FHA 203k Loans Explained

Looking to buy a fixer-upper? Consider a FHA 203k Loan.

Sometimes buying the home that could use some repairs isn’t a bad option, as it is a quick way of building up equity in a relatively short amount of time. However, for many first time buyers with low credit, or higher debt, this goal has often been out of reach. FHA is a stickler for what kinds of properties they will issue loans for, and the property has to pass an inspection. Which means no fixer-uppers. The FHA 203k loan works a bit differently.

What does an FHA 203k loan do?  

The FHA 203k loan allows the borrower to finance two major items: The house itself, and needed or wanted repairs. The Lender tracks and verifies repairs it is willing to approve. This means that more buyers are now eligible to purchase homes that require a bit of tender loving care to get started.

The process is simple, apply for the loan and get approved, then find a contractor (you have to find a licensed contractor) and get bids (don’t worry this is an easy process that we can help you with) finally, close the loan, complete the repairs, and then enjoy your upgraded home!

What repairs can I do?

The kinds of repairs that you are eligible for under the FHA 203k loan, depend on which of the 2 kinds of loans you apply for.

For a standard 203k loan,  you can do any of the following options:

• Modify the number of units in the home (turn a single family home into a 2,3,or 4, unit home or vice versa.

• Structural alterations

• Connect to public sewer or water

• Large landscaping projects

• Move the home to a different site

What you can’t do:
 

• Add in a luxury amenity (things like swimming pools or basketball courts)

• Minor Landscaping

• Any project that will take longer than 6 months.
   

A 203k streamline allows for minor repair work and upgrades. The limit to the costs is $35,000, with a contingency amount of 15% of the total bid  just in case the contractor goes over costs. (If the contingency fund is not used, it is credited back to you).

Most non-luxury and non-structural items are acceptable. Things such as:
 

• Kitchen and bathroom remodels

• Appliance upgrades

• Safety and health repairs.

• Carpet and Flooring

• Energy-efficient upgrades

And many more that we won’t list here. Any minor repair or upgrade under $35k may be likely to qualify as long as it doesn’t change the footprint of the home or structurally change the home in a fundamental way (such as moving a  load-bearing wall). Additionally, there is a minimum budget of $5,000 in repairs needed to qualify.

You Can Use This Loan To Refinance

While many people use this home to purchase a home, it can also be used to refinance as long as you have at least $5,000 in planned improvements. You can refinance into this kind of loan even if you do not currently have and FHA.

Eligibility

As a subtype of the FHA loan, the 203k is more flexible in their requirements to qualify. FHA allows for credit scores down to 580 (though a higher credit score will give better rates) as well as more forgiving debt to income ratios (typically less than 43% of your income should go toward the mortgage, repairs, and all other debts). So there is a high chance that you will qualify for the loan, as long as they would normally qualify for an FHA loan. Additionally, there is the added benefit of being able to receive up to 100% of the down payment as a gift from family members. You can borrow up to 110% of the proposed future value of the property or the home price plus repair costs, whichever is less.

Bottom Line

This is a great loan for those who want to do some serious work on their property, but would otherwise be prevented from doing so by their credit scores or Debt-To-Income. While there are other options available, especially for repairs that cost less, this is definitely a great option for those who are looking to upgrade, expand, or remodel a home.

The Truth About Mortgage Qualification

There are many reasons why people choose not to refinance, or purchase a home. However, one of the most detrimental reasons that I have heard during my time as a mortgage broker is: “I don’t qualify.” While this is sometimes true, I have often found that after a short discussion, things aren’t quite as impossible as they first thought. Many consumers are selling themselves short because they either don’t know, or have an incorrect view of DTI ratios, down payments, or credit scores.

This is a common misconception held by many people. In a recent study published by Fannie Mae, we see that only around one half of consumers had an understanding of key mortgage qualification criteria. For example, most people thought you needed a 652 credit score or better on the study. (It’s 620) (You can find the rest of the study here.)

While there are exceptions to every rule, here are some good general guidelines to follow in the event you aren’t sure whether or not you qualify.

