First time home buyers have a few really good programs to choose from.  These mortgage programs only require little to no money down and some allow a lower credit score.  It’s common to see first time home buyers have little no money for a down payment or a lower credit score prevent them from buying a home.  These shouldn’t stop first time buyers from looking into what programs are available to them.

FHA Loan Program

The FHA Loan program (Federal Housing Administration) is one of the most popular programs among first time home buyers.  Here are some of the best things about this program:

• The minimum down payment is 3.5% of the purchase price.
• The down payment can be gifted from a family member.  It doesn’t have to be your own funds.
• The minimum credit score, with most lenders, is 640.
• Interest rates are lower than conventional mortgage loans in some situations.

Most first time buyers take advantage of this program because of the small down payment and lower credit scores allowed.

VA Loan Program

The VA Loan program is specifically for military veterans and people currently active in the military.  I thinks it’s the best mortgage program available, as it should be for those that choose to serve our country.

Here are some of the best things about this program:

• There is no down payment required for this program.  Yes, 100% financing is allowed!
• Both veterans and people active in the military qualify.
• You can use your VA certificate of eligibily more than once.  The VA funding fee increases each time you use it.
• The interest rates are lower than conventional mortgage loans in some situations.
• The minimum credit score, with most lenders, is 620.
• No PMI (private mortgage insurance) payment is required by the lender.

Anyone that has served in the military should seriously look into the VA mortgage program.  It allows no down payment and no PMI payment, which is the only mortgage program that allows both.

Rural Housing Program

The Rural Housing program is for home buyers looking in a rural area.  This is one of the most popular first time home buyer programs for anyone looking outside of a city area.

Here are some of the best things about this program:

• There is no down payment required for this program.  Besides the VA program, it’s the only other no down payment program.
• The minimum credit score, with most lenders, is 620.
• The interest rates are similar to the FHA and VA programs.  Lower than conventional mortgage loans in some situations.
• This program doesn’t have a PMI payment, but they have there own monthy fee.  It’s much less than the traditional PMI payment.

If you are looking in a rural area to buy a home, it’s best to look into this program.  Since it’s one of the only two no down payment programs, it’s become very popular with first time home buyers.

Conventional 97

The Conventional 97 program is another low down payment program that many first time buyers use.

Here are some of the best things about this program:

• The minimum down payment is only 3% of the purchase price.
• It’s a conventional program, so the interest rates are going to be favorable like other conventional mortgages.
• The minimum credit score, with most lenders, is 680.
• It’s a Fannie Mae product, so it can be used with any Fannie Mae wholesale lender.

If you are looking for a good interest rate and a very low down payment program, this Fannie Mae program is going to be a good option.

Does it make sense to refinance your mortgage if you are only saving a small amount a month, like $50?  The best way to answer this question is with an answer to another question.

Answer this question first:  How long do you plan on keeping your property?

It’s best to try and answer this question, because the answer will have everything to do with whether or not refinancing with a small monthly savings makes sense for you.

Many people refinance to lower their payment, which helps their overall monthly obligations.  Others look to refinance, in order to pay less interest over the life of the mortgage, since even a small reduction to the interest rate can mean savings tens of thousands over the long term.

Visual Graph

If you are in a position where you don’t need the monthly savings to help your monthly obligations, then you should apply that savings to your new mortgage.  If you apply the monthly savings to your new mortgage principal balance, it has a tremendous benefit to your term.

Here is a link to a visual example I created for you to see this.

http://mcedge.tv/16dg1a  (the term savings is highlighted in yellow)

This example is using a 30 year mortgage with a balance of $150,000 that was taken out about a year ago, at an interest rate of 4%.  The new mortgage rate would go down to 3.5% and reduce the monthly payment $77.81.

Normally, a $77.81 monthly savings wouldn’t make sense to most people, but the trick is to apply that to your new payment.  Doing this will reduce the term just over 5 years!  Yes, that is like turning your mortgage into a 25 year term.  Most people don’t realize that they should look at refinancing, even if the monthly savings is very small.  Applying even the smallest amount to your mortgage will reduce the term and pay it off earlier.

