Dear Emily,

Do you have a loan that doesn't have a penalty if paid off early?  Either short term or long term?  The reason I ask is that [another mortgage company] has one they are promoting.

- A REALTOR®
Port Townsend, WA

Money and Handcuffs - Prepayment Penalty

Dear AR:

Prepayment penalties are very, very rare these days.  They're practically illegal.  I can't even remember the last time I saw a loan with a prepayment penalty.*

If another company is promoting such a loan, they're not promoting anything unique or special.  Fannie Mae, Freddie Mac, FHA, VA, and USDA loans all have no prepayment penalty.  You could pay off the loan the day after it funds and nothing bad would happen.

Now the lender doesn't like it when you payoff early because they lose a lot of money!  It costs thousands of dollars to originate a mortgage loan and if the lender doesn't get to sell that loan on the secondary market, they lose money.  But it happens.  And lenders just have to eat the loss.

There are some lenders that have payback clauses for their loan officers.  If a loan is paid off within six months (usually), the loan officer has to pay back their commission.  But that only affects the loan officer, not the borrower.

- Emily

* The exception is home equity lines of credit.  They usually have prepayment penalties if you close them within the first year to three years.  To be clear, you're allowed to off the balance but you have to keep the account open.  And they're pretty tame penalties.  The most I've seen is $500.

If you have a question for Emily, email Ask Emily!

Dear Emily:

I'm 76 years old.  Will they still give me a 30 year mortgage?  I'll never be able to pay it off!

- Over the Hill
Port Townsend, WA

Sleeping Dinosaur

Dear OTH:

 

Yup!  You could be 100 years old and still be eligible for a 30-year mortgage.  We can't discriminate based on age (as long as you're legally old enough to enter into a contract). 

 

There are two laws in the US that deal with mortgage lending and discrimination.  The Equal Credit Opportunity Act makes it unlawful for a lender to base lending decisions on a borrower's race, color, religion, national origin, sex, marital status, or age.  The lender also cannot consider whether part of a borrower's income is from a public assistance program (like food stamps) or whether the applicant has exercised any right under the Consumer Credit Protection Act. 

 

The Fair Housing Act also adds handicap to the list of protected classes.  The Fair Housing Act is much more broad.  It prohibits landlords, sellers, and lenders from refusing to rent, sell, or negotiate with any person based on that person's inclusion in a protected class.

 

- Emily

 

If you have a question for Emily, email Ask Emily!
 

Dear Emily:

I'm retired.  Can I still qualify for a mortgage?  I don't earn any income.

- Golden Years
Port Ludlow, WA

Retired man with his dogs

Dear GY:

Yes!  You may still qualify for a mortgage.  If being retired prevented you from getting a mortgage loan, half of Jefferson County would be out of luck!

You may not have earned income, but people who are retired still have income.  Social security, pension payments, annuities, and IRA/401k distributions are all considered income.  Depending on your age and your circumstances, you may be able to use retirement and investment accounts for income - even if you're not taking regular distributions.

- Emily

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Dear Emily:

We're interested in purchasing a multi-family property, either in Port Townsend or somewhere close by.  I am curious about qualifications for lending.  Does projected rental income count toward the debt-to-income ratio?

- Multi-Curious
Cape George, WA

Picture of a duplex house

Dear MC:

Yes, projected rental income counts toward qualifying.

However, you probably won't be able to finance a multi-family dwelling in Jefferson County, WA.  There aren't enough of them here so it's difficult to find comparable sales.

A comparable sale is a property that is similar to the subject in size, style, and age, that has sold in the previous six months, ideally within one mile of the subject property.  On the Olympic Peninsula, we often have to break the "one mile" rule because we're so rural.  You're not likely to find any sold property within one mile in Lilliwaup, let alone one that is similar to the subject.

