After 31 years of residential mortgage lending in the Princeton area, I thought I had seen it all. Then a few weeks ago, after working through a “challenging” set of financial circumstances for a truly wonderful client, we were fully cleared to close when…believe it or not, the seller passed away, and the closing was canceled. The moral of the story? Whether buying, selling, financing, inspecting, valuing, and a zillion other variables, real estate is a trip!
In all my years of lending, I have come to dislike one commonly used phrase that “buying and financing a home is the biggest decision of your life.” This phrase, while likely a truth, also often needlessly causes worry, fright, indecision and inertia. Buying a home should be fun! Getting a mortgage should be fun! The house doesn’t work out to your needs? Sell it! Rates come down? Refinance it! The point is, while some people do actually stay in a home for 30 years, and some may actually have the same home loan for 30 years, it is highly unusual. Thankfully, I have many clients with whom I have worked on several, in some cases 6 or 7, different loans on the same property! So be not afraid, get in the game, and enjoy the pride that comes with owning a home.
Whether you are looking to buy a home here in Mercer County, or anywhere else, working with the right team can make such a trip pleasant and fruitful, so choose carefully. Find a real estate agent and a lender you like, trust and want to spend plenty of time with. Ask them how many clients they have helped in the last 5 years? What was their most challenging situation and why? How did they choose their career? Why are they affiliated with their company? See how they react. Are they patient? Are they thorough? Do you like being on the phone with them? Meet for coffee, develop a rapport, and then decide. Once you have decided, commit to them, and build the strongest team possible.
Should you work with a bank, a broker, or a non-bank lender? A bank typically has only their own products for sale. A broker has less control over the process, yet may have access to several sources of money, possibly giving more competitive terms. A non-bank lender has multiple sources of money to lend, while retaining control over every step of the process from origination to processing to underwriting to closing and funding. As long as the terms are competitive, and you feel comfortable with your primary contact, you should feel great about committing to and moving forward with that person and institution. Buying a home should a team sport! You should expect to have a strong, communicative “team” in place with your agent and lender, and once under contract, with your attorney, title insurance company, and home insurance provider.
When qualifying for a loan, your income, assets, liabilities and credit make up the 4 key parameters. Once you determine how much you can put down, and what your credit scores are, the math begins. We will consider your new monthly housing payment, plus all existing monthly liabilities, vs. your current gross monthly income. That percentage is known as your Debt to Income, or DTI. While some lenders will push that number to the max, you must consider how comfortable you will be making that mortgage payment every month, while continuing to meet your obligations for your auto, student loans, vacations, and still putting food on the table!
Example:
$10,416 Monthly Income ($125k annual household income)
$750 Monthly debt ($350 auto, $250 student loan, $150 other)
$3,000 New monthly mortgage payment
$3750/$10,416 = 36% DTI
This number COULD be as high as 45%, or even 49% and still qualify for loan approval, but more importantly, is that comfortable for you, for your family, for your individual budget?
The State of NJ offers some helpful first-time buyer benefits. For example, if your household income does not exceed a certain limit (designated by County) and your purchase price is below a certain threshold, there is a $10,000-$15,000 down payment assistance program available. (Again, County specific, Mercer is $15k) Further, if you are the first in your family to own a home, there could be an additional $7,000 available.
Interested in a house that needs work? There are many ways to overcome this hurdle, from putting down less, and reserving your savings for future work, to Renovation loans that allow you to borrow for the purchase, and then have additional borrowed funds available for subsequent repairs and improvements.
Digital applications are the norm now. Once you choose your lender, you will input your data into their website. The more sophisticated lenders will likely be able to verify your income, employment, assets and credit in only a moment. This technology allows instant verification without having to chase down and submit your paper documents.
Two final thoughts:
The Federal Reserve is about to meet, and expectations are that they will lower the Fed Funds Rate by .25%. This adjustment has already been accounted for in mortgage rates, so don’t expect much to change. Should the Fed decide to reduce by MORE than .25%, things could get better for us all, however, predicting these actions is nearly impossible!
Enjoy the process! Yes, big decisions, but real estate has always been a pretty solid investment. And the decision you make isn’t likely to be forever. Thanks for reading, and always feel free to reach out to discuss YOUR situation.
Tom Gates is a Princeton native, and a veteran of over 30 years originating mortgages. Tom joined loanDepot in the spring of 2010. Since then, he has consistently ranked in the Top 1% of loan originators nationwide. In addition, Tom has enjoyed loanDepot’s Chairman’s Elite status for the past several years. Tom can be reached at tgates@loandepot.com.