target them having monthly bills of no more than 45% of this pre-tax income and that number needs to include the new mortgage payment they are requesting.

So...$2,166 x 45% gives you $974 of monthly bills allowed.  Now, if this buyer has $40,000 in student loans that are deferred but the lender has to count 1% of the balance as a payment, that's a $400 payment that needs to come out of that $974, leaving just $574 for everything else.  Let's say they have a $250 car payment and $60 per month in minimum credit card bills, and suddenly you're down to $224 left for the new mortgage payment.

Even in a lower priced market like mine, $224 isn't going to be enough to get a house for most buyers.  So...what's the fix?

There are two possible ways to work around this. First, if there is a payment showing on the credit report and we can show that it is a fully amortizing payment, we can use it even if it's under 1%.  It's going to take some extra legwork to prove this though.  A lender would need to get a copy of the original note from the borrower containing the interest rate and loan term to confirm that the payment on the credit report will pay it off on time.

If the payment will not pay it off in the original term, there is one more option.  Instead of using Fannie Mae or FHA for the loan approval, the lender can run the loan through Freddie Mac.  Freddie and Fannie are the  two government sponsored enterprises that basically drive the mortgage industry and Freddie is currently offering a bit more flexibility on this issue.  Freddie alone will allow a lender to use the lower IBR payment showing on the credit report when approving a buyer.

So why doesn't everyone with student loans just use Freddie for their loan approval then? There are two main reasons.  One, they may not qualify.  Some people need to use FHA financing because of newer or bruised credit or tighter debt/income.  If that's the case, they will have to use that 1% or fully-amortizing rule which may rule them out for a home purchase.

Also, some lenders don't offer Freddie for their buyers.  They're strictly a Fannie lender, so their clients will have to abide by the 1% or fully amortizing rule as well.

So what does this mean for home buyers today?  It means that, while it is harder to get approved for a mortgage when they have student loan balances, there may be options. If you have been told you don't qualify because of your student loans, ask your lender if they looked into documenting that your loans were fully amortizing.  Ask them if they looked into running your approval through Freddie Mac. If they're unable or unwilling to take these extra steps, feel free to contact me for a second opinion (lori.hiscock@ruoff.com). Or, hey, just come to me first! Whether we can do it now or we need to create a plan to get you there in time, student loans don't have to stop you from owning a house of your own.


To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  
Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Tuesday, August 30, 2016

The Loan I would ABSOLUTELY Pick Today

When I'm reviewing mortgage options with prospective home buyers, they often ask me which one I would choose. Typically the answer isn't obvious because the different options have different strengths and weaknesses. The final decision really depends on what matters most to each person and that will vary buyer to buyer.

There is currently a mortgage loan available that blows most of the other options out of the water, though. 

It is Fannie Mae's Home Ready Mortgage.

Why Home Ready ROCKS

There are multiple reasons why this program is exceptional.  They include:
  • Conventional loan - Home Ready is a conventional loan with all of the positive features of a conventional loan including no upfront mortgage insurance/funding fees, more flexible property standards, and the ability to eventually get the private mortgage insurance (PMI) dropped from the payment.
  • Only 3% down needed - This program only requires a 3% down payment and that down payment can be gifted from a family member if needed.
  • Not limited to first-time homebuyer - You used to have to be a first-time buyer to use this loan but they changed that in July. This is a BIG win. Huge.
  • Can own another property - If a person owns a house already and wants to buy another one that they'll live in, they can do that with this loan without having to sell the current house first.
  • Cheaper PMI - The private mortgage insurance rate is cheaper on this loan than on the typical 3% down mortgage.  
  • Better interest rates for lower credit scores - this loan program doesn't charge a higher interest rate for 680-740 credit scores like most conventional mortgages do. This lack of a credit score adjustment is a big win that can save a buyer thousands of dollars over the life of their loan.  

See what I mean?  This mortgage loan has some major benefits for a broad range of buyers.

The One Potential Snag 


There's got to be a downside though, right? Well, there is one but it's not nearly as big of a snag as it used to be.


