You’ve finally found the home of your dreams. There’s just one thing standing between you, and your new house: The down payment.
Many home buyers today opt to use funds from their employer’s 401(K) program to come up with the down payment on a house. Ordinarily, you can’t take money from your 401(K) plan unless you retire, leave the company or become disabled. But many company plans permit certain “hardship withdrawals” when there is an immediate and heavy financial need, including the purchase of the employee’s principal residence.
The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan. Often these taxes and penalties must be paid in the year of withdrawal. Even though hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Check with your employer’s human resources department if you’re not sure if your 401(K) plan allows hardship withdrawal.
Another approach may be to borrow against your 401(K) – sometimes as much as 85 percent of your account balance. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back, and plans can give you anywhere from 5 to 30 years to pay back your loan.
However, there are risks involved in borrowing from your 401(K). If you lose your job or leave your employer, you must pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan, and subjected to the same taxes and penalties. While 401(K) accounts can usually be rolled over into a new employer’s 401(K) without penalties, loans from a 401(K) cannot be rolled over.
Also, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. In addition, you’ll be replacing pretax money with after-tax money which will further shrink your total amount.
If you are planning to use a loan towards a down payment for a home, be aware that this new “debt” might affect your chances to get approved. Some lenders will count the money you borrowed from your 401(K) as an additional debt that will go along with your car payments, student loans and credit cards. While it may seem unfair since you are borrowing your own money, most lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties, or borrow against it.
Your 401(k) can be a useful asset when deciding where to draw your down payment from. However, it’s a financial decision that takes a bit of research, and careful consideration on your part. I recommend consulting with either your financial planner, or mortgage consultant. For more information regarding the home loan process, visit my website at www.AlissaAlvarez.com
Somehow, in the midst of all that fun, we have all grown up. Instead of 21st birthdays, you are now attending 30th birthday parties, weddings, and baby showers. And now, to further emphasize the responsibility of it all, you are looking to purchase your first home!
Of course, being true to your Gen Y roots, you are researching for more information on how to best go about purchasing that perfect first home. There have been many first time buyers before you who have lived, and learned through their mistakes. I’ve compiled a chronological list of 11 tips that will help you avoid costly mistakes, and give you the advantage of preparation!
1. Check and fix your credit report.
It’s best to start preparing yourself at least 6 months before you would ideally like to purchase a home. The first step you will want to take is getting a complete copy of your credit report. Generally, a minimum of a 620 is required to get financed for a loan, and it is vital to know exactly what your credit score is. Once you have a copy of your credit report, you will have an idea of what areas you can improve on. Remember to allow at least 30 days for any improvements you’ve made to actually reflect on your score. Your credit score will be a huge factor when the bank determines whether or not to approve you for a loan, and will also affect the rate you are given. For more on how to improve your credit score, go to my other article called Credit Score 101.
2. Learn real estate and mortgage basics.
As you are in the process of purchasing a home, you will be hearing a bunch of acronyms being thrown around, and crazy terminology. At times, it’s going to feel like your agent and loan officer are speaking a different language. It will benefit you greatly if you familiarized yourself beforehand with all the new lingo. I recommend first going over information you can find off the internet, and then calling a professional to fill in the gaps, and answer any questions you might have. Once you have a basic understanding of the terms and process, you will not only be better prepared to make more informed decisions, but more confident to ask important questions as you go. For an explanation of a few key mortgage terms, refer to my other article called Understanding Key Terms.
3. Get your paperwork in order.
In order to expedite the loan process, collect and organize all of your financial information. When you apply for the loan, you will be asked for the following items:
– Last two years of tax returns, and W-2 forms
– Last two months of bank statements for the accounts you plan on using to finance the purchase
– Most recent pay stubs covering a complete months period
– Legible copy of your Driver’s License and Social Security card
You might be asked for a few other items, but generally this is all you will initially need for the preapproval. If you are an eager beaver, and really want to be ahead of the game, put all that information in PDF format. This way, when your loan officer asks you for your documentation, you can email immediately. Not only will this get you an answer faster, but it will also be much appreciated by your loan officer!
4. Get preapproved for a loan.
Before you even look at a house, whether in person or on the internet, get preapproved for a loan. Also, make sure you get a preapproval, not a prequalification. Get an explanation of the different kinds of loan products that are available, and if certain strategies such as buying down your loan is beneficial. I would also recommend that you write down any questions, or concerns you might have ahead of time so that you don’t forget to ask. For more information on the benefits of getting preapproved for a loan, check out my article called The Advantages of a Loan Preapproval.
5. Shop around.
More than likely you won’t pick the first house you see, so why would you pick the first agent or loan officer you see. Purchasing a home is a huge investment, and you want to make sure you hire the right agent and loan officer that will meet your needs. Every agent and loan officer is different. We all have our strengths, weaknesses, personalities, and different styles of doing business. Interview different people, and get a feel for those you think you would work best with. Remember, you will be working closely with these people regularly, and not to mention trusting them with one of the most important investments you will ever make. Also, be sure to get multiple quotes from different lenders to see who will give you the best rates, and fees.