Does it make sense to refinance your mortgage, even if you are only lowering your payment a small amount?  Absolutely!  If you plan on keeping the property for a long time, just applying a small savings to the new mortgage payment will reduce the term, pay less interest, payoff the mortgage sooner and build equity faster.

As a private lender with many years experience “in the trenches” lending private money (some call it hard money) on residential real estate, I have seen my fair share of potential borrowers with supposedly “killer deals” that end up being anything but killer.  The deal either starts out with a fatal flaw, or during the course of underwriting, something happens that stops an otherwise solid investment.

With this in mind, I would like to share what we encounter in our private lending business as the top things that kill a deal. While there are many factors that can result in a declined loan, I have narrowed it down to five, which I will reveal over the next five weeks.

Deal Killer #1:  No Experience

I wish I could count how many times someone has called me with what is the “deal of the century” looking for a private money loan. They sound like a pro, saying all the right things about the makings of a great fix and flip investment.  When I poke a bit around their experience, the truth comes out.  This is actually their very first deal, however they did just finish a boot camp or a training course with the latest and greatest real estate trainer or “guru”.

Uh oh.

Okay – before I go any further, I certainly don’t want to upset all of you who are fresh out of boot camp or for that matter my real estate training friends who do a great job training new investors each and every day.  HEAR ME OUT!

For the record, what jump started my career in real estate investing was back in 2002, my wife, who could not sleep one night, ended up watching a Carlton Sheets infomercial on TV at 2 am, and I woke up the next morning to her having ordered his entire training tape series (yes, tapes – old school) on a whim.  My first reaction… “You did what?”

I ended up listening to every single one of his tapes and that laid a solid foundation of EDUCATION for my young real estate investing career.

Now here is the key . . . my next step.  I found someone much smarter and wiser than I was and asked him to help me make my first investment.  I asked someone who was a neighbor of mine, a local real estate broker and an investment property manager, and he helped me find my first two rental houses (which I still have today).  He was paid a commission, and I bought him a few lunches along the way, and the rest, as they say, is history.  He helped me turn my education into EXPERIENCE.

It’s the old catch 22… you need experience to get experience.

So here is a question you are probably asking.  Will my company, or other private lenders, lend money to someone who does not have any experience?  Absolutely.  However, key to our lending decision is what is that person doing to offset the fact that they are new to real estate investing.

Here are some suggestions to those of you who are new to real estate investing.

Find someone with wisdom from the school of hard knocks (there are many out there, especially in today’s world) that would be willing to mentor you and partner in a couple of deals with you.  You can find them at a real estate investing club, online, or by just networking in your local market.  At investing clubs, they usually stand in the back of the room, have a few gray hairs (or like the guy I worked with, a few hairs) and have many stories to tell of what to do and what NOT to do.

On rehab to retail type projects, find a general contractor who focuses on fix and flips and has a proven track record for both results and character.  Don’t hesitate to pay them more than the green contractor who has never done a flip.  It will be worth your investment.  They will teach you the ropes and show you how to best manage your budget, and they will finish your project, probably on time and on budget.  You will save way more in the long run by working with an experienced contractor who can teach you along the way.

Don’t do it alone.  Be willing to give up a share of the profit in order to get more experience with a seasoned pro.  People love to help people – find someone who will be willing to work with you and be generous with them both in your thanks and with a piece of the pie.  That will be a great investment.

Coming up in two weeks?  Deal Killer #2:  A Poor Exit Strategy

Photo: Jim simonson

When the popular singer-songwriter Ne Yo purchased his second home in Milton, Georgia last week, speculation abounded as to why he would purchase a second home so close to his first home in Alpharetta. But nobody seemed to care about how he financed the purchase. Likewise, nobody seemed to care when Ellen DeGeneres purchased Brad Pitt’s home late last year.

This week, however, when Facebook founder Mark Zuckerberg refinanced the mortgage on his Palo Alto estate, the news made headlines instantly in publications from tabloids to investment magazines, begging the question, why?