The Minimum Credit Score required to refinance, or purchase a home is 620. (Though this shouldn’t discourage someone who wants to refinance or purchase a home, as credit repair is -in most cases-  a viable option)

The minimum down payment required is 3% (Though there are programs that let you put either 1% or 0% down)

Maximum DTI ratios: (DTI stands for Debt-To-Income) This one is a bit tricky because you’re dealing with two ratios here. For more info on DTI ratios, check here.
Front End: The highest you can go is 45% for FHA Back End: The highest that you can go on the back end is 55% for FHA loans.

Highest LTV: For a more detailed explanation of LTV please go here. Otherwise, in most instances it is 90% unless you have a VA or FHA loan.

Luckily for our readers, we've covered these subjects multiple times in the past.

So why the info? It is our hope that we can help the 55% of first time home buyers and 60% of repeat buyers who are interested in purchasing a home to not disqualify themselves out of a great deal that could save them hundreds of dollars each month.

For those who are curious as to whether or not they qualify, please feel free to get in touch.

Down Payment Options That First-Time Homebuyers Should Definitely Consider

For most people, owning a home is a major step in life. There are many financial and even emotional benefits to owning your own home. Unfortunately, for many the idea of owning their own home seems too far-fetched. Among the most common of problems, is coming up with the money for a down payment. This is a major problem for many would-be first-time home buyers, or at least they think it is.

Many first-time home buyers believe that they need to be able to put at least 20% down, this isn’t the case, in fact, in most cases it is better to put less down.

The reality is, you can afford to get a home with as little as 0%,1%,or 3.5% down. Each option carries different benefits as well as drawbacks.

The 0% down option:
 

This is a topic that I have covered in another blog post here.  I’ll briefly cover the benefits and drawbacks of a 0% down, but for more detailed info, check out the post linked above.

VA, FHA, and USDA loans all have methods to get a home without putting a single penny down out of pocket!

Benefits: 

·         These are good options if you don’t have any money saved, but still have good (700+) credit

·         Allows you to move in without putting any money down.  

·         You also immediately start building equity, though you are starting from 0% equity.

Drawbacks:  

·         Depending on which loan you get, you may end up paying a bit more per month with a 2nd loan, as well as mortgage insurance. However, it is likely still going to be comparable to renting a home of the same value.  

·         In the case of USDA loans, you end up living in rural areas, which, if you like that sort of thing, isn’t really much of a drawback.

·         There are also limits in some cases on how much income you have, and what kind of home you can get.

 

The 1% down option:

This is a much better option for those who can afford to save up a small amount of money. Consider for a moment a $200k home. The down payment at 1% would be around $2,000 or around 2 months’ rent for a 2 bedroom apartment.  

This loan is actually a 3% loan that the lender pays 2% out of their own pocket as a grant to help finance, money that doesn’t have to be repaid (a gift). This option requires that the borrower have good credit (700+). The remaining 1% can either be paid by the borrower, or be a gift by parents, friends, etc.  This is a better option for those who have access to some kind of down-payment.

Benefits:

·         You get to move into a home quicker.

·         You don’t need a 2nd loan to help finance the home or have to live rural.  

·         This gets even better if you can convince mom and pops to gift you the 1% down for the home.

Drawbacks:

·         The mortgage insurance can be a bit higher if you only put 1% down. 

·         This would effectively be a 3% conventional loan, which means that for a while the payments will be higher that they would normally be. But eventually this mortgage insurance drops off.

·         The borrower needs good credit to qualify for the program

 

The 3.5% down option:

FHA minimum requirements are usually around 3.5% down, which for a $200k home is around $7,000. This is a great option for those who are a bit deficient in their credit. And while $7k may seem like a lot, remember that some of that can come in the form of a gift. The loan carries mortgage insurance, which will make it a bit more expensive, but typically these loans are refinanced later into a conventional loan by the borrower once they have paid down the loan a bit. If you have around 3% saved up for a down payment, this might be the option for you, saving that extra .5% or having it gifted, can net you less mortgage insurance than you would pay with a 3% conventional.

Benefits: 

·         You get to move into a home quicker.

