USDA – CHF – Community Heights Funding Inc

5 Important Points for First Time HomeBuyers

Before I even talk about the most important points to consider for first time home buyers, I want you to understand “Is it that time of your life when you can plan your first home“. Trust me this is going to the costliest asset that you have ever purchased and you have to babysit it for many years to come.

Wait! What?

Yes, you heard that right. You were on the other side of the court and now you will be a homeowner. Means, you will have to fix or get fixed every little thing that breaks or needs attention. Based on your financial condition and fund flow you will have to continuously keep upgrading your home from time-to-time. By doing so you add value to your property and hence build equity at a faster rate.

Are you up for the challenge?

Guess so, as you are still reading this. So lets start your journey to your first home.

5 Point Checklist For First Time Home Buyers

The idea here is not to scare you, but prepare you for this purchase with a much more practical approach.

Are your current debt under control?
This is by far the most important thing to understand. You do not want to buy your first home just because your friend or a relative purchased a home. Sort out smaller accounts, before you enter this long term commitment. If you can foresee an expense in near future like for kids or for car etc. then plan that prior to entering this phase of being a homeowner in a hush-hush.
How much of a home can you afford?
This is practically the first step in the direction of buying your first home. Get in touch with a lender, he will look into your current credit, income and debt status and will pre-approve you for a certain amount. This pre-approval is your purse to start the shopping. Do NOT plan to spend all of it. Ideally you should look for homes no more than 60-70% of your pre-approved amount. Like if you are approved for 200K, then do not plan to spend more than 120K – 140K on the home. That way you will always stay ahead of your debts and also build equity in your home pretty quickly.
Shopping for the homes
Ask your lender for an agents referral and they will introduce you to a local agent. Yes, you will need an agent as they are in the market and have better insight on rates and also they take care of all the paper work, title clearance and what not on your behalf. Here you are the boss, do not fall for a house half-heartedly, keep looking till you find the one which you can say “This Is My Dream Home“
If your agent runs out of options, probably it is time to look for another agent. Also keep option open for nearby locations, you never know as you may strike a better deal.
What to look for in a house?
Location, location, location!
Correct, you can change flooring, roofing, doors, windows etc at any later stage, but you cannot move the house around to a different place. So make sure the property you settle for has ideal approach to highways, is near to schools, hospitals, markets etc. You better know your situation in this regard.
One more thing, do not fall for size. A 3BD house in a good location is far better than 4Bd in a far off location. Moreover, good location property helps you build equity at a faster rate in irrespective of market conditions.
Making An Offer
This one is tricky, if it is a hot sellers market then you need to act quickly. Personally I do not advice on making instant decisions if you are a first time buyer. Listen to your agent, if they say it is ok to put in a offer for the asking price then go ahead. Be assured you will most probably not get any seller concessions or any kind of cosmetic requests accepted in the sellers market.
On the flip side, the scenario is ideal for first-time homebuyers as they can get concessions, closing assistance and/or a request or two to fix up something within the property like flooring, or wash room or windows etc.

Those pretty much cover the most important points for first-time homebuyers. What follows next is getting the home appraisal, contracts, inspections, and the actual loan process which take their due time till you get a call from the lender for the actual closing date.

If you need any assistance with a home loan, fill in the form below and lets get started you on your path to your first home.

Downpayment Toward Equity Act of 2021 – Is it for First Time HomeBuyers?

FHA, Finance, Home Loan, USDA

Before I even start on the topic, I would like to clear one point. Some websites are mis-representing the fact that this Down payment act of 2021 is for first time homebuyers.

That is not correct!

The draft by House Financial Services Committee, clearly states that this down payment assistance program is for first-generation home buyers. Now going by the book, that means that all First–time homebuyers whose parents or guardians. have never owned a home are considered first–generation homebuyers. On the same note anyone who has not owned a home is last 3 years is considered as a first-time homebuyer. Coming back to the topic.

What Is The Downpayment Toward Equity Act of 2021?

House Financial Services Committee has released a draft for the states to be used for down payment assistance to first-generation home buyers. Under this program homebuyers may receive up to $20,000 in assistance, or $25,000 in assistance if the home buyer qualifies as a “socially and economically disadvantaged individual.” Federal administration of this program will come under the jurisdiction of the Department of Housing and Urban Development (HUD) and state housing finance agency (HFA) will administer the funds on a state level for all participating states.