Though it’s certainly unexpected for the world’s 40th wealthiest man in the world to finance his purchase instead of paying for the home outright, one could argue that such an event is hardly newsworthy. And yet, there are several things that Zuckerberg’s decision tells ‘normal’ consumers about today’s economy and real estate market.

Here are some things to think about:
Adjustable rate mortgages are not for everyone – Zuckerberg opted for a one-month adjustable rate mortgage (ARM) which is currently set at 1.05% on a 30 year loan. This is a financial product generally reserved for wealthy borrowers. More available for mainstream borrowers are one year ARMs whose rates are tracked by Freddie Mac, and are now hovering at 2.69%, a rate that is safely above the rate of inflation. It is important to note that the interest rates on one year ARMs has fallen slower than that of fixed-rate mortgages.

Because Mr. Zuckerberg poses no risk of default, the lending bank was able to offer him a rate that would essentially allow him to make money on the loan. Nevertheless, since most borrowers pose more of a credit risk, they aren’t eligible for these terms, and should not seriously consider an ARM even if Mr. Zuckerberg set such an example, if only because the rates could theoretically skyrocket at any point, posing serious financial problems for mainstream borrowers, while Zuckerberg and other wealthy people could opt to pay for their homes outright in order to avoid paying higher interest rates.

Today’s low interest rates are still worth pursuing – In today’s tough economy many conservative consumers are pushing off their home purchase, but perhaps they shouldn’t. With average interest rates on a 30 year fixed mortgages hitting 3.56%, the lowest rate since the 1950s, borrowers should consider the advantages of borrowing more money while the rates are reasonable and investing any surplus funds into a financial product that will yield more than the interest rate.

If possible, consider this strategy as an alternative to purchasing a home when the economy stabilizes and interest rates will undoubtedly be higher.

It’s a good idea to shop around – What’s striking about Mr. Zuckerberg’s loan is not only that he has one now, when rates are low, it’s that he’s refinancing, which indicates that he had a mortgage previously but is taking advantage of today’s low rates. This should serve as a lesson to all homeowners and potential homeowners. If you have a mortgage at rate that is substantially higher than today’s interest rate, investigate the refinance opportunities available.

While you may not be eligible for rates comparable to what Mark Zuckerberg received, you may still be able to enjoy a substantial monthly saving or to reduce the term of your loan. Likewise, if you’re considering a home purchase at this time, make sure to look at all your options and to find a mortgage that has necessarily the lowest interest rate, but the best terms for your budget and lifestyle.

Although we can learn some things from Mr. Zuckerberg’s shrewd financial plan, when it comes to personal finance, what’s good for the goose is not necessarily good for the gander. In fact, it’s rarely wise to make financial decisions based on what other people are doing, even if the ‘other’ people are as wise as Mr. Zuckerberg is purported to be. Instead, smart consumers should explore their options thoroughly and consult with an educated mortgage advisor before committing to a long-term loan.

Click Here to Get a Free Mortgage Quote

Photo: Andrew Feinberg

Mortgage rates continue their tumble recently, hitting all-time lows every day for the week starting July 9th, 2012. Current mortgage rates sit around 3.63% nationally for a 30 year fix rate mortgage, moving lower to 2.91% on a 15 year mortgage.

Despite the mortgage rates constant tumble as of late, that hasn’t done much to create new application demand in the market. National economic indicators released by the Mortgage Bankers Association (MBA) report that for the week of July 2nd, mortgage loan application volume decreased 2.1% on a seasonally adjusted basis.

One would expect mortgage application volume to skyrocket even with the holiday weekend due to the low rates, but that was not the case. This might be a reoccurring indicator that the purchase market has not recovered, as year over year, the Purchase Index was 3 percent lower than the previous year’s numbers.

Housing Market Still Moving Forward

However, despite the passive state of the mortgage market with the week’s incredibly low rates, it’s still a good time to invest (it seems) based on a “tipping point” seemingly occurring at the convergence of slightly rising purchase prices and historically low mortgage rates (get rates here). How long these two points will so beautifully converge is yet to be seen, but should be a conscious part of every investor’s decision making moving forward.

