Minki: Hey WINers! Welcome to MoneyBites where we talk about money, mindfulness, and for today, our Home Sweet Homes. Should you rent or should you buy? If you're going to buy, what should you know to protect yourself as an informed consumer before getting a mortgage? Come on board to hear Dana spill the beans on the industry.
Hi Dana! Welcome to MoneyBites!
Dana: Hi Minki. Thanks so much for having me.
Minki: We're super excited. Should we start off with a short introduction of yourself?
Dana: Sure. My name is Dana. I live in the suburbs of Chicago, and I am a VP of mortgage lending with Guaranteed Rate. I've been in this business for almost 13 years now.
Minki: Wow, 13 years! You must have seen some stories and war wounds.
Dana: Yes, very much. I feel like I've seen it all and yet every day, I'm surprised by something new in this crazy lending environment.
Minki: In the 13 years it included the financial catastrophe in 2007/2008?
Dana: Yes, and the lead up to that which was subprime lending - that was when I got into the business in 2004 through 2007. 2008 was when everything really started to implode.
Minki: A dark, dark time for many of us.
Dana: Very much.
Minki: So with that backdrop said, I'd love to hear your expertise and advice so that many of our members don't repeat the same mistakes. No need to reinvent the wheel when we can learn from it.
Minki: By context, by your environment, you were seeing all of these other people who were making the quick bucks through either flipping houses or whatnot but you were able to restrain yourself. How did you do it?
Dana: I think I dodged a bullet. I do. To be honest, I remember looking at condos and the budget, that number just kept getting higher and higher. And I was like "it kind of feels like it's getting out of control. How did we go from just looking at a little condo to a brand-new construction, gut rehabs?" You know, really high price points. It wasn't even a matter of yes, I could have done it, but should I? I'm so glad I didn't. So, maybe that's what more people need to consider. It's not necessarily about could I, but should I?
I know that you asked what it means to be winning in life.
Minki: Wow! You listened to our earlier podcasts! Yay!
Dana: I have. That really is it for me. I think that it's freedom to make decisions out of desire not necessarily fear. It just really impacted me when I talked to people who didn't have the choices, and they were in really bad situations that they didn't really create, but were dealing with. And still that injustice sticks with me. So, the way that I operate is to just kind of be a hoarder when it comes to cash or investing. That paying myself first I think is so important and I think that is winning in life.
Minki: I love that. So, let's take that concept could I VS should I. Going back to the topic of should I buy a house? If you are renting VS considering to buy a house, is there a rule of thumb on when might be a good time to seriously start considering?
Dana: I think when your monthly rent starts to approach what would be a significant monthly housing payment, you've got the means (meaning you got some down payment), you got some reserves (so money left over), and you could be spending the same on a mortgage as you are on a rent monthly, I do think it makes sense. I think in certain areas we are approaching that tipping point because rental markets have increased substantially. There are still some great markets around the country where housing prices are decent.
I think that people kind of get into the habit of thinking about "what's my budget for the house?" and they pick an arbitrary number, like $350. They have no idea what that looks like on a monthly payment basis. What do you earn? If you are salaried, you know what your take-home pay is. You should see how a monthly housing payment fits into that and make the decision based off of that.
Minki: I really also like what you mentioned. Not only the down payments but some of the other costs that you just mentioned, and putting that into your budget...
Dana: Totally. You know mortgage payment is principal and interest, it's your repayment on the loan. But it's also property taxes, homeowners insurance, if you have mortgage insurance that's a factor, if you were buying a condo, you have a monthly homeowners association fee, same for a town home, or if you're buying a co-op, you've got your monthly co-op fees. So, these all go into your monthly payment. In some cases, you'll save by renting, and other cases, you'll save by buying. But it's important to think of the full picture of what a housing payment is.
Minki: Absolutely. So one thing that might be helpful for some of our members may be to run, as we continuously stress, experiments, where you know how much you're paying for rent, but if we're thinking about buying a house, rather than just the mortgage payment, add in all the other cost factors that Dana has just mentioned and see if it's doable.
Dana: Right. Then, we don't want to see that you're using every penny in your bank account for your down payment. You need to cover closing costs, as well. Also, you need that. You need money left over. It used to be 3 to 6 months reserves, but a mortgage approvable with zero reserves. That's just what you can be approved for. I don't necessarily think that you should go into it like that though. Because unless you're really familiar with what a roof costs, or a new furnace, or a hot water heater, or updating your home, renovating, there's not the same financing out there for home remodeling as there used to be that you could kind of combined with a purchase. There's some programs but they're not all that vast. So just know what you're buying. Know what you're getting yourself into and being prepared in having a safety fund for the things that certainly will come up.
Minki: So once you've made the calculation and you see that buying a house does make sense, when you're about to go in for a mortgage, what are some of the key considerations to take?