Lets checkout the points of the draft:

How much funding has been set aside?
Currently there is not set funding for this assistance program. Congress is authorized to appropriate the necessary funding for next 10 years.
How the funds can be used?
Funds may only be used to assist eligible home buyers purchase homes, either through down payment assistance, closing cost assistance, or payments to reduce the interest rate on a mortgage.
Who is an eligible home buyer under the program?
As explained above, down payment assistance under this act can be provided to first-time home buyers who qualify as “first-generation” home buyers.
Income requirements to qualify for the program
Income for home buyers in low-cost areas should be at or below 120% of the area-median-income (AMI) and those buying in the high-cost area, the homebuyers income must be at or below 180% of the area AMI.
Which mortgage programs qualify for the Act?
This assistance program can be used to purchase any home bought with a mortgage that
1. is eligible for purchase by Fannie Mae or Freddie Mac or
2. is insured by either FHA or USDA or
3. meets the definition of a qualified mortgage
Do you have to refund this amount?
Well, yes if you plan not to live in the home for more than a year then you will have to pay the full amount back. If you continue to live in the home, then this assistance amount will waive off 20% every year, means after 5 years you will not have to pay anything back. One more thing if you sell the home in loss due to some unforeseen reasons, then the penalty will be waived off to that extent.

Still not clear? Lets get in touch and we will explain you all about this down payment assistance program.

Documenting Self-Employed Income

Finance, Home Loan, USDA

In our last couple of posts, we have been talking about the rules for documenting different types of income. In the first post, we learned that we are always going to have to provide proof of the following:

That you have a history of receiving the income
That you are currently receiving the income
That you will continue to receive the income

In our first week, we talked about how to pull this off for someone who is paid a salary. Last week, we talked about how to jump through these hoops if you are on a fixed income.

This week, we will talk about how to document these three facts if you are self-employed.

The first thing we have to do is prove your history of receiving this income. Most often, the loan program will require that we provide your prior two years’ worth of tax returns to either show your Schedule C income or to show your Schedule K returns (depending on which type of business you own). Sometimes, however, this is not a true representation of how much money you actually earned. Commonly, your tax returns will have expenses or costs that did not actually occur in the real world, but did matter for taxing purposes (things, for example, like increase in value of equity, or things like depreciating assets). Because of this, there are a few different loan programs that will allow us to document this differently by provided your prior 12 months’ worth of bank statements so that we can show the pattern of incoming money to your personal account from your business.
On almost all loans, you will need to provide your last two months’ worth of bank statements. There are different reasons for this in each of the loan types, but in 95% of all loan, you will need to provide these. This makes it easy for us on the second data point, because the way that we prove that you are currently receiving this income is commonly just by providing those same two months’ worth of bank statements.
The last data point is definitely the most tricky. The likelihood of your continuing to receive income is going to be directly tied to the likelihood of the ongoing success of your business. However, it is not within the scope of the underwriter to make a judgement call on the viability of continued business. As such, the guidelines are written in a way that allows the underwriter to make a simple calculation and have a black or white answer. First, we are going to need to provide the underwriter with a YTD profit and loss statement. This may sound overwhelming if you have a small business, but it really is not. All you need to do is write up a ledger of the total amount of expenses and total amount of revenue for each month of the year that you are applying for a new home loan in. Finally, the underwriter will have everything that they need. Instead of looking at how much you are making right now, and then trying to determine if this is reasonable to continue, the underwriter will instead take the three data points that we have provided and calculate an average.

They will take the amount earned on your tax returns along with the amount earned so far in this year and average this amount of monthly income over the time period of the income provided. This is not a true representation of how much you are earning, but it is the amount that they will use as your monthly income to qualify for the loan. I hope we’ve helped sort out what you will need to prove when it comes to a new mortgage, but if we’ve left anything out, just reach out to us and we will be happy to take a look at your specific circumstances and help point you in the right direction!

How to go about income proof if your income comes from Retirement and or Social Security?

203K Loans, FHA, FHA 203K, Home Loan, Refinance, Renovation, USDA, VA

In yesterday’s post, we talked about the three items that you will always need to document in regard to your income. To recap, we always need to show the underwriter the following:

Proof that you have a history of receiving this income
Proof that you are currently receiving this income
Proof of the likelihood that you will continue to receive this income

Last time, we talked about the steps to show this for a salaried employee. Today we’re going to take a look at how to go about this if your income comes from Retirement and or Social Security.

