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

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

How To Make Your Offer Better

In my thirteen years of mortgage lending, I've never seen the market balanced. The number of buyers and sellers is always lopsided with someone having an advantage.

Any active home buyer will tell you that the seller is currently on the winning side of that equation. There are more buyers out their than good homes so the attractive properties are selling fast, often with multiple offers.

This can really stink for buyers. They find a house they like only to find out other buyers want it too. So what can they do? Can they somehow make their offer look better than the other guy's offer?

Absolutely! There are certain small differences that can have a big impact on the seller's decision to pick one offer over the other. Let me share three important ones here:

Go Conventional

Conventional mortgages and FHA mortgages are the two most common loan types used today. Many buyers use FHA financing because it offers more flexibility with the loan approval. Credit scores can be lower, the down payment can sometimes be lower, bills can be higher compared to income, etc.

FHA is a logical choice for many buyers, but it can make some sellers nervous. FHA financing requires a higher property standard which could mean that some repairs are required for a FHA buyer that wouldn't be required for a conventional buyer.

Because of it's flexibility, FHA financing also sometimes has the reputation of being used by 'less solid' buyers. That is not the case at all - a FHA buyer is just as able to close on a mortgage loan as a conventional buyer - but perception matters and some sellers view FHA offers as weaker than conventional offers.

So what can you do to make your offer look better in a multiple offer scenario? Talk to you lender and see if you can go conventional. While FHA may have made the most sense for you when you did your initial loan application, you may also have a conventional option. There are now several 3% down conventional loan options available and the requirements for credit score, savings and debt/income ratio continue to soften, so a conventional option might be available to you if needed.

(If you'd like to learn more about the 3% down conventional options, go here - The Best Mortgage Loan You've Never Heard Of)

Remove Seller Concessions

It's common for buyers to ask sellers to contribute to the buyer's loan costs. When you are up against multiple offers, though, asking for seller assistance can put you out of the running. Even if the net amount to the seller is the same (or sometimes even better) the impression given with seller concessions is that you don't have enough money to buy the house without help. That can make a seller nervous so they may go with a different buyer.

But what if you really don't have enough money to buy the house without help? In a competitive offer situation, you may want to look for help from another source. Do you have a family member that might gift you the money needed for closing costs? Do you have a 401k that you could take a loan against? A vehicle you own outright that you could borrow against?

Or does your lender have an option to charge you a higher interest rate and waive some of the loan costs? That's not always an option but it often is. In a competitive situation, you'll want to explore all options to help your offer be strong.

(LENDER SIDE NOTE - if you choose to try any of these options, talk to your lender before making the offer.  Adding gift funds in or a new loan can change your approval status. Be safe. Talk to the lender first.)

Use a Trusted Local Lender

I can see how me telling you to use a local lender may seem self-serving. I am a local lender, after all, so of course I'd say to go local, right? The truth of it is, though, going local really can make a difference. Even if the seller doesn't have a preference, odds are good that their Realtor does. The seller's Realtor has worked with the Internet banks before and they have worked with many of the mortgage lenders in town and they have opinions of who is good and who is not. The seller will likely take their Realtors advice into consideration when deciding who to go with.

Now, don't get me wrong. All Internet lenders are not bad. All local lenders are not good.  People are people and there are strong and weak ones on both sides. There are local lenders though that have a strong reputation in the market for getting things to closing on time and with little drama. If your offer comes with a preapproval letter from one of those lenders, that can go a long way in helping your offer stand out from the rest.

And is Ruoff Home Mortgage one of those well-respected, low-drama, get it done lenders? You bet we are. But don't just trust me, ask around. Check with your Realtor. Read the online reviews (Zillow Review for Lori Hiscock).  Talk to us and judge for yourself.

So...there you go. If you want your offer to be stronger than the other guys, these options could help. If you'd like to explore them deeper and get that 'well respected local lender' advantage, email me at lori.hiscock@ruoff.com. Good luck with your home shopping!