6. Understand closing cost.
Once you have picked your lender, be sure to go over the closing costs with your loan officer. Both buyers, and sellers have separate closing cost that they are responsible for. Besides lender fees, a buyer should be prepared for costs such as insurance, home inspections, escrow, notary and recording fees, etc. Be sure you understand which you will be responsible for, and an estimate of how much they will run you. It is best to know how much this purchase will really cost you ahead of time, rather than right before you close escrow!
7. Differentiate your “must haves,” from “would be nice to haves.”
Now that you have been preapproved for a loan, and you understand the financial responsibility, you are now almost prepared to start looking at houses! Make a list of all the things your first home MUST have. Is it mandatory that you are close to work? Do you need at least two bedrooms? If you are looking in a city like Long Beach where parking is scarce, is it necessary that the home comes with a parking space? Once you have made this list of “must haves,” you now have a clear and established idea of what homes you will NOT look at. Give your list to your agent, and explain that you don’t want to see any homes that don’t meet your “must have” criteria. By staying focused on what you absolutely NEED in a first home, you will streamline the process and avoid wasting time.
8. Don’t be afraid to put your back into it!
Keep in mind that this is your first home, not your dream home. A first home is merely the initial stepping stone that will ultimately lead you to that dream home. So if you come across a home that meets all your “must have” criteria, has a great location, but might need a little work, try not to dismiss it right away. Not only can you find a great deal with an open mind. It’s amazing what paint, new flooring, and a few personal touches can do to make a house into a home.
9. Scope out the neighborhood.
When you’ve narrowed down your search to a few choices, be sure to check out the neighborhood. Drive by the house at different times of the day to get a feel for the atmosphere. You might even want to try driving to and from work from the house to get a feel for the traffic conditions. Also, don’t be afraid to talk to the neighbors as they will be good sources on what the area is like.
10. Pay for your own home inspection.
I cannot stress the importance of a home inspection enough. Furthermore, make sure you order your own inspection. You might be told by the seller’s that they just had one done, and that the house is fine. Or, there might be a home inspection report from a previous buyer whose escrow may have fallen through. Either way, do not rely on an old report, or one that was not ordered by you. The last thing you want to happen is to move into a first home you absolutely are in love with, only to get stuck with an expensive repair bill that breaks your bank.
11. Have fun and stay positive!
The last tip I can give you, and perhaps this belongs at the top, is to always remember to have fun, and stay positive. Buying a first home, and any home for that matter, can be stressful and frustrating at times. It’s not uncommon to see 15, 20, 25 homes before you find the right one. More than likely, you will come across some roadblocks, and might even feel like giving up at times. Purchasing a home can turn into an adventure sometimes, but like most adventures, totally worth the reward in the end. Stay focused, optimistic, and the rest will work itself out.
If this is finding you at the beginning of your search, hopefully, you have a clearer idea of where to go from here. If you have any questions regarding a home loan, or would like to get pre-approved, visit my website at www.AlissaAlvarez.com Happy hunting, and good luck!
When obtaining a loan for a home purchase, you will be dealing with lots of terms that relate to important numbers, and figures that will affect your loan approval. Before you get approved, it is vital that you understand these terms, and how they will impact your loan. We’ve already gone over what DTI is (see last entry), and now we will go over what Loan To Value, or LTV, means.
LTV: Loan to Value Ratio
Whether you are purchasing or refinancing a loan, the LTV will be used by the lender to determine loan approval. The LTV is the percentage that reflects the loan amount compared to the current market value of the property. The key element when determining the LTV is the amount the home appraises for. In some cases, a property can appraise for less than the sales price. In this case, the lender will require the loan amount, and the appraised amount to line up with one another. To calculate the LTV, you divide the appraisal amount by the loan amount after down payment.
Loan Amount / Appraised Amount = LTV
If you are purchasing, nowadays, almost every loan program requires a down payment. If you are going conventional, the down payment requirement can be anywhere from 5% to 30% of the purchase price. If you are using an FHA loan, you will need a minimum of 3.5% down payment. Let’s take a look at a few examples.
Scenario #1: FHA buyer putting 3.5% down
Appraised Amount: $350,000
Down Payment: $12,250
Loan Amount: $337,750
$337,750 / $350,000 = 96.5% LTV
Scenario #2: Conventional Buyer putting 20% down
Appraised Amount: $550,000
Down Payment: $110,000
Loan Amount: $440,000
$440,000 / $550,000 = 80% LTV
Again, the LTV is one of the most crucial terms to understand when obtaining a loan to purchase, or refinance a home. If you have more questions, do not hesitate to contact your mortgage professional! We loan officers love it when clients take an interest in their loan, and ask lots of questions!
