Accelerator: 2.1 Funding Your Owner-Occupant Home

Accelerator
2.1 Funding Your Owner-Occupant Home
Cheat Sheet

Are you aware that the mortgage loan typically covers the majority of the money needed to purchase the property?

1. Before you find the money

1. To qualify for a mortgage, it’s best to meet the following criteria:
   • Your middle credit score should be at a 620 or higher.
   • Your debt to credit ratio should be 30% or lower.
   • Your debt to income ratio should be lower than 45%.
2. Build a list of lenders and choose the one that has the best reviews.
3. Apply for a mortgage if you have a 580 credit score. However, the higher your credit score, the better mortgage terms you’ll receive.
   • Email your mortgage lender a copy of your credit report, tax returns, W2s/ 1099, pay stubs, and bank statements.
   • Let the mortgage lender know what you need in a mortgage:
     1. Owner-occupant mortgage
     2. A property that’s in habitable and livable condition
     3. A 2-4 unit investment property where you can live in one unit and rent out the others for income
     4. Down payment of 3.5% to 10%
     5. Down payment assistance program (if any)
     6. The area/locale of interest
   • Ask for a verbal/ unofficial pre-qualification:
     1. “Hey, Mr. Lender, here’s a copy of my credit report. Here’s an email of my tax returns, pay stubs, W2s, and bank statements. I know you have to run my credit in order to pre-qualify and pre-approve me, but off the strength of my credit report and my financials that I emailed over, does it look like I’ll qualify?” 
     2. Find out what your purchasing power is.
4. Once you know your purchasing power and the terms (interest rate, amortization period), use that information in the Deal analyzer to analyze if a deal is a good deal.
   • The Deal Analyzer will need to know the mortgage amount, interest rate, amortization period, down payment, and how much of a loan you qualify for.

2. Credit

1. Mortgage lenders will want to pull your credit report:
   • Ask the lender if they think that you would qualify for a mortgage with your current credit score without them doing a hard inquiry pull. 
   • Once you are in position to purchase a property, then allow the lender to pull your credit and take a look at your credit to see if you actually qualify.
     1. The mortgage lender will be looking for the following on your credit report: 
        • Public records (Judgements, Tax Liens, Bankruptcies)
        • Student Loan debt
        • Revolving and installment debt
        • Non-medical bills in collection (especially over $2k)
        • Payment history for medical bills
        • Any recent past due 30 days late payments
        • High credit card balances
        • Secured credit cards
2. If you have any negative accounts listed on your credit file, then you will need to start repairing your credit.
   • Be mindful that mortgage lenders will look to see if you are actively disputing your debts.
   • Once you have at least a 620 credit score and are ready to apply for a mortgage, stop the dispute process.

3. Student loan debt

1. You will not qualify for a mortgage if you have delinquent student loans.
2. Make sure any student loan debt is in good standing with any and all debt service providers.
3. You will need a middle credit score of 620 or higher to qualify for the student loan debt mortgage program.
4. Set up a payment plan with your student loan servicer.

4. Documentation

Mortgage lenders generally require the following documents to process your mortgage application:

1. Job history: 2 years of W2s from all jobs
2. Business history: 2 years of 1099s
3. Pay stubs
4. Pension statements
5. 2 years of tax returns
6. 2 months of bank statements to include all pages
7. Any documentation that supports:
   • Bankruptcies
   • Divorce
   • Alimony
   • Child support
   • Disability
8. Any documentation that supports you transferred retirement funds to close on an investment property.
9. 24 months of work history:
   • Documentation that proves you’re working now and have worked in the past 2 years:
     1. If working 2 jobs (full and part time), then you must have been on both jobs for 2 years or longer.
     2. It’s preferred that you’ve not had 3 job changes in the past 2 years.
     3. It’s preferred that having multiple jobs are within the same field.
10. If you do not have any documentation at all to provide to the mortgage lender, then the best mortgage product to apply for is a Low Doc mortgage loan:
    • With a Low Doc loan, the mortgage lender will want to see 12 to 24 months of bank statements.