This program was created to help low to moderate income borrowers and they enforced that by having income limits. In July they rezoned the map for this and a significant chunk of our market now has no income limit at all. That means a person could make a bazillion dollars per year and still only put 3% down and get the cheaper PMI if they were buying in one of these newly-expanded areas (although, with a bazillion dollar income, they really should just pay cash).

Some areas still have an income limit though. It's determined by census tract and the map can be easily accessed here - Home Ready Map.  For those areas with a limit, it's currently $52,900.

This is the maximum income for the borrower, not the household. This is significant because it gives us a workaround when someone wants to buy in an area with this cap. If there are multiple borrowers, we often can do the loan in just one of their names to stay under the limit while putting them both on the deed to the house.

It's SO Worth It

A first time home buyer will also have to take an online home buyer education class but that and the income limit in some areas are really the only negatives. If a person can work around those, it is SO worth it to get the lower down payment, lower PMI costs and lower interest rate.

So are you interested?  Do you want to learn more?  Just email me at lori.hiscock@ruoff.com to see if this program is a fit for you.

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  
Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Monday, August 22, 2016

Why Flipping is so Flipping Hard

A past client emailed me this weekend asking for my help with a new property she wants to purchase. I love working with previous clients and was initially delighted by her message. As I read on though, that delight faded a bit.

She was wanting to buy a house to flip it. Now please don't get me wrong. I have nothing against people flipping homes. I've flipped a few myself (with the hugely important help of my contractor husband that is). I truly love when people take a home that is neglected and improve it. The whole community benefits from better houses so I'm a big fan.

That being said, flipping a house is just so flippin' hard to do. And I'm not talking about the actual work involved, although I think most first time flippers grossly underestimate that. I'm talking about the financing part of a house flip. Let me share why getting a mortgage for a flip home is so challenging for most buyers.

The Undervalued House

The way to make money on a house flip is to find one that is undervalued, normally because of condition, fix it and resell it for a fair market value. The challenge is that you need to cover the costs of your financing, repairs and your profit in that new 'fair market value' which means the initial price needs to be quite low when compared to the houses around it.

That does happen, but when it happens, it's often because the problems with the current condition are significant. They're things like missing plumbing or visible mold or significant damage (floors torn up, toilets missing, etc.). The issues that exist are often things that make the house uninhabitable and an uninhabitable house is not a financeable house.

What does that mean for a flipper? It means that most of the houses that will make the best flips have to be bought with cash. If you don't have the cash to buy and fix them, you're not going to be able to buy a lot of the more profitable flip houses.

Down Payment and Reserves

Maybe a person finds a house that could be a profitable flip that is actually in good enough condition to get financed. Yea! The next hurdle then is the down payment and repair costs. When you're purchasing an investment property, you need to invest more upfront than you do on a home you intend to live in. An owner occupant home can often be purchased for as little as 3% down (even 0% down for USDA eligible homes) but an investment property typically takes at least a 20% down payment.

To make it more challenging, a lender will need you to have additional funds in savings AFTER the down payment and loan approval costs are covered (called 'reserves'). You often don't need to have any additional savings with an owner-occupied home purchase but an investment property purchase typically requires you to have savings equal to six months of payments on your existing mortgage(s) and the new mortgage combined. That savings can often be in the form of retirement savings if needed (IRA, 401k), which helps. For many would be flippers though, they're stretching all their savings to just buy and fix the house and the requirement to have additional savings is just too much.

Debt/Income

So....maybe just maybe you find a house that is financeable and maybe you have the money for the down payment, reserves and repair costs. Do you have the room in your budget for the new loan though? Even if your intent is to sell the house fairly quickly, the lender has to see that you can afford the payment on it on top of your current payments. This means your income has to be enough to cover your current bills (mortgage, car loans, credit cards, student loans, etc.) and the new mortgage payment with enough cushion above these for the lender to be comfortable. Some people have that kind of space in their budget but, if you don't, this could stop your flipping plans in their tracks.

All to say...