But we can't break the "similar in style" rule.  You can only purchase a 2-plex if the appraiser can find other 2-plexes that have sold in the last six months.  You can only purchase a 3-plex if the appraiser can find other 3-plexes that have sold in the last six months.  There are so few multi-unit properties in Jefferson County that it's nearly impossible to find comparable sales.  So when multi-unit properties are sold, it's usually for cash.  They are rarely financeable.

You're more likely to be able to finance a multi-unit in Kitsap County.  There are lots of them in Bremerton, for example.  And probably a significant number elsewhere.  At least enough to make them financeable.

If your multi-unit property is going to be a primary residence (live in one unit, rent the others), you'll need 15% down for a 2-unit property and 20% down for 3-units or 4-units for a conventional loan.

FHA will allow multi-unit properties with the standard 3.5% down payment.  But you must live in one of the units.  FHA does not allow investment properties.

If the home is going to be an investment property (rent all the units), you'd need 25% down.  And I will warn you, they're expensive loans.  The interest rates are about 1% higher than the average rate and you'll pay 1.5% to 2.0% (of the loan amount) just to get the loan.

Anything over four units is no longer considered residential and requires a commercial loan.

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

I was thinking about getting a mortgage from my bank.  I've had a checking account and savings account there for years.  They can see my paycheck being deposited every week.  And I've never bounced a check.  Won't it be easier just to go through them?

- Bank Customer
Nordland, WA

Bank building

Dear BC:

The short answer is probably not.

The biggest advantage to using your bank for your mortgage is that you probably won't have to provide bank statements.  Your loan officer will be able to access your bank statements directly or request them from a banker.  And let's be honest.  You can probably access your bank statements online anyway.

But that's about as far as it goes.  Your bank isn't gong to cut you a deal because you've never bounced a check.  They're not more likely to approve your loan because you're a valuable customer.  And they can't offer you reduced paperwork requirements because your paycheck is direct deposited every other week.

As long as you're getting a Fannie Mae, Freddie Mac, or government (FHA/VA/USDA) loan, every bank and mortgage company has the same requirements.  Every lender has to request the same list of paperwork.  And everybody has to play by the same rules.  Even if you already have a mortgage with your bank that you've paid on time for years, you'll have the same application and approval process as a brand new customer.

I get it.  It doesn't make a lot of sense.  A bank should be able to deduce that because you've made a $2500/month payment on time for ten years, you'll probably make this $2200/month payment on time too.  But that's not the way it works.

The exception would be if you have lots of money in their bank.  Like millions.  If you're a "private wealth management" client, you might get special treatment.  But if you've got that kinda cash, you might not need a mortgage anyway.

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

If you check my credit for a pre-approval, won't that hurt my credit score?

- FICO Fears
Port Ludlow, WA

Laptop computer with a credit report showing on the screen.

Dear FF:

Probably not as much as you think. Credit scores are indeed affected by "excessive inquiries." If you are applying for a credit card every week, I'd be concerned. But applying for credit once every three or four months should be fine. After all, how are you supposed to use credit if you never apply for it?

We don't know the exact mathematical formulas for predicting credit scores. But we do know what factors affect credit scores. Scoring models primarily evaluate five factors:  payment history, credit utilization, length of credit history, inquiries, and credit type. Inquiries only represent about 10% of your credit score.  If you pay your bills on time and use credit responsibly, a few credit inquiries while you're shopping for a mortgage shouldn't hurt you.

If you already have an 800 score, I wouldn't be concerned about inquiries at all. Even if you lost 25 points due to an inquiry, you'd still have great credit.

Chart of credit score tiers and their corresponding mortgage interest rate and price

In mortgage lending, the price you pay for a particular interest rate depends (in part) on your credit score. And lenders use a "tiered" approach.  For instance, someone with a credit score between 640 and 659 would pay more for the same interest rate than someone with a score between 720 and 739.  If you suspect that you might be "on the line," proceed with caution.