So, first up, we need to prove that you have a history of receiving this income. What we need to gather up here is actually very similar to the needs of a salaried employee. Instead of needed the prior two years’ worth of W2 forms, we will need to get the last two years 1099 forms. These are very similar to W2 forms, in that they break down your total amount of money received. You will have received a copy of these from your retirement and the Social Security Administration at the end of each year. If you don’t still have copies of these then you will need to reach out to your retirement provider or to the Social Security Administration and request copies.

In order to prove that you are currently receiving the income, we will need to get your prior two months’ worth of bank statements to show that the benefit amount is being deposited to your account. This is pretty easy, because on all loan types, we have to get bank statements in order to document your current assets, so we get to kill two birds with the same stone .

Finally, in order to prove the likelihood that you will continue to receive this income, we’ll need to get a copy of your most recent yearly Award letter. This is a document that is sent you by either your retirement provider of the Social Security Administration at the beginning of each year that spells out the amount that you can expect to receive for the upcoming year.

Overall, this process is a little bit easier than documenting income for a salaried employee, but there are still hoops that you have to jump through. Here at the Heights, we think that the more you are prepared and educated for what you can expect, the easier it is to achieve what is needed. So, in that spirit, in the next post we will take a look at some more complicated income types to document!

What documentation are you going to need to prove your income if you are paid by W2?

203K Loans, FHA, FHA 203K, Home Loan, Refinance, Renovation, USDA, VA

On most mortgage transactions there will be uniform requirements for what kind of documents you will need to provide to the underwriter. Here at the Heights, we are of the belief that the more you are prepared for what is going to be required, the easier and smoother the mortgage process will be for you.

A common misconception is that since I have been at the same job for a long time, I shouldn’t need to provide very much information. On the surface, this makes sense, but one thing to remember is that in today’s modern age, there are no longer what was called “make sense underwriters.” You can think of this term as going into a bank in the 1950s and sitting down across from the banker. He knew you from around town and was aware of your character. He didn’t really rely on any lending guidelines, but instead, looked you in the eye and hear you out and made a decision that “made sense” to him.

Unfortunately, these days are long behind us. Now, all lending guidelines are made from on high in Washington, DC. Each year, as part of the Congressional budget talks, each of the lending programs has to fight for its funding, and typically, each year, as a part of that negotiation, more rules are added to the program guidelines. On top of that, these rules have to work for everyone in the country who is utilizing one of these mortgage programs, so the rules have to cover a broad scope.

So, for income, regardless of where you work, whether you work, or how you are paid, you are always going to have to document three things:

Proof that you have a history of receiving this income
Proof that you are currently receiving this income
Proof of the likelihood that you will continue to receive this income

These rules manifest differently depending on the way that you are paid, but for all types of income, it will always come down to these three rules. So, today, we’ll talk about a regular, salaried employee.

In order to prove that you have a history of receiving this kind of income, we will need to get two things. First, we’ll need to gather up your previous two years’ worth of W2 forms that your employer provided to you at the end of each year. If you don’t still have these, you can typically get these from whoever filed your taxes for you, or from your employer themselves. Second, your Loan Officer will need to order a tax transcript from the IRS. This comes from the general idea that the Federal lending programs have, which is “trust, but verify.” This process is easy on you, in that you simply need to sign a form (IRS form 4506T), which will be provided to you by your Loan Officer, which they will then use to order this transcript directly from the IRS.

In order to prove that you are currently receiving this income, we will just need to get your paystubs from the most recent 60 day period. These are pretty straightforward, but bear in mind that there are a lot of things that can appear on paystubs that will trigger different sections of the guidelines, so it is not uncommon to need to get some supplemental documentation to address items that have appeared on your paycheck.

Finally, in order to prove the likelihood of your income continuing, we simply need to get a verification of employment form completed by your employer. This is actually one of the easiest items from the list in terms of simplicity, but it is not uncommon at all for an employer to be less motivated to fill this out quickly than we are, so it is a good idea to let your employer know that this request is coming and that it is important to move quickly on it.