·         Credit scores can be lower.

·         FHA is more forgiving of debt.

·         Lower Interest rates!
 

Drawbacks:

·         Carries mortgage insurance, which causes the loan to be more expensive than if it were conventional with 20% down, due to the extra payment of mortgage insurance.

·         Limitations on what kinds of home you can buy (No fixer-uppers, no loans over $337k).

 

The Bottom Line:

The above options are only a few available to the average home buyer.  Don’t let a down payment deter you from owning a home. There are so many options these days for people to move into a new home with little to no down payment, that it doesn’t make sense to pay rent anymore. 

While having a larger down payment reduces the overall amount that you end up having to repay, moving into a home immediately means that you are building equity.

As for paying 20% down, it’s great if you can afford it right off the bat, but most people can’t. Remember, you will always end up paying a mortgage. Either your own, or someone else’s.  If you aren’t sure that you are ready to own a home yet, check out our guide of things to consider before buying a home.

If you have any questions, don’t hesitate to contact us for free information regarding the path to home ownership.
 

In the meantime, take care and have a wonderful day!
 

Managing Debt: How To Deal With Low FICO Scores.

As many of us are all-too-aware, there are many things which can affect our credit score, whether positively or negatively. Every purchase you make, every line of credit extended, and even the amount that your credit balance sits at each month, all affect your credit score.

If you’re reading this, chances are that you have thought about either purchasing a home, or refinancing a mortgage recently. One of the key factors in determining whether or not you can move forward in these endeavors is your credit score.

What is a FICO score?

Your FICO score is a history of all of the payments, debts and accounts that you have ever held in your life. Recent events are weighted higher than older ones, as people can change.

If you have a history of missed payments, bad purchases, or high balances, chances are your FICO score will be pretty low. Anything below 620 is generally considered “poor” credit, usually barring you from (or making it exceedingly difficult to) refinance or home purchase. From 620 to 689 you are generally considered to have fair credit. 690-719 is considered good credit, and 720-850 is considered excellent. (850 is the highest credit rating a person can have)  


What can I do to improve my FICO score?

If your FICO is down in the dumps, the first best thing to do, would be to take a look at your credit report and actually pay the $7 or so for a credit score. This will help you find a place to start. From there, do these 3 things:

·         Check for inaccuracies or overdue payments you were unaware of. If such events exist, get the items scrubbed from your records, in the case of payments you were unaware of, try negotiating to have them delete the record for payment. (Make sure to get this in writing, that they will delete the event from your credit history.)

·         Make certain that you don’t have an overdrawn account or excessively high credit account. They will punish you for this one, the good thing though, is that it is easily taken care of, just pay down your cards.

·         If you do have a large amount of money owed, or a large number of items on your credit report, pay off the most recent events first, ensuring thatyou attempt each time to work with the company involved to have the event taken off of your credit report.

This list isn’t meant to be exhaustive, but rather a good place to start. If you are having credit troubles, don’t fret. Credit scores, just like your situation, can change for the better, and with time and attention, they most certainly will.

If you have any questions regarding your credit, or how to mitigate debt, please give us a call at 801-223-7060. In the meantime, please have a wonderful week! Take care!

Home Equity Lines of Credit: How a Short-Term Solution Can Lead to Long-Term Problems

The Basics

Home Equity Lines of Credit (also known as HELOCs, which is how I’ll reference them from here on out) are mortgages, but with some key distinctions:

·         During the “draw period”, you can borrow up to your credit limit, pay it down, and borrow up to the credit limit again.

·         You only have to make interest payments during the draw period (but doing so will not pay down the balance).

·         The interest rate is variable, normally based off of Prime

·         After the draw period, you enter the “repayment period”, during which the balance must be paid off.

HELOCs are great ways to consolidate credit cards, get access to cash for home improvements, finance a new business, etc.  But unless there is a long-term plan, HELOCs can cause more problems than they solve. 

