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How to Buy Your Dream Home When You Have Student Debt

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Many people new to the workforce are strapped with student loan debt. Some are eager to purchase a home but believe that they cannot because they have not saved for a down payment or they will not qualify because of the debt.

Fortunately, there are loans and programs that are designed to help. Below are a few ways that people in this situation can buy a home.

1. Deferring student loans or getting an income-based repayment plan. Student loans are not designed to hamstring people to the point that they cannot afford to own a home. There are several programs available that allow student loan debt to be temporarily deferred or lower the monthly payment based on income.

Here is a resource for helping you navigate each of these. Note that different loan types treat deferred student loans and income-based repayment differently. You will need to go over these guidelines with your mortgage professional.

2. Co-signers. Some loan types will assign 1 percent of the balance of student loans to the debt to income ratio even if the loans are deferred or they are income-based repayment. For these folks, a viable alternative is a co-signer. Fortunately, most loan types will allow for family members to cosign. Again, it is something a good lender will advise and consult you on.

3. Gifts or low-down loans. Some have been unable to save enough money for a down payment. There are alternatives to this as well. Some loans like the USDA and VA loans do not require a down payment. Other loans, like the MSHDA loan, allow for 1 percent and loans through Fannie Mae or FHA allow folks to come in with 3 percent or 3.5 percent. Your loan officer will know all of the options available to you.

4. Budgeting. Oftentimes a simple budgeting plan can save the day. At Michigan Mortgage, we review all household income and debts with clients to make sure that they can afford a home and still make all of their monthly payments, including student loan debt. In fact, we will help them create a budget if they don’t have one so that they are comfortable with their bill and the payment of a new home.

While student loans can seem daunting and stifling, they should not stop folks from pursuing the dream of home ownership. If you are ready to make homeownership a reality, contact us today for a consultation.

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How do Escrow Accounts work?

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Escrow “accounts” have more to do with your monthly mortgage payment than the initial home purchase.

When you borrow money from a bank or direct mortgage lender, this account is where the lender will deposit the part of your monthly mortgage payment that covers taxes and insurance premiums.

By collecting a fraction of those annual costs each month, the escrow account reduces the risk that you’ll fall behind on your obligations to the government or your insurance provider each year.

If you are putting down less than 20 percent for your down payment, most lenders will require you to open an escrow account. You will deposit monthly payments into the escrow account to cover your mortgage, plus property tax and insurance premiums; the lender will then take out the mortgage payment and pays the taxes and insurance for you. As for the mortgage insurance, the amount you will have to pay and when, depends on the type of you loan you get, so be sure to ask your lender what to expect.

The biggest advantage of using an escrow account is not having to come up with large payments once a year to pay taxes and homeowners insurance. Typically, it is much easier for people to pay $200 per month into a “forced” savings account instead of paying $2400 all at once.

Mortgage escrow accounts also guarantee your bills are paid on time. Your payments have already been budgeted for you and the money is waiting and available in your account. When the bill is due, the escrow account takes care of everything for you. It’s nice not to have to remind yourself of payment dates, amounts, etc.

A mortgage escrow account is an easy and simple way to manage your annual tax and insurance payments and put them on autopilot.

If you have any specific questions about your account, contact your lender and they can answer any questions you have.

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Tips that Make Getting a Mortgage a Breeze in 2019

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Tip #1: Start early. One of the most important mortgage tips you should know before you get started is to understand all of your financial details. This makes the mortgage process go much more smoothly and eliminates surprises throughout the process.

Tip #2: Check your credit report for errors. Review your credit report to ensure that there are no errors such as incorrect addresses, phone numbers, names or accounts that show up. Your mortgage lender can give you the most detailed credit overview. There are multiple online sources that will provide a free credit report as well.

Tip #3: Work with a qualified lender before making repairs to your credit score on your own. A professional will consult you so that you don’t end up inadvertently lowering your score by trying to repair it on your own.

Tip #4: You can avoid private mortgage insurance if you have 20 percent down. If you do not have 20 percent down, there are multiple loan programs available that require a lower down payment. Your credit score and other variables come into play, so it’s not a one-size-fits-all process.