If you have questions regarding a home loan, or how much you can be pre-approved for, visit my website at www.AlissaAlvarez.com
If you are a first time home buyer, or even if you already own a home, understanding the terminology of a loan can be mind numbing! So many letters being thrown at you…PMI, MI, FHA, DTI, GFE, URLA, LTV! Of course, your loan officer will explain these terms as they come up, but it can be difficult to keep track of them all.
While every acronym is important, there are four that are especially important to understand; DTI, LTV, PMI, and MI before committing to a loan. Over the course of the month, I’ll be going over these terms. First, let’s start with the all important DTI.
DTI: Debt to Income Ratio
When you are getting pre-approved for a loan, or refinancing your current loan, your Debt to Income ratio (DTI) will be a determining factor. This ratio is the percentage of how much of your monthly income is committed to your monthly debts.
Bills such as your cell phone, internet, and gym memberships aren’t considered towards your “debt.” In the eyes of the bank who is approving your loan, the only debts they are concerned with are those that show up on your credit report. Common debts are car loans, student loans, mortgages, credit cards, child support, etc.
When calculating your income, the bank is looking for your gross monthly income, or the amount you earn BEFORE taxes. Other income will also include qualified child support, spousal support, rental, retirement, and disability.
Generally, banks will require that you have a DTI ratio no greater than 31% on the front end (not including the proposed mortgage payment) for an FHA loan. In considering a conventional loan, generally a DTI ratio no greater than 28% on the front end is accepted.
In order to calculate your DTI, you will need to divide your total monthly debts by your total gross monthly income.
Monthly Debt / Gross Monthly Income = Debt to Income Ratio
Scenario #1: FHA buyer looking to purchase their first home
Total Monthly Debt = $500 a month
– Car loan = $220
– Student loan = $130
– Credit Card payment = $150
Gross Monthly Income = $5000 a month
$500 / $5000 = 10% DTI
Scenario #2: Conventional buyer looking to purchase a 2nd home
Total Monthly Debt = $1700
– Mortgage = $1200
– Car loan = $450
– Credit Card payment = $50
Gross Monthly Income: $3800
$1700 / $3800 = 45% DTI
In scenario #1, the DTI is well under the maximum 31% allowed for an FHA loan. As a result, this particular borrower would generally meet the DTI requirement. In scenario #2, the borrower’s 45% DTI is too high, and therefore, will probably not meet the DTI requirement.
There are sometimes exceptions to these guidelines, and each lender will have their own requirements. Therefore, it is important that you discuss with your lender about their specific guidelines. Do not be afraid to ask your loan professional questions, that is what we are here for! Asking questions, and fully understanding the terms of your loan is crucial to making the right decision for you.
If you have questions regarding an FHA loan, or would like to know how much you are pre-approved for, visit my website at www.AlissaAlvarez.com
If you are considering an FHA loan, it’s likely that you are a first time homebuyer, and you probably have plenty of important questions. As you are deciding whether an FHA loan is best for you, it is vital that you understand the way an FHA loan works. One of the most important details of an FHA loan to consider are the fees involved. Before we go over the fees, let’s look at the reason for these fees by covering how an FHA loan works.
How does an FHA loan work?
An FHA loan is insured against default by the Federal Housing Administration (FHA). Essentially, the FHA guarantees that a lender won’t have to write off a loan if the borrower defaults. If a borrower defaulted on an FHA loan, FHA will pay that loan back. In order to maintain the capability to pay back these loans in case of a default, FHA charges two types of fees; the upfront mortgage insurance premium, and the annual Mortgage Insurance.
Upfront Mortgage Insurance Premium (MIP)
Since FHA is responsible for paying back an FHA loan that has been defaulted on, it is important that FHA maintains enough capital reserves. In order to maintain these reserves, FHA charges an upfront MIP of 2.25% of the loan amount. This amount is paid in the beginning when the loan is financed.
Annual Mortgage Insurance (MI)
In addition to the upfront MIP, you will also be responsible to pay an annual mortgage insurance that is broken down into monthly payments. The FHA annual MI works similarly to the annual insurance premium you pay on your car. When you get car insurance, you have a annual premium that most people choose to pay in monthly installments. In the same fashion, FHA charges an annual premium of .55% for mortgage insurance that is broken down into monthly payments. These monthly payments are automatically included in your total monthly mortgage payment.
You’ve found a home for a purchase price of $300,000, and you have provided a 3.5% down payment of $10,500 using an FHA loan. Here is how we can figure out how much the two fees will cost:
$300,000 – $10,500 = $289,500 Loan Amount
$289,500 x 2.25% = $6513.75 Upfront MIP
$289,500 x .55% = $1592.25 Annual MI, or $132.68 a month
While they do have additional costs, FHA loans have provided many buyers the opportunity of home ownership that may not have otherwise been possible using other products with stricter criteria. FHA allows many first time buyers put little down, with minimum reserve requirements, looser credit criteria, and competitive rates. FHA is a great loan program that has helped many become homeowners, who otherwise, would not have been able to.
If you have any further questions, or would like to know if FHA is the right loan product for you, visit my website at www.AlissaAlvarez.com