In tomorrow’s post, we’ll move on to talking about how we go about documenting these three things for some more exotic income types.

Understanding What A Down Payment Actually Is

FHA, Home Loan, USDA

In our ongoing series of commonly heard questions here at the Heights, today we’re going to talk about a small distinction that is commonly misunderstood. On your loan, there are a lot of different things that come together as costs and fees, and a lot of times the differences between them are hard to distinguish. It is not uncommon for bad actors to use this difficulty as a selling point against you. But, being armed with the proper understanding of how these costs work and where they come from is one of the strongest defenses against this.

Today we’re going to talk about your “down payment” on the loan. This term is a very slippery one, in that for most people, “down payment” equates to the idea of a “deposit.” This is not the case. In fact, in the lending world, the term isn’t actually even used! Instead, the term is known as “Minimum Required Contribution.”

In order to understand this, we’re going to have to dig in to a little bit of history. Bear with me. It will be worth it 😉 For a very long time, if you wanted to purchase a home and use a mortgage to pay for it, you would have to first come up with a minimum of 20% of the purchase price in your own funds, as the most that any bank would be willing to lend on a home was 80% of the purchase price. Why was this?

Well, when the FHA loan program was created in 1934, the Federal Government began tracking a whole lot of statistics relating to the housing market. One of the things that began being tracked was the amount that homes sell for at Sherriff’s sale after they had been foreclosed upon. Very quickly, a trend emerged, and they noticed that with very small variance, almost all homes that were foreclosed ended up selling for only 80% of what they were actually worth at the time.

What is very interesting is that since that time, they have continued to track this figure, and there has never been a year where it has varied more than 5% from that 80% mark since the inception of the tracking in 1934! We have read a lot of theories for why this is, but the data itself only confirms that this is the case; not why.

It is due to this very figure that the banks of old would never lend above 80% of a home’s value. If you think about it, this makes pretty good sense too. If the banks know that they risk losing the value of the collateral (the home you are buying) by 20%, then why would they take the risk of lending more than that?

Well, the reason why they would was invented in the mid 1980’s. This invention was (and still is) known as Private Mortgage Insurance, or PMI. This was an invention not by mortgage companies, but instead by insurance companies. Their idea was that they would insure the banks against the potential of lost funds from a foreclosure. The way that this works is that they provide insurance on any funds lent above that special 80% threshold, and if the home does go to foreclosure, the lenders will get recouped for their loss.

With this invention, the lender market opened up for MUCH lower down payments, and that trend has continued to this day. It has, in fact, become so commonplace that the Federal Entitlement Programs (USDA, VA, FHA) have even followed suit!

This leads to our final question: If lenders can get insurance against lost equity on foreclosures, then why is any money needed at all? It’s a good question, and it all comes down to what, exactly, PMI will cover and what it will not. The simplest way to say it is that PMI is insurance ONLY for lost equity. So, if the lender gives $90,000 loan on a $100,000 house and that loan later goes to foreclosure, it is reasonable to assume that the home will sell for somewhere around $80,000. The lender is out $10,000 in equity as a result of this. But, they will then be able to recoup that loss from the PMI on the loan, so everything should be ok, right?

Wrong. The problem here is that despite being recouped the equity, there will still be a sizable amount of money that the lender will lose throughout this process. For example, they will have to pay a fee (typically 3%) to the Sherriff to conduct the auction. There will be title costs to first transfer the title into their name, and then again to transfer it to whomever wins the auction. There are a lot of legal actions that go along with a foreclosure, and all of these have costs associated with them. These are just some examples, but there are many, many small costs that the lender will incur.

So, where this leaves us is that PMI has loosened the risk of lending above 80%, but has not eliminated all of the costs that will occur. So, each lending institution has to determine how much risk they are willing to contribute, and how much risk that they will require you to inherit yourself.

On top of that, they commonly want to know that you are invested in the home as opposed to just moving along to your next place for housing, so to use a catchphrase, they want to make sure that you “have some skin in the game” to help minimize the risk that you will go to foreclosure.

On the surface, this may seem like a small distinction between “down payment” and “minimum required contribution,” but this actually manifest in a lot of big ways throughout the loan process. If you want to learn more, we are here to help, and we take educating our borrowers as being our core mission. Reach out to us here and we will be very happy to show you how you can utilize this distinction to your benefit!