Tip #5: Make sure you can afford the payment comfortably. Most mortgages have a debt-to-income (DTI) ratio requirement. The DTI is the amount of monthly debt payments you have compared to your monthly income. Most mortgages will allow a maximum DTI of 41 percent; however, this number is not the same for every borrower nor for every loan. Ideally, you want to be comfortable and not stretch yourself too thin so you still have cash on reserve.

Tip #6: Know the right kind of loan for your unique situation. There are multiple loan options available. With conventional, FHA, rural development, VA, doctor loans and MSHDA options, as well as the streamlined 203(k) program, there are numerous nuances and options available to meet every borrower’s unique situation. Make sure you work with a knowledgeable loan officer that will take the time to educate you.

Tip #7: Have your documents ready so you don’t slow down the loan process. The mortgage process requires a great amount of paperwork, so having as much documentation beforehand can save time and energy. A loan officer will need to verify your income, tax documents, employment and a slew of other things.

Here is a checklist of some of the documents you may need (not all will apply to your unique situation).

  • Bank statements
  • Tax returns from the previous two years
  • W2s from past and current employers
  • Pay stubs
  • A list of your debts
  • A list of your assets
  • A gift letter if you’re using gift funds
  • Proof of timely rental payments
  • Credit Report
  • Profit and loss statements
  • Signed purchase agreement
  • Proof of additional income
  • Divorce decree
  • Bankruptcy paperwork

Depending on the loan and your credit history, you may need additional documentation not listed above. To better understand the process and be the most prepared, reach out to your trusted loan officer. We’re always here to help.

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How to Save for a Down Payment

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Even if you don’t plan on buying a house for several years, you have probably started thinking about how to save for a down payment. Saving for a down payment means slowly setting aside small amounts of money and there are a number of ways to do that.

1. Plan ahead. Before you begin saving for a down payment for a home, you first need to know approximately how much you will have to save. Plan to sit down with a mortgage lender who will let you know what you qualify for.

In general, your housing expense should not exceed 29 percent of your monthly income. So, if your monthly income is $3,750 you can safely allocate $1,087 to your future house payment.

The $1,087 will include mortgage principal and interest, homeowners insurance, private mortgage insurance (PMI), real estate taxes and homeowners association (HOA) dues, if any. With interest rates at about 5 percent, this will put you into a mortgage loan ranging from $130,000 to $140,000.

To arrive at the amount that you can afford to pay for a house, you’ll have to add the down payment on top of that. So, if you are putting 5 percent down you would be looking at a sales price of about $135,000 to $145,000.

2. Determine your timeframe and budget. You will have to make some room in your budget to make sure that your savings are doable. Managing a tighter budget is a good way to prepare you for managing the type of tighter budget that home ownership requires.

3. Find the best way to save your down payment. Typically, since the money that you are investing will be used in a specific time frame, you should not save in a risk type investment (stocks). Instead, the money should be saved in a safe vehicle like your savings account or short-term CD.

4. Set up an automated savings plan. Set aside a certain percentage of or dollar amount of your regular pay to go directly into a savings account or money market account. This will remove the temptation and ability to spend the money for other purposes.

5. Windfall savings. You can shorten the savings period by including income tax refunds, gifts received, bonuses, and large commission checks and even the sale of personal assets into your down payment savings account.

If you have questions about down payments and costs associated with owning a home, please reach out to your trusted mortgage lender.

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Tips to Establish Credit for the First Time

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Picture this: You live rent-free with a family friend, own your car outright, you are debt free and pay everything in cash and all the while you have been able to save thousands of dollars since starting a new job three years ago.

You’re in the perfect position to buy your dream home. Right?

Not exactly.

“Before applying for a mortgage, clients really need to understand the importance of having established credit and having a good credit score,” said Jill Dobb, loan officer assistant at Michigan Mortgage. “Buying a home requires you to have credit and the better the credit score the better the interest rate you will qualify for.”