Buying a new property A) near a low point in real estate prices and B) at a historically low point in mortgage rates – just seems like the right way to go when considering the state of the market. Of course, this is all postulating, as every year seemingly brings new prognosticators predicting “a new bottom” of the market and also coming up strikingly, shockingly wrong.

BiggerPockets is a great place to start when making intelligent decisions about investing in real estate. The Mortgage Center has today’s rates and also an option to get a custom rate quote. Similarly, sites like MilitaryVALoan.com offer VA specific loan rates if you have military experience in your background.

If you’re looking purchase a new home or refinance an existing one, it’s important to understand the basics of qualifying for a mortgage so you can get the best deal possible. It’s not as easy to get a mortgage these days as it used to be, so it’s important to understand the basics of qualifying and take some simple steps ahead of time to “groom” your financial profile. The idea is to position yourself ahead of time to get the best deal you can.

Mortgage lenders look at a variety of factors when making a lending decision, but most can be classified into three general categories, credit, capacity, and collateral – or the “3 Cs”.

Credit – Do you faithfully repay your debts?

Your credit scores are an important factor in mortgage qualifying because they indicate how well you manage debt. Mortgage lenders require a credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) to document your payment histories for mortgages, auto loans, personal loans, credit cards, and any derogatory information such as collections, foreclosures, judgments, charge offs, bankruptcies, liens, etc. Credit scores are considered highly predictive of the risk of lending to you, so lenders give them a lot of weight. The higher your credit scores, the better!

Credit scores range from 300 to 850, with most people falling in the mid 600s and above. Scores below 620 are considered bad and scores above 720 are considered good. Ideally, you want to have all three of your credit scores in the mid 700s or better to get the best mortgage deals.

The following are some of the factors that weigh heavily on your credit scores:

• Debt payment history – Late payments, particularly on mortgages, can have a big negative impact on your credit scores. Be sure to make all your payments on time.
• Credit utilization – If you carry credit card balances that are more than 30% to 50% of your credit limit, it can have a big negative impact on your scores even if you’re making your payments on time. Over utilizing your credit can make you look “maxed out” and is considered a risk factor, which is why your credit scores are downgraded accordingly.
• Collections or charge offs – Past debts reporting as collections or charge offs can damage your credit scores significantly. If you have some of these in your credit file, be sure to get them resolved as soon as possible. If the debt is with a collection agency, you may be able to negotiate a reduced payoff, but be sure to get the agreement in writing.
• Bankruptcies and foreclosures – If you’ve had a bankruptcy or foreclosure in the recent past, pretty much the only cure for your credit scores will be time. Fannie Mae and FHA also have waiting periods of 2 to 4 years before you will be able to qualify for new mortgage financing.

Capacity – Do you have the financial ability to repay the loan?

Capacity has to do with your financial ability to repay the home loan. W2 income (you work for somebody) is considered the most stable income because it doesn’t typically vary much from month to month. Self-employed income is considered riskier from a lending standpoint because it can vary widely from month to month and the self-employed borrower is responsible for generating the business that creates the income.

If you’re a wage earner, the lender will typically want you to document your income with W2s, paystubs, and tax returns.  If you’re self-employed, you typically won’t have W2s, so you’ll be required to document your income with tax returns.

An important component of capacity is your debt-to-income ratio, or DTI. Your DTI is important because it shows what proportion of your income is dedicated to debt payoff. The higher your DTI, the tighter your finances are and the riskier it is for the lender to give you a loan.

Depending on the loan program, a mortgage underwriter typically won’t want to see a DTI higher than 45% to 50%. In other words, no more than 45% to 50% of your qualifying income should be going to debt service for mortgages, auto loans, credit cards, installment loans, etc.

Collateral – What is the security for the loan?

Because the property you’re financing will serve as collateral for the mortgage, the lender will be concerned with the value, type, quality, and condition of the property.