Here’s why:

The Variable Rate Will Change…and Go Up

Most HELOC interest rates follow the Prime rate, plus 1-2%.  Prime is currently at 3.75% and has been under 4% for the last 8 years.  But, Prime is increasing and will continue to do so as the economy slowly improves.  Since 1990, Prime has averaged 8.75%.  If your interest rate is Prime plus 1-2%, you could likely face a 10% interest rate if you hold on to your HELOC.

The Balance Isn’t Going Down

During the draw period (which is typically 5-10 years) you are only required to pay the interest accrued on the balance.  While many people fully intend to pay more than the minimum (interest-only), the number of borrowers that actually pay a significant amount towards the balance during the draw period is MINISCULE.  The vast majority of HELOC borrowers that start with a $25,000 balance will have a $25,000 balance 10 years later.

The “Payment Shock” Can be Substantial

After the draw period is over, borrowers enter the repayment period, which is typically 15 years.  That means that not only can you not make the interest-only payment, you have to make a 15-year payment.  For the typical HELOC borrower, once they start the repayment period, the payment will increase by over 125%.

Here are some examples of what normally happens to HELOC payments after the draw period (assuming a $25,000 balance):

Interest Rate	Payment (Draw Period)	Payment (Repayment Period)	Increase In Payment
4.00%	$83	$185	$101 (125%)

If we assume that Prime reaches its 30-yr average, it gets even worse:

Interest Rate	Payment (Draw Period)	Payment (Repayment Period)	Increase In Payment
8.75%	$185	$250	$167 (200%)

What to Do?

The best way to avoid the increased interest expense and “payment shock” of a HELOC is consolidate it into fixed-rate 1st mortgage.  Here’s why this helps:

·         The rate will be fixed, and likely lower than your HELOC rate.

·         The balance will actually paid off!

·         The payments will stay the same and be substantially lower what they would be during the repayment period.

If the same borrower with the $25,000 HELOC balance consolidated that into a fixed rate 30-yr loan, the payment for that balance would only be $119/month.

We are in a unique market here in Utah.  Home values have finally re-achieved their peak from 2006, but interest rates are still historically low.  That means that this is the perfect opportunity to “fix” your HELOC problem.

Call us today to see what your scenario would look like.

Evergreen Mortgage 2016 Year In Review

2016 is just about done. It's been a hectic year, and I think many are looking forward to the year ahead. A lot happened in this last year, and it is our hope that we were of some help to many of our readers out there. Here is a list of blog posts that were written along with a brief description of what is inside, for your browsing perusal. 

Thanks! and have a great New Year!

1/7/2016 Some Facts About ARMS - Don't understand how 5/1, 7/1 or 10/1 ARMS work? This is a great read for those who might be moving in the next couple of years.

1/16/2016  Credit Card Consolidation Myths - We explain how and why Consolidating Credit Card Debt is usually the best choice when available. 

2/22/2016 Should I Choose A Home Before Talking To A Mortgage Broker? - Short answer, probably not. We'll explain in this post how talking with a broker can give you a better idea of what you can afford.

2/29/2016 Renting Is Cheaper Than Owning A Home - It really is, and we'll explain some of the reasons why here. (Among the most important of which is, you are investing money.)

4/11/2016 Recent Home Valuations: Utah VS Everyone Else - Ever wonder how Utah fares when compared to the rest of the nation when it comes to home value? 

5/16/2016 A Few Tips To Add Value To Your Home - Planning on selling your home soon? Or possibly building an addition? Remodeling? This is a good, quick read for those who are planning on selling their home someday. (protip: Pools aren't necessarily a great investment)

6/17/2016 How To Leverage Your Children - A good read for mom and pops who have kids going to college. They need a place to live, and you benefit from getting Rentals at a lower Interest Rate. 

6/29/2016 Rentals: An Excellent Investment, If You Know What To Expect - Some great advice on how to manage and buy rental properties, get the best rates, and ensure that your rentals are taken care of properly. 

7/8/2016 Mortgage Definitions Made Easy - Simple Mortgage Definitions, reference this if you are ever unsure of what a term means. 

8/26/2016 HOA's What To Expect and What to Watch For - We Explain how HOA's don't necessarily have to be the devil incarnate, and how they can actually benefit you, if you know what to look for. 