5. Mortgage types

1. Contact a mortgage broker for they will let you know what type of mortgages you qualify for.
2. Federal Housing Administration (FHA) loans:
   • 203K loan:
     1. Allows for the purchasing of a 1 – 4 unit property
     2. Also allows for renovation on distressed properties
     3. Requires a 3.5% down payment
   • You only need a 580 credit score to qualify for an FHA loan.
   • Seller assistance is provided up to 6% of buyer’s closing costs.
   • Mortgage Insurance Premium (MIP): 
     1. As the borrower, you pay MIP when you secure an FHA loan at 3.5%.
        • The MIP will stop once you have 20% equity built in.
3. USDA loan:
   • 100% financing is provided to those who qualify.
   • Seller assistance is provided up to 6% of buyer’s closing costs.
   • Check on the USDA website for 100% financed eligibility of the property located in a rural area.
4. VA loan:
   • Current and prior, full time or reservist, military service is eligible for a VA loan.
   • Provide the VA with a certificate of eligibility from the military.
   • VA loans help reduce attorney and closing cost fees.
   • Seller assistance is provided up to 4% of buyer’s closing costs.
   • Seller can pay off the credit card for the buyer. 
5. Conventional loan:
   • 3 – 10% down payment is required.
   • A 620 credit score is required to qualify.
   • Seller assistance is provided up to 3% of buyer’s closing costs.
   • A 20% down payment will eliminate the need for MIP.
6. Jumbo loan:
   • If the property is purchased at $510,400 and above, no MIP will be required.
   • A 680 credit score is required to qualify.

6. PMI vs MIP

1. Insurance costs paid by the borrower offset default to lenders when borrowers provide down payments below 20%. 
2. Private Mortgage Insurance (PMI):
   • PMI is purchased through a private company for conventional mortgages:
     1. PMI can be paid in full at closing
     2. PMI can be financed into the loan 
     3. PMI varies based on the loan amount and the loan to value ratio (LTV)
     4. Rates range from 0.5% to 2% of the loan amount
     5. PMI must be removed at 78% of the LTV
3. Mortgage Insurance Premium:
   • For FHA backed loans, there is a 1.75% premium of the loan amount.
   • For FHA backed loans, there is a premium of 0.85% of the loan amount.

7. Property/ hazard insurance

Property/ hazard insurance is required by lenders to protect the property.

8. Down payments

1. These are the various ways to fund your down payment:
   • Retirement account:
     1. 401k
     2. 403b
     3. IRA (Individual Retirement Account)
     4. TSP (Thrift Savings Plan)
2. Gifts:
   • Family 
   • Friends
   • Fiance:
     1. You will need a receipt for the ring
     2. You will need to provide the lender with a lease if you and your fiance live together.
     3. Provide the lender with photos of the two of you throughout the years.
3. Savings:
   • Checking and/or savings:
     1. Proof of deposits from a reputable source
     2. Funds seasoned in bank for a minimum of 2 months
4. Down payment assistance programs:
   • Ask lender for programs you can qualify for based on your specific situation and needs:
     1. Income
     2. Locale 
   • Ask lender about the qualifications for down payment assistance programs for:
     1. State specific
     2. Industry specific
     3. County specific
     4. City and town specific
5. NACA: (Neighborhood Assistance Corporation of America)
   • Down payment assistance for:
     1. Low income areas
     2. Low income buyers 
     3. Reach out to NACA for more information 
6. Creative Financing:
   • Owner occupant property purchases are not permitted using seller financing.
   • You can use seller assistance with closing costs.
   • You can use Business Credit that’s liquidated and seasoned in your bank account for a minimum of 2 months before applying for a mortgage. 