If you're on the edge of one of the above tiers, be careful.  One point on your credit score could cost you a lot of money! On a $300,000 loan, someone with a 719 credit score would pay $1,500 more for the same interest rate than someone with a 720 score.*

But never fear! You can shop around for a mortgage or an auto loan without being penalized. Mortgage and auto inquiries are grouped into one inquiry if you shop within a certain period of time (usually 14-45 days).  That means you can have as many inquiries for homes or cars as you want during that period, and it only counts against you once.

"Pre-approved" solicitations for credit don't count as an inquiry. Pulling your own credit report doesn't count.  And an existing creditor checking up on you does not affect your score.

In addition, inquiries only affect your credit score for one year.  If you've gotten yourself into a pickle with inquiries, at least it won't affect you for long.

If you're concerned, ask your lender if they can pull a "soft" credit report.  Not every lender can (or will), but many can take a peek at your credit without it resulting in an inquiry.

- Emily

If you have a question for Emily, email Ask Emily! 

Additional Resources:
Experian:  How Long Do Inquiries Impact My Score?
Transunion:  The Difference Between Hard and Soft Inquiries
Equifax:  Understanding Hard Inquiries on Your Credit Report

* On a Fannie Mae loan, the Loan Level Price Adjustment for a 20% down payment is 0.75% for credit scores of 720-739 and 1.25% for credit scores of 700-719. That means a person with a 719 score will pay 0.5% (of his loan amount) more for the same interest rate than someone with a 720 score.

Dear Emily,

Should I get pre-qualified or pre-approved?  What is the difference between the two?

Curfuffled
Port Hadlock, WA

Rubber Stamp Showing Pre-Approved

Dear Curfuffled,

There is no standard industry definition for "pre-approved" or "pre-qualified".  They can mean different things to different people.  But I think most people rely on the following definitions.

I consider a person to be pre-qualified when they've had a conversation with a lender about their income, assets and debts.  The lender hasn't pulled credit or reviewed the person's paycheck stubs or tax returns.  They've simply had a conversation about what the person might be able to afford based on their answers to a few simple questions.

In my opinion, a pre-qualification is a waste of time.  Why would you want me to guess how much home you can afford?  Wouldn't you want to know for sure?

If you want accurate information, a pre-approval is probably what you're after.  A pre-approval involves completing an application (either in-person, over the phone, or online) and providing a lender with a minimum amount of paperwork (usually paystubs, tax returns, W2s, and bank statements).  The lender then reviews the application, paperwork, and credit report and has a discussion with the applicant about the type(s) of mortgage loans for which he would qualify.

Some pre-approvals even involve submitting your paperwork to an underwriter for an official credit approval.  Personally, I don't think that's necessary for every transaction.  If you have an 800 credit score, a 20% debt ratio, and a 40% down payment, I don't need an underwriter to tell me you're qualified.  But if there's any question whatsoever, I would definitely seek an underwriter's opinion.

Regardless of what it's called - pre-approval or pre-qualification - make sure your lender has checked credit, taken an application, and reviewed income documentation to make sure he or she is giving you the most accurate information possible.

Hope this helps!

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

When I checked my credit score on Credit Karma, it said my TransUnion score was 735.  But when you checked my credit, my TransUnion score was 710.  Why the difference?

Debt Discrepancy
Port Townsend, WA

Mortgage Credit Score

Dear DD,

Most people know that there are three (major) credit bureaus and you have a credit score with each bureau - Equifax, TransUnion, and Experian. 

You don't just have one score with each bureau.  You have dozens of scores with each bureau.

There are four different credit scoring models - one for the auto industry, one for the mortgage industry, one for the insurance industry, and one for everybody else.

And they're all a little different.  The algorithm for the mortgage industry puts greater emphasis on mortgage loans.  The algorithm for the auto industry puts greater emphasis on installment loans.  Even the ranges of scores are different.  A mortgage credit score tops out at 850 but an auto industry score can reach 900.

When you check your credit on Credit Karma or a similar consumer credit web site, you're getting the "everybody else" scores.  Those scores are probably a little different than your auto scores or your mortgage scores.