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

The Best Mortgage Loan You've Never Heard Of

Back in the early 2000's it seemed like the mortgage industry was coming out with new loan types all the time.  No Income Loans.  No Asset Loans.  No Income AND No Asset Loans.  If You Have A Pulse You Can Buy A House Loans (OK, maybe not that one).  It was nuts.

Somewhere around 2007, though, things changed.  We found ourselves in a recession and those crazy flexible loan types were given much of the blame.  The mortgage industry clamped down, taking away a lot of the fluff and leaving us with the tried-and-true mortgage products of yore (5% Down Conventional, FHA, USDA and VA).

In the past year or two, though, we've begun to see a thawing.  Underwriting requirements have loosened a bit.  PMI companies have lowered their rates and requirements. The best thing in my opinion, however, has been the addition of some new lower down payment options for conventional buyers.

Let's go over what's out there today...

Fannie 97

 The first to show back up on the scene in early 2015 was Fannie Mae's Fannie 97.  The Fannie 97 is a conventional loan that only requires a 3% down payment.  

The advantage of a conventional loan over a FHA loan is that the private mortgage insurance (PMI) eventually stops being charged in the payment.  The upfront fees are lower with conventional financing too (no 1.75% financed mortgage insurance like with FHA).  The property requirements also aren't as strict as with FHA, which is VERY appreciated here in Indiana where exterior peeling paint is pretty common due to our extreme seasons.

Fannie 97 does require the buyer to be a first time buyer.  A first time buyer is viewed as someone who hasn't owned a home in over 3 years.  Other than that, though, there are minimal extra requirements. Thankfully, there is no maximum income cap that you must be under to qualify unlike the other programs discussed below.

The downside of Fannie 97 is twofold.  First, the PMI companies charge more for their monthly coverage because the down payment is lower.  This makes the monthly payment higher for the buyer.

The second disadvantage of the Fannie 97 is that, like with most conventional loans, the interest rate goes up as your credit score goes down.  FHA loans don't see as much of a rate increase with 'less than perfect' scores, but conventional loans often see a rate increase at every 20 point increment when the score slides below 740.

Home Possible Advantage

Not to be left out of the game, Freddie Mac jumped in later in 2015 with their Home Possible Advantage loan.  Home Possible is also a 3% down loan and it's not only for first time home buyers.  There is a maximum income limit for the buyer, though (100% of the area median income).  In St. Joseph County, Indiana, that median income is currently $57,300.

One nice thing is that Freddie only counts the income of the borrower, not of everybody in the household. Many special programs are based on 'household income' regardless of who is on the loan. Not with Home Possible though.  If there is a two person household and together they make above that $57,300 but one or the other makes under $57,300 and can qualify for the loan on that income only, they could likely use this program.

Another REALLY nice thing about Home Possible is that the PMI rates are much cheaper than with the Fannie 97.  As of right now, the savings with the cheaper Home Possible PMI is equal to about 0.5% in interest rate (NICE!).

Hellooooooo HomeReady

Not to be outdone by Freddie Mac, Fannie Mae recently threw a second hat in the ring.  This winter we've seen the addition of Fannie's Home Ready Mortgage.

Like the two above, this is a 3% down program.  You do not need to be a first time buyer.  You do (maybe) need to earn below a 'maximum allowed' income limit.

Why 'maybe'?  Well, with HomeReady, the income limit is by census track - not by county. Many census tracks in our county have no income limit under this program at all.  Some have that $57,300 and some have $45,840 (current limits - subject to change).  Again, though, they only count the borrower's income, not the whole household income.

HomeReady brings a middle ground on the PMI rates.  It's not as cheap as Home Possible but it's cheaper than Fannie 97.  What potentially makes HomeReady REALLY attractive though is that it doesn't do that whole 'higher interest rate for lower credit scores' thing that the other two 3% down programs do.  With HomeReady, the interest rates are the same when your score is 680 or higher (NICE!).

SHOW ME IN PICTURES PLEASE!