9. Notable mentions

1. There are benefits to home ownership:
   • Equity
   • Tax breaks due to depreciation
   • Principle and interest payments set with a fixed rate mortgage 
   • Control and management of tenants
   • Gain experience
2. There are cons to home ownership:
   • Responsible for maintenance 
   • Management 
     1. Vendors and contractors
     2. Paying bills 
   • Illiquid asset:
     1. Not able to tap into the equity for a period of time.
3. DTI (Debt to Income):
   • This is your monthly debt divided by your gross income:
     1. Work on getting the debt you owe down to 10 payments or less.  
4. Ask your mortgage lender for a Good Faith Estimate (GFE):
   • The GFE is an estimate that lets you know how much your closing costs will be.
5. The mortgage lender should also provide you with a Truth in Lending Statement:
   • It’s basically a disclaimer. It will let you know what you’re getting into as far as the loan.
6. Build your “team” in an orderly fashion:
   • Reach out to a real estate agent first.
   • Second, reach out to a loan officer or broker: 
     1. A loan officer can only provide you with mortgage products of their institution.
     2. A broker can shop around for a mortgage loan that fits your needs.
   • Next, reach out to a title company or a lawyer.
   • Reach out to a property inspector. 
   • Lastly, reach out to a closing agent.
7. Protect yourself:
   • Ask your lender for documents that address predatory lending:
     1. Fair Housing Acts
     2. Real Estate Settlement Procedures Act (RESPA)
8. Lender:
   • When you contact a lender, make sure to verify the mortgage types you qualify for.
   • Confirm the qualifications of the mortgage type:
     1. Find out your purchasing power
     2. Find out your interest rate
     3. Find out your amortization
     4. Find out the down payment requirements
     5. Find out the monthly payment amount
9. No multi-units in your area:
   • This program works for single family properties and even Airbnb.

Words of advice

• Mortgage lenders are meticulous and intrusive.
• Since mortgage lenders are loaning you 80 to 90% of the purchase price, expect to answer additional questions and provide explanations.
• Based upon your documentation that you provided, credit, and what you’re looking for, you should expect to qualify for up to $200,000 for a 2-4 unit rental property.
• A pre-qualification is an estimate of what you can borrow.
• A pre-approval is what you actually can borrow.
• Deal Finders will work with you if you have a pre-qualification or a pre-approval.
• Mortgage lenders are basically looking to see how well you pay your debts.
• If the negative accounts on your credit report remain after an extensive dispute process, negotiate a payment arrangement with the creditor/collection agency; this includes judgements. Mortgage lenders may overlook the negative account as long as you can prove you’re making payments agreed upon.
• The balance on any medical bills do not matter to mortgage lenders. They only want to see if you’re paying on time. 
• Credit card balances should be 30% or less than the total line of credit.
• Having a secured credit card will increase your FICO score as long as you stay within 30% and pay the bill on time. 
• You can also boost your credit score by becoming an authorized user on a responsible person’s account. However, lenders will only consider accounts that you are the primary holder of when qualifying you for a mortgage. 
• If you do not have 2 years of tax returns, you can use 12-24 months of bank statements to provide to the mortgage lender.
• If you’ve changed careers within the last 2 years, you’ll need to provide an explanation as to why.
• With a Low Doc mortgage, please know that the interest rate and down payment will be higher than the typical loan.
• Mortgage lenders classify applicants of Low Doc mortgages as high risk borrowers.
• Negotiate with the seller to assist by financing 6% of the purchase price with an FHA loan.
• With a USDA loan, you can possibly get your earnest money deposit back at closing since the USDA provides 100% financing.
• Mortgage insurance of any kind does not protect buyers; it protects the lender if the buyer defaults. 
• The MIP annual premium can be lower if the LTV values or the mortgage terms are 15 years or less. 
• Down payments that are gifted to you cannot be paid back.
• When “seasoning” liquidated business credit for purchasing a property, you will still be responsible to pay your monthly payment.
• Lenders want to see if you have the ability to pay down your debt in monthly payments.
• Lenders are commission only, so only reach out to them when you’ve met the qualifications for a mortgage listed above.

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