9/25/2016 Guide to Skipping Payments When Refinancing - A great guide on how to save yourself a bit of money up front when refinancing your mortgage. 

10/19/2016 Retiring A Millionaire - We discuss some solid methods, that when used in conjunction have the best results of netting you over a million dollars upon retiring. 

11/11/2016 VA Loans: Reason Enough for Everyone to Join The Military - VA loans are arguably THE best loans in the biz. Low interest rates, 100% LTV refinancing... read more if you're interested to see why you should join the military. 

12/12/2016 Christmas Budgeting Guide - Read this if you find yourself falling short near the end of the year, or really if you just want some tips on how to budget better. 

And that's all! It's been a blast folks! We'll be back in 2016 with more new content, so stay tuned, and if you haven't already, subscribe to our newsletter!

 

Rate Post 9/2/2016

HOA’s: What to Expect and What to Watch For

What is an HOA?

If you purchase a condominium, townhouse, or property in a gated community or subdivision (anything considered a PUD, or a “Planned Unit Development”), you will likely be obligated to join that community’s Homeowners’ Association (HOA).  

HOAs help protect property values and keep common areas/interests functioning properly.  HOAs collect dues for the upkeep and management of common areas/interests such as insurance, security, landscaping, parks, parking lots, pools, security gates, pest control, etc.  It’s important to note that “common areas”, at least for condominiums, often include anything not within the walls of your own unit, so HOA fees also cover the costs of maintaining (or replacing) roofs, exterior walls, stairwells, etc.

HOAs also set forth rules which may prohibit certain actions or activities such as painting your house neon green (thus lowering the value of not only your home, but the homes nearby); having a big, loud dog; parking in certain locations; or starting a garage band and playing at midnight. Typically the HOA can levy fines against individuals who break the rules and in some cases can even foreclose on your home.

Benefits of an HOA

The major benefit is from economies of scale. Because everyone is pitching in and the HOAs are buying these services in bulk, 50+ HOA members can negotiate better rates (per unit) than the individual homeowner. The overall cost is usually much cheaper for everyone involved. For example, the insurance that you would normally have to pay to protect your home from flooding, fires, or natural disasters –which normally cost you $40 – now costs $10 through the HOA.

These are typically things that a homeowner would naturally have to pay for anyway, so it is a major benefit to not only pay a bit less, but not have to worry about securing these services for yourself. (I.e. you don’t have to set-up trash pickup:  it’s already available through the HOA.)

What to look for

It is important to read through the rules of the HOA (called the CC&Rs) to understand its responsibilities and what actions they are able to take in fulfilling those.  Finding an HOA that lines up with your values is a must.  Is garbage pickup included?  What are the smoking restrictions?  Are pets allowed (if you’re a big dog person, it might not be the best idea to jump into a community that forbids pet ownership)?  What kind of insurance does the HOA have against flooding, fires, or other natural disasters?  Is the HOA managed by professionals or by a few members?  And finally, how much are the fees, and have they risen substantially in the last few years (and if so, why did they rise)?  

Research what kind of reserves the HOA keeps. What sort of things do they spend it on: new roofs for homes or carnivals?  Have they saved enough for upcoming maintenance or are they going to have to raise the dues?  Try to find out if the HOA is spending their reserves on things that are truly important to you or things that you don’t really care about.

Finding out these key pieces of information can be a huge breath of relief – or a warning signal to stay away. Think seriously about whether or not you want to buy a home with the current HOA.
 

Conclusion:

All-in-all the benefits outweigh the costs. If you have a good HOA you can rest easy knowing that the neighborhood you bought property in will not only have its property value protected, but that the standards are clearly outlined for you to see up front. HOAs can save you a lot of time, money, and stress if managed properly.

Rate Post 7/20/2016

Enjoy low rates through the summer!

A few tips toward adding value to your home (and a few things to avoid)

Whether you are selling, refinancing, or just renting, upgrading certain aspects of  your home can be a boon toward raising it’s value, while others are just a money-sink with no real return. Here at Evergreen Mortgage, we took a look at some of the best (and worst) places to sink time, money, and effort into to get the best bang for your buck.