Whew!  After all those words and pros and cons, I bet your mind is just BEGGING for a picture :). While it's still kind of number-nerdy, this graph does what words can't do easily - it compares the effective cost on all three options as of today.  By 'Effective Cost' I'm meaning the interest rate plus the annual PMI charge.  This is then broken down by credit score to see which is better at each point.

Well, here's one.

So...which is better?  As of today's interest rates and PMI pricing, the HomeReady option is beating the other two options if the credit score is 680-720.  At that point, Freddie's Home Possible gets a slight advantage.

For the borrower who wouldn't qualify for HomeReady (maybe buying in one of the lower max income areas and they make too much), Freddie's Home Possible is a decent option even at the lower credit scores.  If the buyer's income is just too high for either of those but they are a first time buyer, there is always Freddie 97 available.

So does this have you more confused than when you started?  It very well might with all the facts and figures.  Don't worry though - that's why I'm here!  The important thing to know is there ARE 3% down conventional options out there.  Just give me a call or drop me an e-mail (574-234-5201/lori.hiscock@ruoff.com) and I will gladly help you figure out which one is the best 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

What Would The Mortgage Lender Do?

It happens all the time.  I'm sitting with a prospective home buyer, going through mortgage options together, and they ask me "What would you do if you were me?"

I love that question.  It shows that they trust my knowledge and experience and they consider my advice valuable.  So...I answer them!

That answer's not always the same either.  There isn't one 'right loan' solution.  Things like the size of their savings, the stability of their income and the likelihood of them staying in the house long-term are just a few of the factors that could make that answer different.

There are two things that I personally would ALWAYS do when buying a house, though.  Let me take a minute to share them.

Have Emergency Savings

Many people who are looking to buy a house are living paycheck to paycheck.  They don't see that as something to worry about because, hey, it's worked for them so far, right?  Many times their mortgage payment will even be lower than their rent so...why not?

Here's why not.  When you own the house, you are responsible for the house.  Things break, it is part of life, and as the homeowner you have to pay for fixing those things.

Purchasing a home warranty can protect against some of this risk but there are always things that are not covered.  I can't tell you how many times I've had a client call me after their home closing to say "Oh no, the water heater/furnace/sump pump/refrigerator broke!  I don't have the kind of money needed to fix it.  What can I do?"

My answer always breaks their heart.  "The seller isn't going to cover this and neither is the home inspector.  It's your house now.  You need to find a way."

So...what would I do?  I would always, ALWAYS, have at least $1,000 in a savings account earmarked just for potential home repairs prior to ever becoming a home owner.  $2,000 would be better...or maybe $2,500.  At a minimum though, I'd have $1,000.

Leave Room For Change

When you're buying a house, it's so easy to look short term.  This house is just right for us right now!  We can totally afford the monthly payment!  It's perfect!

It probably is perfect...now.  But will it be perfect 3, 5, 7 years from now?  While you can sell a house down the road if it is no longer 'perfect' then, there are costs involved in selling a house. Realtor commission, title company fees and property transfer costs will all have to be covered.  Home buyers frequently find that, once they want to become the home sellers, they can't.  There is not enough equity in their house to cover the costs so they can't sell.

Knowing that, I always look at a house not only in terms of "Does it fit my life now?" but also "Will it fit my life 5 years from now?"  If the answer is "Maybe not", then maybe this is not the right house for me.

That same long term approach needs to be taken on the monthly payment.  People often want to buy right up to the maximum they can qualify for.  Why not?  Who wouldn't want the best house they can get?

Here's why not - life changes.  You may need to buy a new car, a new furnace, or pay unexpected medical bills.  Your work scenario may change because of things beyond your control, or maybe it will change because you WANT it to.  You may choose to change careers or cut your hours or open a business of your own.  If you're tied to the maximum mortgage payment you could qualify for though, you're trapped.  You can't handle the things you don't want and you don't have the freedom to pursue the ones you do.

So...what would I do?  I would leave some wiggle room between my budget and that payment.  Actually, I'd leave ALOT of wiggle room.  If life brings me something bad or (hopefully) something really really good, I want to be able to take it.