The value of your property is one of the most important factors because it allows the lender measure risk with a ratio called loan-to-value, or LTV.  LTV is essentially the percentage of the value of the property that you are borrowing. For instance, if your property is worth $100,000 and you are borrowing $80,000, the loan-to-value is 80%.

Lower LTV loans are less risky than higher LTV loans because the lender isn’t as likely to incur a loss in the event the borrower stops making payments. It’s because of this that lower LTV loans typically have better pricing and lower interest rates.

Most of the time you’ll be required to get a full appraisal to verify the value and condition of your property, but there are some refinance scenarios where a limited appraisal or no appraisal at all is needed.

Steps to Take Before Applying for a Mortgage

1) Check your credit. If you plan to purchase or refinance in the near future, it’s important to first check your credit to make sure there aren’t any issues that need to be cleared up ahead of time. Again, credit scores are an important factor when you finance a home, so you want to make sure they are as high as possible so you can get the best financing deal possible.

2) Pay off outstanding debt. If you have a lot of debt, I highly recommend paying off as much as you can before you apply for a home loan. Doing so will lower your debt-to-income ratio, make qualifying easier, possibly raise your credit score, and maybe result in better financing terms. Having a lower debt-to-income ratio could also position you to take advantage of shorter-term loan programs that offer lower interest rates and faster payoffs – which can put a lot of money back into your pocket over the life of the loan.

3) Take care of any needed repairs. If you’re refinancing, it’s important that your home appraise for as high as possible. If your home has some minor cosmetic issues or repairs that need to be done, take care of them before the appraiser comes out. Having your home in good condition could help you get a higher appraised value, which could result in better financing terms.

Preparing for Your Next Mortgage Is Well Worth the Effort

Unless you know you have a pristine financial profile, low debt, and high credit scores, I highly recommend doing some legwork ahead of time to make sure you put your best foot forward for your next mortgage loan. It’s common in the mortgage industry for borrowers to get surprised with unexpected hang ups such as derogatory credit items or unexpectedly low credit scores. Understanding how lenders think and preparing your financial profile before you start applying for loans can help you get a much better deal and make the loan process go much smoother.

FHA-insured mortgages are about to get more expensive.

Starting in April, the Federal Housing Administration is increasing the upfront and annual mortgage insurance premiums for FHA-insured loans. From a recent FHA press release:

As part of ongoing efforts to encourage the return of private capital in the residential mortgage market and strengthen the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund, Acting FHA Commissioner Carol Galante today announced a new premium structure for FHA-insured single family mortgage loans.  FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount.  Upfront premiums (UFMIP) will also increase by 0.75 percent.

In case you’re not familiar with FHA financing, two types of mortgage insurance are required on the majority of FHA-insured loans:

1. Upfront mortgage insurance, or UFMIP, which is paid once at loan closing. FHA allows this premium to be financed into the loan.
2. Mortgage insurance premium, or MIP, which is paid in equal installments are part of your mortgage payment.

To see how the rate changes will impact the cost of an FHA loan, let’s assume a home buyer is putting down 3.5% on a new home and taking out a $200,000 FHA-insured loan.  The UFMIP premium will increase from the current rate of 1% of the loan amount, or $2,000, to 1.75% of the loan amount, or $3,500. The MIP will increase from 1.15% of the loan amount to 1.25%, which increases the monthly MIP payment from $191.66 to $208.66.

If you’re in the market to get an FHA loan, I highly recommend getting the ball rolling as soon as possible. You don’t need to have your loan closed before April to take advantage of the current mortgage insurance rates, your lender just needs to have your FHA case number before April 9, when the first premium change takes effect. If you don’t know what an FHA case number is, don’t worry about it, just make sure your lender has it before April 9.

Mortgage lending underwriting criteria falls into three general categories, credit, collateral, and capacity. Credit has to do with how well you pay your bills (as evidenced by a credit report and score), collateral has to do with the type and quality of the property you’re using to secure the loan, and capacity has to do with your financial ability to repay the loan. Your debt-to-income ratio falls into the latter category – capacity – and is considered an important factor in determining your financial ability to pay back your mortgage.

What is a Debt-to-Income Ratio?