Dana: Getting your financial house in order. And that's just really having a good idea of where your credit is (what's your credit score?), what your other monthly liabilities are, because all of that gets taken into consideration when you're being approved. So if you have student loans, and car payments, and credit cards, just know what your minimum monthly payments are on those. Have your financial tax documents handy. Pull your W-2s, pull your tax returns, get your pay stubs for the last two months, print your bank statements. Having all that handy is really just key. Because I could quote interest rates all day long with somebody who gives me hypothetical numbers, but it doesn't do you very good if I'm throwing out an interest rate that you might not really ever qualify for because your credit score is much lower than you think. So I do have that. I do have people that are wary of having their credits pulled. They just want to get an idea of what a monthly payment is and I'm happy to provide that. But when it's time to get serious, if you really want to be considered for pre-approval, you should have all those documents handy before you talk to somebody. Just so you're not wasting your own time.
Minki: Super helpful. And then, once you are ready to make the commitment and you go in to get pre-qualified, are those going to affect your credit scores?
Dana: That's a really good question. A lot of people are really wary of having an inquiry on their credit, with good reason. Credit scores are just this crazy voodoo that nobody really understands. And you hear that it's bad to close a credit card, and you hear that you shouldn't let a lot of people check your credit in a short period of time. Both of those things are true. But there are some things that just have to be done. If you're applying and shopping around for a mortgage, which a lot of people do, each different lender or bank is going to want to check your credit because it's such a crucial part of what we can do for you, what we can offer, and whether or not you qualify. It's not just your credit score. It's everything that shows on your credit history. The most important factor is your debt to income ratio. So what shows outstanding, what do you owe on a monthly basis to other creditors, plus your new mortgage payment. You need to qualify for the loan taking all of that into consideration. So, I know that it is a scary thing and that you're told not to do it, but you should. It's part of the process. If you can maybe contain it to two weeks or so, I think you'll be in good shape.
Minki: I'm just going step-by-step here. So, once we are pre-qualified, and once we're about to lock down on a mortgage...
Dana: First you have to be under contract on a home, most of the time. We do have products out there that allow you to shop around, and you can lock down the interest rate before you actually have a property. But most times, you're going to see different houses and you're coming back to your loan officer and saying "this is the house price. This is what I have available for down payment. This is what the property taxes are. Do I qualify? If so, what does that monthly payment look like?" Then, you can go ahead and make an offer on it.
So, once you're under contract, whether that's verbal or you've gotten it back from the seller and it's signed (both of those are acceptable), that's when you're going to make a firm decision on who your lender is going to be, who you're going to go with, why, what your interest rate is, what program you're going to do, etc. That's when you make that decision.
And something else to be educated on is: closing costs. Those vary by not just state or city, but by county and village. In the Chicagoland area, we have transfer taxes. I know that New York does as well. There's the mansion tax in New Jersey. But real estate transfers are taxed at particular rates levied by each individual county so that might be a complete shock to people. You can look into these things on your own but your loan officer or even your realtor should be able to enlighten you on some of those things, because I think that does play into your decision about renting VS making that financial commitment to buy.
Minki: Absolutely. You mentioned a lot of these insurance, tax, closing costs, etc., that we spoke about to incorporate into the budget to make sure that you can actually afford this house. Is there a good source where we can check these numbers beforehand?
Dana: That's a really good question. We actually approve you based on your gross income. So if you know what your salary is, or what you reported on your tax return as your adjusted gross income because you were self-employed... If you make $120,000 a year, on a monthly basis, that's $10,000 a month. We can approve you up to 45% of that, and that includes all other monthly liabilities that you have. So, any credit cards, or student loan, or car payment needs to be factored in. That gives you about $4500 to work with. That's got to encompass everything. So, that's the rule of thumb. We do have instances where we can go up to 50%. It's not ideal for most people but it may be approvable.
As far as checking on local closing costs, it's tough. You got to just jump on Google for the most part. But if you're talking to an experienced loan officer, they should be doing that for you and filling you in ahead of time. You could do a little bit of research on your own, but if you don't necessarily know what you're looking for, it's hard to find. I consider that part of my job. Absolutely.
Minki: Going back to that 45% to 50% ratio, that's credit card minimum payment, student loan minimum payment, and all that included?
Dana: Right. So, if you make $10,000 a month gross, 45% of that is $4,500. If your mortgage payment, if you know that all in your loan, your homeowners insurance, your taxes, your monthly condo fee, is going to be $4000. You got $500 to work with that can be allocated, or you are currently paying on other monthly liabilities. So, that all in number is really important.
Minki: That's like a gold nugget tip, right there. Ok. Are there any other numbers that you should be cognizant of? Any other fees that might come up that we should keep an eye out for?
Dana: Yes, absolutely. Fees, not so much, on a monthly basis. But fees pertaining to the purchase - they fall into mostly three main categories. You got your lender fees that is going to be particular to whichever financial institution you're getting your loans from. Lender fees to do the loan are commonly $1000-$2000, including the appraisal for the property that you are buying. If you're paying more than that, you might want to shop around a little bit, or you may be paying to buy down your interest rate a little bit.