There are more things I'd do, and maybe sometime I'll write a 'Chapter 2' to share those. For now, though, I'd ask all prospective home buyers to trust the advice of this wise old mortgage lender who has bought alot of houses personally and financed a WHOLE lot more for others.  Save some money and leave some wiggle room to prepare yourself for the good and the bad.  

And...when you're ready to take that step into home buying, call me :).  

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

How Paying More Interest Could Save A Home Buyer Money

Andrew and Amanda thought they knew what I was going to say when they walked in the door.  They were looking to buy their first home, had good jobs, great credit and the ability to put 20% down.  They had already talked to a couple of other lenders before me so they were fully prepared for my recommendation.

“So we should put 20% down, right?  And probably do a 15 year loan to pay it off faster?” they asked nonchalantly.

“No….no, that’s not what I would recommend for you.  I’d only put 10% down in your case and consider the 30 year term.”

Needless to say, Andrew and Amanda were surprised.  Anyone who has worked with me before would likely be shocked as well. Why?  Because it’s well known that I’m very anti-debt.  Even though I help people get loans for a living, my goal is for my buyers to owe as little as possible for as short of a period as possible. 

So why would I encourage these buyers to borrow more and stretch it out over a longer time?

Considering The Whole Picture

Truly, there was a method to my madness.  When making my recommendation, I was just looking at a bigger financial picture than the previous lenders had considered. 

Most mortgage lenders tend to look at the new mortgage as an isolated loan when making their recommendations.  It’s not though.  This new loan is going to be a part of the buyer’s total financial picture.  As such, the full financial picture should be looked at when deciding on which mortgage options are the most beneficial.

Yes, Andrew and Amanda had the savings to put the 20% down.  They also had extensive student loans, though, most of which were at 6%-7% interest rates.  Andrew and Amanda had larger incomes which was great in that it allowed them to save money quickly but bad in that it excluded them from getting any income tax benefits on the interest paid on those student loans.

The interest rate on their new mortgage would be 2-3% lower than the student loan interest and it likely would be deductible when determining their taxable income.  Seeing it would be a cheaper source of money on multiple fronts, financially it made sense to pay more on the student loans and less on the mortgage.

But….what about PMI?

When I explained my recommendation, Andrew and Amanda immediately grasped the logic of using their extra savings to pay down the student loans instead.  The risk of Private Mortgage Insurance (PMI) concerned them though.

“Don’t we have to put 20% down?” they asked.  “Won’t we have to pay PMI if we don’t?”

“Not in your case.  For you, I would recommend a no PMI conventional loan.”

Ways To Slay The PMI Beast

No PMI?  Is there really a no PMI conventional loan with less than 20% down?  Well, technically...no.  If you don’t have a 20% down payment, someone is going to have to pay for insurance to protect the lender if the buyer defaults.  Normally that insurance is paid for in monthly installments by adding a premium to the buyer’s mortgage payment. 

That is not the ONLY way it can be paid though.  If the buyer chooses, they can pay a lump sum upfront and have no PMI for the life of the loan.  If that lump sum needed is under 3% of the price, they can also ask for the seller to pay for it in seller concessions.

These weren’t the options I proposed for Andrew and Amanda though.  Instead, I recommended lender paid PMI.

Getting Smart with LPMI

Lender Paid Mortgage Insurance (LPMI) can sometimes be the best option for PMI avoidance.  In Andrew and Amanda’s case, I could increase their mortgage interest rate by 0.125% and, with the excess lender income from that, pay the lump sum PMI in full for them.  This was a win on both fronts in that it removed a higher monthly PMI cost (not tax deductible) and replaced it with a lower increase in interest cost (wonderfully tax deductible). 

And how did this work out for them in dollars and cents?  Very nicely, actually.  The monthly PMI option would have added $108.23 to their monthly mortgage payment.  The 0.125% higher interest rate?  It only added $25.59 to the payment. 