Your debt-to-income ratio, or DTI, expresses in percentage form how much of your gross monthly income is spent on servicing liabilities such as auto loans, credit cards, mortgage payments (including homeowners insurance, property taxes, mortgage insurance, and HOA fees), rent, credit lines, etc.

Living expenses such as cable, gas, electricity, groceries, etc., are not considered part of your DTI.

If your DTI is high, it means you are highly leveraged and have tight finances, which, naturally, is considered risky from a lending standpoint. On the other hand, if your DTI is low, the lender knows you have plenty of room in your monthly budget to absorb unexpected expenses and still make your mortgage payments.

In today’s mortgage marketplace, the maximum DTI allowed is 45% for Fannie Mae loans and 50% for FHA-insured loans. In other words, for a Fannie Mae loan, no more than 45% of your gross (pre-tax) monthly income can go to debt service and mortgage and housing-related expenses.

Both Fannie and FHA allow for higher DTIs under limited circumstances, but these are the standard guidelines.

Calculating Your Debt-to-Income Ratio

If you’re in the market for a home loan, it doesn’t hurt to calculate your debt-to-income ratio ahead of time so you know where you stand. To do this, simply tally up your total monthly debt obligations and divide by your gross monthly income, as follows:

1. Either obtain a recent copy of your credit report or gather up your most recent statements for all your debt obligations. Note that only debt obligations are included in your DTI, not utility bills, phone, cable, etc.
2. Tally up your payments for all debts, including auto loans, credit cards (use just the minimum payment), credit lines, student loans, and any other debt obligations that you have.  If you have an American Express credit card, use 5% of the outstanding balance if the minimum payment is showing as the full balance on your credit report. Note that underwriters will include any child support payments in your DTI.
3. Add your rent or home mortgage payment, including monthly property taxes, homeowner’s insurance, homeowner’s association (HOA) fees, and private mortgage insurance (PMI) premiums.
4. Divide your total debt obligation figure by your gross monthly income (assuming you’re a W2 wage earner), then multiply by 100 to get a percentage.

If you’re self-employed, I recommend working with your loan agent to determine your qualifying DTI. Self-employed income verification is more complicated and there’s really no way to determine your qualifying income definitively without tax returns.

Keep in mind that when you’re qualifying for a home loan, your qualifying DTI will be based on what your expenses will be after the loan is complete. In other words, if you’re currently renting and are taking on a house payment higher than what you’re paying for rent, your qualifying DTI will be based on the new mortgage payment. If you’re refinancing and consolidating debts, your qualifying DTI will reflect your expenses after the various debts are consolidated.

Are you considering refinancing to consolidate multiple mortgages? With rates so low today, this can be a great way to reduce monthly payments and interest costs over the life of your loan, but unfortunately, it’s not always easy to accomplish. If consolidating mortgages is either not practical or simply impossible, there may still be some good loan options for you.

It’s no secret that lending guidelines are far tighter today than they used to be, so depending on what kind of second mortgage you have, when you took it out, and the total combined amount you owe on your mortgages, it may not be as easy to consolidate today into one loan as it was in past years.

The following are some common scenarios where consolidating multiple mortgages is either impossible or provides little benefit:

• You have a very low rate on your second mortgage. If you already have a low interest rate on your second mortgage (HELOCs often have very low rates today), it may not make sense to refinance and combine it with your first mortgage.
• Cash out refinance limitations. If you have a HELOC that you took out after you got your first mortgage, consolidating both loans may be considered “cash out” financing and subject to cash out loan-to-value limitations. Most banks tend to limit cash out loans to around 80% of the value of the home (lower if you have a “high balance” loan greater than the $417,00 conforming limit for most areas), so if you owe more than 80% between your mortgages, consolidating may not be an option at all unless you’re willing to pay down your loan balance.
• You will soon pay off your second mortgage. If your plan is to pay off your second mortgage in the next few years, it may not make sense to stretch it out again by consolidating into a new first mortgage unless you really need the lower payment.
• PMI may wipe out all the benefit in the new loan. If the total combined loan amount is greater than 80% of the value of your house, you’re going to end up paying a monthly mortgage insurance (PMI) premium. Unless consolidating results in a significant drop in your payment, the PMI may wipe the benefit in the new loan.

