Saving Money With a Higher Interest Rate

"So wait...you're telling me you want me to pay a HIGHER interest rate for my mortgage?"

By the incredulous sound to his voice, I could tell that Mat thought I was crazy. His Realtor had referred him to me for a second opinion on his mortgage even though he was already preapproved with another lender, and he was clearly wondering what his Realtor had been thinking.

"Yes, Mat, I want you to consider paying a higher interest rate. If you do, your monthly mortgage payment will be lower and your tax refunds will be bigger. Are you open to hearing how we can get creative to save you some serious money?" I replied.

"OK...I'll listen. I already don't get it, but I'll listen. Lay it on me..."

All PMI Rates Are NOT The Same

Mat's suspicion made sense. The interest rate is what makes a mortgage payment higher or lower, right? well, yes, it is one piece that makes a payment higher or lower, but it's not the only piece. To understand this, you need to know exactly what makes up a mortgage payment.

Typically, a mortgage payment includes the principal and interest on the mortgage loan, the property taxes on the house, the insurance on the house and something called private mortgage insurance (PMI). PMI is something a home buyer typically pays as part of their payment when they are not putting 20% down on the price.

What most home buyers don't realize is that all PMI rates are not the same. Different loan types require different amounts of coverage. If the required coverage is lower, the cost for PMI each month is lower making the total monthly payment lower. 

"Mat, I want you to consider participating in a down payment assistance program offered by Indiana Housing and Community Development Authority, known as IHCDA. You would get a conventional loan, just like you'd wanted, with only 3% down needed. IHCDA would cover that 3% down payment for you."

"But I have 3% saved up for the down payment. I don't need down payment assistance so why should I pay a higher interest rate for it? Didn't you say this rate was 0.25% higher than what the other bank was quoting me?"

"I'm glad you have savings available because you'll need some of that for the closing costs and prepaid items when you buy. And yes, Mat, the interest rate with this program is 0.25% higher currently but, because this is a state sponsored program, the PMI coverage required for your credit score costs 0.37% less annually so paying the higher interest rate but lower PMI will make your total monthly payment lower."

"Really? That just seems so strange. I get what you're saying though, and I really do want the lowest payment I can get. But didn't you say something about my tax refund being bigger too? What was that part?"

"Ahh yes....the tax refund part...you're going to love this..."

Getting a (Much) Bigger Tax Refund

"Mat, the IHCDA program I'm recommending not only covers your down payment and gives you cheaper mortgage insurance, it lets your participate in a Mortgage Credit Certificate program."

"A what? I've never heard that phrase. The other lender didn't mention it at all. What is it?"

"A Mortgage Credit Certificate program, often referred to as a MCC, is a federal program for eligible first time home buyers that allows you to get between 20 and 35 percent of the interest you pay each year back as an income tax credit. I would estimate your credit at around $850 which means your tax refund after the first full year of home ownership should be around $850 more than it would be if you weren't enrolled in the MCC."

"Wow! Is that for the first year only? Or does it go three or five years or something?"

"Even better than that Mat. It goes for the entire life of your loan. As long as you live in this house and pay on this mortgage, you will be eligible for this credit."

"Well that's cool. Why didn't the other lender mention this stuff? He just quoted me a rate and didn't talk about it at all."

"That's why your Realtor recommended you talk to me too. I'm glad he did and I'm glad you listened to him. So shall we take the next steps to finish your preapproval?"

Mat said yes, and we got him fully preapproved and ready to roll. Three weeks later he found his house, used the IHCDA program, and closed a month later with less money needed at closing, a lower monthly payment and everything in place for even more savings at tax filing time.

Does bringing less upfront, having a lower payment and saving money at tax time sound interesting to you?  If so, give me a call or drop me a line! Together we'll see if using IHCDA's down payment assistance program and the Mortgage Credit Certificate can help save you money too.

Lori Hiscock is a Sr. Loan Officer and Branch Manager 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 Love/Hate Credit Karma

I love that there is a Credit Karma in the world today. Never before has the general public had such quick and easy access to their credit information. Not only does Credit Karma share credit scores with them, it gives them information on what is driving that credit score and steps they can take to potentially improve it. Yep, I love Credit Karma.

As a mortgage lender, though, I also kind of hate it. While it tells people their credit score, it's not the same credit score I'll be using for their loan application which regularly leads to disappointment for my clients.

So why isn't it the same score? Good question. Let me explain.

What Credit Karma Is

Credit Karma is a custom credit score calculated with the VantageScore scoring model. The VantageScore is a scoring model that was created by the three main credit reporting agencies (Equifax, Experian and TransUnion) back in 2006.

To clarify, a 'scoring model' is just a term for the way the math is done. These mathematical models are complex algorithms that look at all of the components of a person's reported financial picture (payment history, balances, collections, judgements, etc.) and calculate a number that lenders can use to determine just how high the risk is when they make a loan to a person.

While use of the VantageScore scoring model has been growing since its creation, it is still not the primary credit scoring system out there. The main scoring model out there today is the FICO score.

What Credit Karma Is Not

A Credit Karma score is not the same as a FICO score.  FICO has been around since 1989 and is the leader in the credit scoring arena for one primary reason - it is the model the banks have to use. In the mortgage arena at least, lenders are required to use a FICO score in their loan approval if they are selling their loan to Fannie Mae, Freddie Mac or FHA. Seeing most loans are sold to those entities, it's easier for mortgage companies to just use the FICO scoring system across the board.

Why This Is A Problem

The problem with this is that the VantageScore and the FICO calculations are different and they give the user different credit score numbers.  If a potential homebuyer gets a higher VantageScore from Credit Karma, they may think they're in good shape to buy a home. They then may go out and find the house they love and officially apply for their mortgage only to have the mortgage lender pull their FICO score and learn that they actually don't qualify.

Still, though...

Finding out that the information they were relying on was faulty can be heartbreaking for a potential homebuyer.  Still, though, Credit Karma can be an excellent tool when used in the right way.

The key is for a consumer to use Credit Karma to monitor movements, not the actual score. If someone is looking to buy a house, their first step is to talk to a mortgage lender and learn what their FICO score actually is. Then, if it's lower than needed, they should get their Credit Karma score and start taking the steps their lender recommended to improve their FICO.

As those steps take effect, the consumer should see their Credit Karma score moving up. This is a good indicator of what is happening with their FICO score as well.  Even though these scores are calculated differently, they are using the same data and movement in one is a good indicator of movement in the other.  Once the Credit Karma score has moved the number of points that the FICO needed to move, the consumer should check back with their mortgage lender and have them check again to see if they're where they need to be.

Bottom line, though, a Credit Karma score is just an indicator and shouldn't be used when figuring out if you can get a mortgage or not.  That question needs to go to your mortgage lender.  If you're looking to buy a house in Indiana or Michigan, I'd love for that mortgage lender to be me!  Feel free to contact me at lori.hiscock@ruoff.com if I can assist.

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

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

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

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,

click here - Why I (almost) Always Recommend Conventional.)

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, 

click here - The Loan I would ABSOLUTELY Pick Today.)

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.

click here - The Downside of Down Payment Assistance.) 

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

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

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