So does all this mean that only cash buyers can flip houses? No, not really. A person can potentially flip with a mortgage but there are so many 'ifs' to it. You could potentially flip with a mortgage if the house meets minimum property conditions, if you have the 20% down payment, if you have the required reserves, if your debt/income ratio isn't too high (plus a few more minor 'ifs' not covered here). Add on top of all of this that most sellers will prefer a cash offer on their distressed property over a financed one and it's just really, really flippin' hard for people to get into home flipping if they need a mortgage to do it. 

My best advice - if this is something you really want to do, find a property that meets minimum property standards and buy it to live in while you're fixing it. If you make it your home and live there, repairing it over time, and selling it down the road, a lender will view it as your primary home and a lot of these tighter requirements go away.

If that's not an option, try to save the money and become a cash flipper. It may take longer to get to your goal, but it's do-able if you're willing to put effort and time to save upfront.

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  
Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Wednesday, July 13, 2016

Why I (almost) Always Recommend Conventional

Sometimes a home buyer will call me and say they were referred to me for a home loan. My first response is typically "YEA! That's awesome!"  I'll then ask if they've gone through the preapproval process before and they'll often say that, yes, they're preapproved with another bank but don't wish to work with them any further (typically because of poor communication).

I then typically ask if they recall what type of loan they were preapproved for and they'll often say "They told me FHA financing, but I have no idea why....."

That answer saddens me because it points out a common weakness in my industry.  Lenders have a tendency to tell buyers what loan we think they should use instead of giving them the pros and cons of multiple options and letting them decide.

Sometimes FHA is the right fit for a buyer. Sometimes, it's the ONLY option for a buyer. There are many times conventional financing is an option too though. When Conventional is an option, it will (almost) always trump FHA in my eyes.  Let's review why:

  • Lower fees:  FHA currently charges a home buyer an upfront fee equal to 1.75% of the mortgage amount.  This fee is rolled into the loan so the buyer doesn't pay it upfront, but if they borrowed $100,000, they're going to owe $101,750 right out of the gate.  Conventional loans don't charge a fee like this.
  • Lifetime mortgage insurance:  When a home buyer is not putting 20% down on a loan, they typically pay something called mortgage insurance as a part of their monthly payment.  With a conventional loan, that piece of the payment will automatically fall off and the monthly payment will become lower once the buyer has built up 22% equity in the house (they can request it be removed at 20% equity).  With FHA loans though, that mortgage insurance typically stays for the life of the loan.  
  • Lower down payment:  People often think they need a bigger down payment for conventional loans. Not necessarily though. There are several 3% down conventional options available these days. FHA requires 3.5% down.  
  • Simpler property standards:  FHA has a higher bar on property conditions which can make the home purchase more challenging.  For example, if the home is a flip, FHA has rules on how long the seller needs to have owned the home (conventional does not). Also, FHA is picky about peeling paint on homes older than 1978 and will require it to be scrapped, sanded and repainted before the loan closes. Conventional financing doesn't require this.
Now are there reasons why FHA might be a better fit for a buyer? Absolutely!  FHA is more willing to approve someone with a lower credit score and it's more flexible with previous bankruptcies and foreclosures.  It also can offer a lower  interest rate or cheaper mortgage insurance in some situations which should definitely be considered in a loan selection.

The problem comes in when a lender thinks 'Well, I know they'll be approved FHA, so we'll just go that route' instead of exploring the FHA vs. Conventional option more deeply and giving the buyer the information to let them decide what fits them best.  Yes, it can be more difficult to get a loan approved for a conventional loan sometimes, but if it's best for the buyer, it's worth the extra work.

Given all the advantages of conventional financing, it's almost always my first choice for a buyer who qualifies. Why only 'almost', you say? Because I love love LOVE VA loans even more. To learn more about VA financing, feel free to click here - VA Loans - The Flax Seed of Mortgage Lending.

Bottom line, there is no one right answer for all buyers. Each loan situation is unique. Each home buyer's goals and priorities are different. A lenders role is to review their situation and help them decide which of the available options suit them best.

To learn more about the loan options that give the best benefit to you based on your scenario and goals, feel free to contact me at lori.hiscock@ruoff.com.

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  
Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182