If your plan was to consolidate your mortgages but there’s no benefit in it or it’s impossible to do because of lending guidelines, ask your lender about redoing just your first mortgage and leaving your second mortgage intact in a subordination transaction. This is not as simple as a refinance transaction not involving a subordination, it may still provide you with benefit.

The following are some important considerations when evaluating loan options involving a subordination:

• The process is typically longer than a refinance not involving a subordination. Subordinations must be authorized by your second lien holder and can often take 2 to 6 weeks (sometimes more) to process.
• You’ll likely be charged a processing fee. Depending on who your second mortgage holder is, you’ll likely be charged $30 to $300 as a processing fee. Note that this fee is not being charged by the bank you’re refinancing with, but your second mortgage holder.
• You may not be able to lock your rate right away. As I mentioned, the processing of the subordination request can take some time, so don’t be surprised if you can’t lock your rate right away. Rate locks are usually done for 30 to 45 days, and if the subordination takes longer than that, you could end up paying relock fees.

Even with the above considerations, a subordination could be a very beneficial loan option. I’ve worked with clients who were able to consolidate, but a subordination option ended up saving them significantly more money on a monthly basis and over the long term.

If you’re considering consolidating mortgages, you might ask your consultant to run some subordination options as well to see if it can benefit you more.

If you’ve applied for a home loan recently, you’ve probably already figured out that the mortgage industry is a lot more nitpicky then it used to be. Five years ago lending standards were super loose, now they’ve swung to the opposite extreme and are overly tight in many circumstances.  It’s just not as easy to get a loan these days as it was a few years ago; not only are qualifications tougher, but the hoops you need to jump through to get the loan done have multiplied.

If you’re applying for a home loan where you need to come in with cash-to-close (as with a home purchase or refinance transaction where you’re paying down your loan at closing), plan on being asked to “source” and “season” the funds you’ll need to close.  I highly recommend planning ahead for this because it can be a real headache to take care of at the last minute.

Sourcing and Seasoning Cash-to-Close Funds

The first requirement for cash-to-close is that the funds be “seasoned” for at least 60 days. In other words, the lender wants to make sure you aren’t obtaining cash from somewhere on a short-term basis simply to meet the cash-to-close requirements of the loan.  To verify that you have “seasoned” funds, you’ll be asked to provide bank statements covering the last 60 days for all accounts you intend to use for your cash-to-close.

If you’re pulling cash out of an account that has some restrictions on withdrawals (such as 401ks, IRAs, etc.), you may be asked to provide the terms of withdrawal in writing as well.

One of the headaches that arises from bank statements is that the underwriter will likely require you to “source” any unidentified large deposits. Underwriters are concerned about such deposits because they want to make sure you aren’t pulling cash out of an unknown debt account that isn’t included in your debt-to-income ratio. Be prepared to provide cancelled checks or bank statements sourcing the deposits. If the deposits are transfers from another bank account, be prepared to provide the last two months of statements for that account and source any unidentified large deposits on those statements as well.

A Little Planning Ahead Can Help Simplify the Sourcing and Seasoning Process

Unexpected things often come up in the loan process, including low appraisals, property taxes coming due, etc., so it’s not always possible to anticipate cash-to-close issues ahead of time. However, if you’re going to be purchasing a home or refinancing and paying down the loan balance as part of the transaction, a little planning ahead can make the sourcing and seasoning part of your transaction much easier.

If you’re going to be coming in with cash at closing (purchasers, heads up!), I highly recommend pulling together the bank statements and sourcing documentation ahead of time so you’re not scrambling at the last minute before closing. Your loan consultant can help you determine what documentation is needed if you’re not sure.

If you’re still a few months from seeking mortgage financing, I highly recommend transferring the funds you’ll need to close a few months in advance into a single account that doesn’t have much deposit activity. This will help you cover the seasoning requirements as well as avoid sourcing headaches.