So, you got lender fees, you got title fees. Title is usually something that nobody has really put much thought into when they're buying properties, with good reason. I mean, it's just so ambiguous. What is this? It's the deed to your home. It's the recorded document that you own, you got financial ownership in this property. But you purchase title insurance when you buy a home. The best way to think about it is a medical insurance protects you from something that might happen in the future whereas title insurance protects you from something that might've happened in the past. Anytime there's going to be a transfer of property, they need to research the lien and make sure it's a clear title, ex) nobody slapped a $10,000 mechanic's lien saying before you sell, you need to pay me $10,000. So, that's what the title company is doing. You're paying for their services.
Minki: So it's protecting you?
Dana: It's protecting you, although I can't say that I've seen many title claims. There's something really interesting that I've heard about how BitCoins may kind of take over title because it's the chain that you can see... I don't know. It was really interesting. You can look into it if you find that interesting too, but we'll see.
Then lastly, prepaid. What the heck are prepaid? Well, if you are as escrowing your property taxes and your homeowners insurance, that means you're going to pay them on a monthly basis. You're not going to start out your loan with zero dollars in your escrow account. You need to prepay some of those monthly costs so that when the bill comes due, the account has a balance that is sufficient enough to make the payment. The property taxes or the homeowners insurance. So those are things that go into closing costs, but I wouldn't say on a monthly basis that there's anything else that's really pertinent beyond principal and interest, monthly taxes, insurance, and homeowners association fees.
Minki: In terms of down payments then, is there also a rule of thumb on how much you should at least have?
Dana: There are certain rule of thumbs based on the market that you are in and the price point of the home. So if you're getting a conforming loan, a conforming loan means it conforms to the guidelines that Fannie Mae and Freddie Mac have established, in most counties across the country, except for high cost areas like New York, California, and Hawaii, the conforming loan limit is $424,100. That just increased as of 2017. So if you are borrowing that much, you can put 3% down. I know that might sound like "wow, that's not very much money." Your interest rate will reflect that you're only putting 3% down. Your mortgage insurance will reflect that you're only putting 3% down. It's doable. Each individual scenario is different. But if it's a matter of reaching to put more money down or having money left in reserve, I actually think it's better to have that emergency fund as long as the monthly payment is doable and manageable.
In other areas where you need a jumbo loan, meaning you're financing more than that $424,100, you're going to have to put more down to get a conventional product, meaning a 30 year fixed. There are other programs out there, an adjustable-rate or ... I'm trying to think what else... But in jumbo markets, if you need to borrow $450,000, you may need to split your loan into a first and second mortgage. So the rule of thumb depends on some other factors too.
I will say that 20% down is one of those things that has been beaten into all of our heads over the years and it's less and less common. I think simply because interest rates are so much lower than they were and housing prices are so much higher than they were. If I were buying a home for $20,000 and interest rate was 15%, maybe I would be putting 20% down. But that's certainly not the case anymore.
Minki: Gotcha. So you're seeing a trend of lower down payments then?
Dana: I think that people still strive for the 20% because it's ingrained. But I think that after having a discussion, people end up debating whether it's worth depleting all of their cash for 20% VS just putting less down and paying a little bit more monthly.
Minki: I'm assuming take that in consideration with how much in total interest you will be paying?
Dana: I don't know. I mean, it's never fun to look at how much interest you're paying over 30 years. But most people don't spend 30 years in their first home. At 5% even, it's really still extremely low historically speaking. That's a figure in the equation that I don't pay much attention to, and I know most people don't either because it's never going to be fun to see that, but the likelihood of spending 30 years on that particular property is probably pretty slim anyway. You're going to move after five, maybe seven.
Minki: That's an interesting figure. Fantastic. Well, Dana, this has been so helpful. For our members that may be are interested in getting in touch with you, can you also do out of state or are you only based out of Chicago?
Dana: Absolutely. No, we are nationwide. We lend in all 50 states. I've closed loans in Alaska, I've closed loans and the U.S. Virgin Islands, and everywhere in between, pretty much. And I really enjoy it. Please feel free to get in touch with me - the best way is online. It's Guaranteed Rate. My name is Dana Zito. And you can email me at firstname.lastname@example.org.
I love being a resource for people. So I'm happy to answer questions and just guide people to the right place, if their journey does involve purchasing real estate.
Minki: Fantastic. Fantastic. Thank you.
Dana: Thank you so much Minki.
Minki: Awesome. So that's a wrap! That was really amazing. Yay!
Dana: It was so much information, I feel like.
Minki: Yes. Today was a jam packed episode. I hope this will help some of you WINers when making the big jump.
For our next episode, we'll be talking about money and kids. Do you talk about money with your kids? If so, how? If not, why not? What's the craziest thing you've bought them? We'd love to hear your experiences. Please leave a voice message at 516-WE-WINII. That's 516-934-4644. We may play your clip on our next episode. You can also find us on Twitter @WINiiHQ. See you next week!
Our theme music was played and produced by Luna Lee.