To complicate matters further, there are also different versions of each industry's scoring model.  Much like different versions of the operating system on your iPhone or computer, the models are "upgraded" from time to time.  So if your credit was checked by two different mortgage companies, you could have slightly different scores with each company (and each bureau) because one company could be using FICO v5 while the other company is using FICO v8.

So how do you make sure your score is as high as possible?  Have credit and use it wisely.  Pay your bills on time.  Avoid collections.  And keep credit card balances low compared to the credit limit.

And if you're curious about your mortgage credit score, give me a buzz.  We can pull a "soft" credit report that will allow us to peek at one bureau's credit score without creating an inquiry.

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

I don't need a lot of space and am looking at buying a 380 sq ft home.  Is there a minimum square footage for the home to be eligible for financing?

Size Matters
Port Townsend, WA

Bilbo Baggins' Hobbit House

Dear Size,

Fannie Mae does not specify a minimum square footage, as long as the home is stick built, we can find comparable sales to support the property value, and there are no marketability issues.

Manufactured homes must be 600 sq ft to qualify for conventional financing or 400 sq ft for FHA.

Thanks for your question!

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

I'm just looking for information.  I haven't found a house and I don't even know if I'll qualify for a loan yet.  Why do I have to provide all this paperwork?

Overwhelmed
Port Hadlock, WA

Big Stack of Mortgage Paperwork

Dear Overwhelmed,

Because the more information I have about you, the more accurate I can be with the information I give to you.

Mortgage lending guidelines are incredibly complex.  I need to review your paystubs and tax returns to understand which types of loan programs might work for you.  I need to review your credit history to see whether or not you may qualify for those loan programs.

Yes, there are hundreds of web sites where you can get a pre-approval letter in a few minutes with nothing more than the answers to a handful of questions.  Those pre-approval letters aren't worth the paper they are written on.

There is no way a lender can be certain that you are truly eligible for a mortgage loan without reviewing (at a minimum) paystubs, tax returns, and credit history.

Without reviewing these documents, I can't be confident in the information I give to you.  I'd just be guessing.  And that's not an effective use of my time or yours.

I frequently get calls from customers who are on vacation when they find a house they love and want to make an offer.  Now they need a pre-approval letter but they don't have their paperwork handy.  Who brings their tax returns on vacation?!

Never fear.  It's easy to get transcripts directly from the IRS.  Evidence of VA disability income is available on eBenefits.  And social security benefits can be verified through my Social Security.  There's an alternative method for procuring just about everything!

If you have specific concerns, let me know!

  • We may be able to get away with a "soft" credit pull that won't affect your credit score.
     
  • If you use a local bank, they will probably fax your bank statements to me if you can't locate your copies.
     
  • Bring your bank account user name/password to our appointment.  You can logon from our office and download what you need.

Let me know how I can help!  I know it's a big stack of paperwork.  And I'll do whatever I can to make it easier for you.

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

Can I get a mortgage for $30,000?  I have a lot of cash, but I'll still need a small loan.  Is there a minimum loan amount?

Minimum Required
Port Ludlow, WA

Pocket Change

Yes and no.  But you might not want to.

Technically, there is no minimum mortgage loan amount.  Fannie Mae, Freddie Mac, and others don't stipulate that you must borrow a certain dollar figure.  But some lenders have minimum loan amounts - often $50,000.

Why?

Because of federal mortgage lending laws that are actually designed to protect you, the consumer.

Fannie Mae, Freddie Mac, and government mortgage loans (FHA / VA / USDA) are all what we call qualified mortgages.  A qualified mortgage has certain features that make it more likely the consumer will be able to afford his loan payments.  A qualified mortgage isn't allowed to have risky features like interest only payment options or terms longer than 30 years.  If lenders issue qualified mortgages, they are also offered certain legal protections.