Knowing the Downside

While this was a good option for Andrew and Amanda, this structure isn’t one I would propose for everyone because there is a downside.  The buyers going this route have to actually follow the plan we’ve made.  That means the extra that was going to go toward the down payment needs to actually go to the student loans, NOT to new furniture for the home or other optional items.  And the extra money they’ll have each month by taking a 30 year term instead of a 15 year term also needs to go to the those student loans.  If it doesn’t, they’ve taken on additional debt for nothing.

I could see that Andrew and Amanda were capable of working this plan though.  As a matter of fact, they were thrilled by it.

Paying off their student loans had been a BHAG (big hairy audacious goal) for them since graduation, and they were excited to start working on it in an intentional, mapped-out way.

So The Moral Of The Story Is…

Is there a moral to this story?  But of course!  In short, mortgages are not a ‘one size fits all’ thing.  There are multiple ways to structure a loan and a mortgage lender should be exploring all of them in light of their buyer’s big-picture finances, not just through the lens of the mortgage alone. 

If you’re considering a home purchase and want a detailed review to see what mortgage options will best benefit you, drop me an email at lori.hiscock@ruoff.com.  I wish you all the best in your home shopping adventure!

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

More Home Buyers Now Qualify For Indiana Down Payment Assistance

Great news!  Indiana Housing and Community Development Authority (IHCDA) announced an increase in the income cap for home buyers wanting to participate in the mortgage credit certificate program, the My Home reduced down payment program and the Next Home down payment assistance program.

What this means is that more Indiana home buyers can now take advantage of these programs.  Let me take a minute to summarize what these programs offer:

Mortgage Credit Certificate (MCC)

The MCC is a federal income tax credit that is available for first time buyers.  The eligible buyer who enrolls in the MCC program will receive an income tax credit when filing their tax returns that is equal to a percentage of the interest paid on their mortgage that year.  Annual credits given range between 20-35% of the interest paid and they are ongoing for as long as the buyer lives in the home, pays income taxes and pays mortgage interest.  Amounts received vary based on loan size but typically run between $800-$1,000 in year one, declining slowly thereafter.

My Home 

My Home is a conventional loan product for first time buyers that offers a 3% down payment, a competitive interest rate and a lower cost for private mortgage insurance (PMI).  The interest rate is not driven by the credit score which is different than the norm for conventional mortgages, so a person qualifying with a 680 credit score will get the same attractive interest rate as the person qualifying with a 780 score.  That and the lower PMI cost are what make this loan option appealing to certain buyers.

Next Home

Next Home is the most well known IHCDA product because it addresses the down payment need of many buyers.  Next Home has both a FHA and conventional option and, in both cases, the entire down payment is covered by IHCDA.  This program is NOT for first time buyers only.  As long as the buyer sells their existing home before closing on the new home, they could qualify.

The interest rate and fees are higher for this program.  Seller concessions are typically used to cover the higher fees but conventional loans are limited to a 3% cap from the seller so the conventional buyer typically needs to invest some money themselves (the FHA buyer typically does not).  It is still less than with a typical loan product, though, and the conventional loan gets that same reduced PMI as the My Home product, so it can help many buyers get into a home sooner with little to nothing out of pocket and a comfortable payment.

Higher Income Limit Amounts

With today's announcement, IHCDA is allowing more buyers to now qualify for these programs by raising the maximum household income limits.  In St. Joseph County, Indiana, a buyer using the MCC program or the Next Home FHA program can now qualify with an income of up to $61,700 for a 1-2 person household.  For a 3+ person household, the income limit is increased to $70,955.

For conventional loans not used jointly with the MCC, the limits are now even higher.  Next Home Conventional and My Home are allowing household income limits up to $86,380.

Share the Word

Many home buyers in Indiana are not aware of these programs and they should be.  Not all buyers will choose to participate because of the higher interest rate and higher fees, but all buyers should be aware of the option so that they can compare the costs/benefits and decide for themselves.

At a minimum, all first time buyers should consider the MCC. The $500 enrollment fee is regained in under a year typically which makes it a great option for the buyer who has the upfront money available.

But, again, many home buyers have never even heard that these programs are out there.  Please - help them learn by sharing this post.  They'll thank you for it.  :)


To learn more about the IHCDA 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