“Many believe that just because they don’t have any debt, they are ready and financially capable of financing a home, which oftentimes is not the case.”

Living debt free is a goal for many, but in the eyes of the credit bureaus, debt free sometimes means you’re a credit “ghost,” meaning you’ve been inactive and nothing has reported to the bureaus for six months.

If you’ve had your credit pulled by your trusted mortgage lender and your score comes back 0, Dobb offered a few pieces of advice.

“We suggest that our clients with a zero credit score apply for a credit card or get a secured credit card at any national bank,” she said. “They need to use that card wisely to obtain a good credit score.”

“We recommend keeping all of your credit card balances below 30 percent of your credit limit and make sure all of your payments are made on time.”

If you have absolutely no credit score with all three credit bureaus, it will take a full 6 months to obtain a score with a revolving line of credit.

If you need additional information about credit improvement, or are interested in getting pre-approved for a mortgage, give us a call. We’d be happy to guide you in the right direction.

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When is the right time to lock in your interest rate?

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Interest rates can be tricky. They change often, rising and falling with the market.

We want to make sure you’re getting the best rate possible, and we do that by locking your rate. How and when do we lock? Not all lenders are created equal, as you will see, but we wanted to take some time to explain our thoughts on the issue.

How do we know when to lock?

As interest rates continue to rise and the market becomes more volatile, it is more important than ever that your interest rate is locked at the right time.  So, when is the right time to lock? This article will discuss what goes into deciding when, and under what circumstances your loan should be locked.

There are two timing questions that should be considered.

  1. How far in advance of closing should you lock?
  2. How do you know if the market is getting better or worse?

How far in advance of closing should you lock?  

What many people don’t know is that a shorter lock duration generally gives you better pricing than a longer lock duration. I am not talking about the term (30-year loan v. 15-year loan) but rather the number of days the locked rate is secured before the closing happens. In other words, at any given time of day, if you lock for 15 days it is better pricing then if you lock for 30 days. This is the case regardless of the term of the loan.

One might deduce that it makes more sense to wait as long as you can (just before you close) to lock your rate. That might be a good strategy in a stable market, but not when rates are getting worse.

I think the old saying “pigs get fat and hogs get slaughtered” applies here.

I like to lock loans as soon as possible so long as you are willing and able to close within 30 days. Because the market is finicky, I would rather take what is available now rather than risk market shift and a higher rate. If the closing is farther out than 30 days, I usually wait a bit to lock unless there are some very strong indicators of increasing rates. This is because a longer than 30-day lock carries with it a higher rate regardless of what the market does.

Playing the Market

But How do you know if the market is getting better or worse?  The short answer is… you don’t.

After 22 years in the business, I still rely heavily on experts to tell us where the mortgage market is going. We actually subscribe to a service that alerts us to lock our clients’ rates when the market is getting worse and to float when there is evidence it will get better or remain neutral. This is invaluable in a market like we currently have.

For example, in the last few weeks rates have increased four times. Each time before those rates moved, I was able to lock any loans that where floating and where scheduled to close in the next 30 days. Some of them I was able to lock on 15-day lock, thereby saving my clients thousands of dollars.

One last thought.

Clients that use lenders that cannot close within 30 days are at a significant disadvantage. Those that cannot close within 45 are even more vulnerable to a changing market. It is more important than ever to have a lender that can close quickly, watches rates and utilizes all technology available to them to make sure the client gets that best the market has to offer.

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Why a Doctor Loan?

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For a new physician excited about the possibility of buying a home but carrying the weight of heavy student debt, a physician mortgage can be a great springboard for entering the housing market.

The physician loan (also known as a doctor loan) is designed to help a unique population that often has a high amount of student loan debt and minimal savings, as well as a new job contract that is required by lenders.

These loans are available for doctors, dentists, podiatrists, ophthalmologists and veterinarians.

The main advantages of doctor loans are access to financing with little to no money down and no required private mortgage insurance.

For new physicians, doctor loans offer a fast path to home ownership that would not be available otherwise. Last year, 84 percent of graduates from medical school reported having student loan debt; the median amount was $190,000 (according to the American Association of Medical Colleges).