Image by Nancy Hugo, CKD

1.Remodeling your kitchen.

It is a well-known fact that the kitchen is among the most important rooms in the home. You will definitely want this looking nice before getting that appraisal.

Replacing outdated appliances, and repairing or replacing the counters or floors, if needed, will go a long way toward making your home feel modern and up-to-date. Try spending money on stainless steel appliances for that truly modern look and feel.

Also, adding a fresh coat of paint never hurts either. Upgrading the kitchen can even raise the value of your home between 3%-7% on average.

Photo of a finished basement by Sean Madden. License Labelled for Reuse

2. Finish your basement or attic.

Not only will this add usable square footage to your home, but allows for a flexible living space, that can serve a variety of purposes: an extra room, an office, a second living room, a playroom for the kids, or the adults, the possibilities are endless.

The bottom line is having the extra usable space never hurts. Doing this can raise the value of the home between 4%-6% on average. 

Image by Todtanis

3. Freshen up the bathrooms.

Just like the kitchen, bathrooms should feel fresh and updated. Replacing your worn out linoleum floor, or possibly simply the faucets and fixtures, can go a long way toward improving the overall value of the home. You don’t have to go overboard, make the bathroom look nice. No one wants an old messy bathroom.

Some other things to consider:

1. Re-painting rooms that need it is an easy, cost effective way to add value to your home.

2. Update all of your energy-guzzling appliances to make your home energy efficient, replace single-pane windows with double-pane or triple-pane windows. For better heat retention and energy efficiency.

3. Maintain and fix any leaky faucets or drains, replace burnt out bulbs, and make sure the home is clean and presentable.

Doing these three things, is practically guaranteed to get some value, but let’s look at some of the things that won’t.

Image by Vic Brincat From Ontario Canada

1. Installing a pool.
While it is wonderful to be able to cool off during the summer time, adding a pool likely isn’t likely to raise the value of your home. That doesn't mean you shouldn't make the investment if you want a pool, just be aware that with maintenance costs it is more a liability than an asset. Whether you are simply refinancing, or trying to sell your home, a pool is an investment best left to those who really want one.

Image by Todtanis

2. Creating specialized spaces. While you may have always wanted to convert that bedroom into a personal sauna, it might not work out so well when it comes time to sell or refinance. Individuals looking at your home on Zillow or other websites will expect a certain number of rooms to be present. If the house no longer fits the description, they may look elsewhere.

Long story short, sometimes it is best to keep things simple.
 

Rate Post 5/9/2016

Spring Showers Bring Lower Rates

*These are the closest “par” rates for the different types of mortgages.  They assume very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different specific risk factors will affect interest rates.

Low Rates Hold Steady

Just for St. Patrick's Day, rates are staying low! Well maybe not for St. Patrick's day but hey they are constant which means they aren't rising. Happy St. Patrick's Day!

*These are the closest “par” rates for the different types of mortgages.  They assume very good credit, sufficient equity, and the absence of other negative risk factors (e.g. property use, cash-out or not, loan amount, etc.).  Different specific risk factors will affect interest rates.

Common Misconceptions: renting is cheaper than owning a home.

One idea that I often hear, especially from people my own age, is the statement “I couldn’t afford to own a home, whether due to the down-payment, or due to the amount of monthly payment.

For many, the prospect of owning that first home can be rather daunting. But is owning a home really more expensive than renting one? Let’s take a look at some comparisons.

Home Value                                 Mortgage per month                     Rent per month

$150,000 (condo)                       $1023                                               $1150

$250,000 (house)                       $1500                                              $1600

(Both mortgage values were calculated using 3.5% down at a 3.375% fixed interest rate)

We can see in a side by side comparison that renting isn’t necessarily cheaper than owning a home, in this case, both the condo and the house were slightly cheaper to own than to rent. While this isn’t always the case, there are plenty of benefits to actually owning a home, such as consistently growing equity and value.

If owning a home is something that you are interested in, contact a mortgage broker, as they can point out price ranges in the area, present options, and outline the steps needed to be taken to actually accomplish the goal of moving into a home.