QM loans also limit the amount you can pay for your loan in points and fees.  And those limits depend on the size of your mortgage loan.  In 2017, the limits are as follows:

Loan Amount Points & Fees Cap
  > $102,894 3% of the loan amount
$61,737 - $102,893 $3,087
$20,579 - $61,736 5% of the loan amount
$12,862 - $20,578 $1,029
< $12,862 8% of the loan amount

Not all costs associated with obtaining a loan are included in the points and fees cap.  Typically, a lender would include the same costs included in calculating APR, with the exception of daily interest, mortgage insurance premiums, and bona fide discount points.

Let's say you're buying a $300,000 house and borrowing $240,000.  Your "qualified points and fees" should come nowhere near the 3% cap.  In fact all of your closing costs and prepaids would probably be less than 3% of your loan amount.

But what if you were borrowing $24,000?  Your limit on "qualified points and fees" is $1,200 (5% of your loan amount).  But the dollar figure of those qualified points and fees would likely be the same (or similar) as it would be for the $240,000 loan.  The points and fees for your $24,000 loan could easily cost nearly 10% of the loan amount.

Many fees are fixed amounts - regardless of your loan amount.  The certificate that determines whether or not you're in a flood zone is the same whether you're borrowing $10,000 or $1,000,000.  Even the escrow or settlement charges are based on the purchase price - not the loan amount.

CFPB legalese regarding qualified points and fees
You can see it is easy peasy to follow the rules. From the Consumer Financial Protection Bureaus Ability to Repay and Qualified Mortgage Compliance Guide, January, 2014.

So what if a lender is originating a QM loan and the qualified points and fees are more than the Consumer Financial Protection Bureau's stated limits?  The lender has to eat the excess cost.  And few lenders are willing to do that.

The lender that I work for, New American Funding, does not have a minimum loan amount (to my knowledge).  That being said, at a certain point, it just doesn't make sense.

Again, must of the cost associated with obtaining a mortgage loan is fixed.  The appraisal charges are based on the size and complexity of the home - not the amount the consumer wishes to borrow.  Closing costs can easily run $3,500 to $5,000 - regardless of whether you're borrowing $20,000 or $200,000.

And why would you pay $5,000 to borrow $20,000?  That doesn't make sense.  There are cheaper ways of borrowing that money.  Contact your lender or financial advisor and ask them about a home equity line of credit, personal loan, or borrowing against assets.

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

I met with another lender who told me I couldn't get an FHA loan because I already have an FHA loan on a home in Alaska that I use as a rental.  I moved away from Alaska three years ago when I stopped commercial fishing to work as a shipwright.  Now I want to buy another home and I don't have a big down payment.  Is it true that I can't have two FHA loans at the same time?

Double Jeopardy
Port Hadlock, WA

Two is better than one!

That's not always true.  FHA defines very specific instances when you are allowed to have more than one FHA loan.  They are as follows:

  1. You are relocating (or have relocated) for an employment related reason and you are establishing a new residence that is more than 100 miles from your previous residence.
     
  2. Your family has increased in size, your home no longer meets your needs AND you have at least 25% equity in the home you are vacating.
     
  3. You are vacating a property that is jointly owned with a co-borrower (for example, in the case of divorce).
     
  4. You are a non-occupant co-borrower on an existing FHA loan and now wish to purchase your own home using an FHA loan (for example, in the case of a parent co-signing a mortgage loan with a child).

In your case, DJ, you relocated three years ago, your relocation was due to work related reason, and your new residence will be at least 100 miles from your previous residence.  I'd say that's pretty compelling evidence that you would be eligible for another FHA mortgage.

Why is FHA so rigid about this?  Two words, DJ:  occupancy fraud.

In the mortgage world, we classify the occupancy of a property as either a primary residence, a second home, or an investment property.  An investment property has a higher interest rate and larger down paymetn requirement than a primary residence or second home.

Occupancy fraud occurs when borrowers deliberately misrepresent their intended use of a property.  For instance, they tell the lender they will occupy the home as a primary residence when they actually intend to use it as a rental.  This might get the borrower a better interest rate.

It's also highly illegal.

FHA is not in the habit of helping people become real estate investors.  The purpose of an FHA mortgage is to help someone become a homeowner who couldn't otherwise qualify for a mortgage loan.  Therefore, FHA purchase mortgages are only available for owner occupied properties.  And in order for you to have multiple FHA loans, DJ, you will have to convince your FHA underwriter that you will unequivocally occupy the property you wish to purchase.

Hope this helps!

- Emily

If you have a question for Emily, email Ask Emily!

Dear Emily,

I was pre-approved six months ago but really just started to look at houses.  How long is my pre-approval valid?  Do I need to go through the whole process again?

Re-Approved
Marrowstone Island, WA

Dear Re,

Technically, a pre-approval expires after four months.  But that is because your credit report and income/asset paperwork expires after four months.

But as long as your financial situation doesn't change, your pre-approval should be valid virtually forever.  I don't feel like I need to re-pull credit and re-examine your paystubs every four months.

That being said, if it's been more than three or four months, I think it's a good idea to check in with your lender.  Interest rate changes can change the maximum loan amount for which you are qualified.  Guidelines also change - for better and for worse!  Maybe the mortgage program you were interested in is being discontinued.  Or maybe the rules for calculating student loan payments have changed.

Now if you quit your job, stop paying your bills, and trash your credit, all bets are off!  Any of those things could render your pre-approval null and void.

To make sure you don't become "un-approved" after a pre-approval, make sure your financial picture stays as static as possible.  Don't quit your job or become self-employed.  Don't increase the balances on credit cards or buy a car.  Don't close credit accounts.  Pay your bills on time.  File your taxes when they are due.  Return your library books.  And don't forget to vote!

Good luck with your search, Re!

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Dear Emily,

My husband and I are ready to dive into real estate investing.  What do we need to know about financing?  Is it just like the financing we have for the house we live in?  Is it true that we can't use rental income to qualify because we don't have a history of being landlords?

Newbie Investors
Port Ludlow, WA

Monopoly game with houses on rental properties.

Dear Newbie,

The most important things to know about financing for investment properties is that you have fewer options, you'll need a larger down payment, and you'll probably pay a higher interest rate.

There are a myriad of conventional (Fannie Mae and Freddie Mac) and government (FHA/USDA/VA) financing options for a primary residence.  But, unless you're buying a really expensive investment property or you have a really unusual set of circumstances, you're probably limited to just Fannie and Freddie loans.  Government loans cannot be used for investment properties.

You'll also need a larger down payment.  There are no 0% down or down payment assistance programs for investment properties.  You'll need at least 15% down and the majority of my investors put 25% down.  The larger your down payment, the better your interest rate.

The chart below illustrates the difference between interest rates for different down payment amounts.

Down Payment and Interest Rate for Investment Properties

Note:  These are not actual interest rates that are available on any particular day.  They are simply examples being used for illustrative purposes only.

The cool thing about investment properties, however, is that you can use projected rental income to help you qualify for the loan.  Let me repeat that (because it's a very common misunderstanding).  You can use projected rental income to help you qualify for the loan.

You will get an appraisal on the investment property that you are purchasing.  And the appraiser will provide "rent comparables."  This will determine the amount of rent we can use to help you qualify.

Now what if you don't have 20+% down?

You can always purchase a new primary residence (with much lower down payment requirements) and turn your current residence (we call it the "departure residence") into a rental property.  We can still use anticipated rental income on the departure residence to help you qualify.  All we need is a lease agreement.

Another note:  If you plan to purchase an investment property with cash or using owner financing or hard money and you plan to refinance into permanent financing later, talk with your lender before you purchase!  There may be restrictions regarding how long you need to be on title before refinancing.  And there may be guidelines around how you take title (as an individual, an LLC, or a corporation).

Let me know if I can help, Newbie!

- Emily

If you have a question for Emily, email Ask Emily!