Here’s a list of the program highlights.

  • 15-year fixed
  • No Mortgage Insurance
  • Loan amount up to $650,000
  • Minimum Credit Score: 700
  • Not available for Construction Loans
  • Not available for investment properties, second home or manufactured housing
  • Maximum 50 percent debt-to-income ratios

The perks of doctor loans are appealing for medical professionals who are ready to settle down after the grueling years in medical school and residency.

Physician loans are not a on size fits all option. It is important to sit down with a trusted mortgage professional and consider your individual situation to decide whether or not one is right for you.

For more information about doctor loans, visit www.michmortgage.com or contact one of loan officers. We’re here to help.

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MSHDA $15,000 Down Payment Assistance Program for First-Time Home Buyers

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Note: Funds for this program have expired. Ask us about MSHDA’s $10,000 Down Payment Assistance program!

The Michigan State Housing Development Authority (MSHDA) introduced a new down payment assistance program for eligible, first time home buyers purchasing in the 49442 zip code.

The “Step Forward Down Payment Assistance” program is a $15,000 forgivable loan and is to be used in conjunction with the MSHDA MI Home Loan first mortgage for first time buyers.

We’re happy to introduce the program because, unlike the current MSHDA down payment assistance program, it’s a forgivable loan. In five years, if the borrower still occupies the home as their primary residence, the loan is completely forgiven. The loan is forgiven 20 percent each year until the five-year mark is reached.

Additionally, it’s a complete $15,000 and can be used towards the down payment, closing costs and escrows. If there is money left over, we will use it to reduce the principal loan balance on the new mortgage.

The new program can be used with FHA, Rural Development, VA and Conventional MSHDA MI Home Loans. According to MSHDA, the interest rate is typically lower than the other down payment assistance programs offered.

MSHDA allocated $20 million for the Step Forward Down Payment Assistance program and funds will be distributed on a first come, first served basis. The program is available in 61 eligible zip codes in 10 Michigan counties. The sales price limit follows MSHDA MI Home Loan guidelines and is $224,500 for the entire state. Contact us for a complete list of eligible zip codes.

The Step Forward Down Payment Assistance program will be available for new purchases on or after October 8, 2018. Eligibility is based on credit score, total household income, appraised value of the home available for purchase and more according to MSHDA guidelines.

If you have questions, or to see if you qualify for the Step Forward Down Payment Assistance program, give us a call at 231-799-2606. We’re here to help!

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How is the value of a home appraised?

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You’re pre-approved for a mortgage, you found your dream home and put in an offer. It’s been accepted! Before you can take possession, an appraisal is necessary.

Will you be able to move forward with the purchase? That depends on the loan-to-value of the home you’re pursuing.

Here’s what Eric Ridlington, owner of Prestige Appraisal Service, had to say about the process.

Michigan Mortgage: How is the value of a home appraised?

Eric Ridlington: Simply put, an appraisal consists of a comparison of your home to the most similar, recent and nearby sales in a given area. The appraiser will view your home inside and out, and use that for the basis of selecting comparables.

MM: What factors do you look at when appraising a home?

ER: The appraiser should consider all features including – but not limited to – the site, design, quality, condition, size, room count, added features and overall appeal to the market. An appraiser should consider all factors of a home and/or property as the typical buyer would, but also with a professional eye because of their experience in their given market and neighborhood.

MM: Why is the appraisal value so important in the lending process?

ER: The value of your home assists the lender in determining to approve your loan or not, or to what extent to agree to lend. Meaning, how much money to lend you. They’ll use the appraised value to calculate loan-to-value.

MM: Thanks for the great information! If a seller is interested in increasing the value of their home, what updates or upgrades should be made?

ER: The most common updates which impact value are the big items such as siding, kitchens, bathrooms, etc. However, to get a big bang for your buck, flooring, paint and light fixtures go a long way because those items cover such large areas and painting can be done without a professional in most instances, if you’re willing.

Not only is Eric Ridlington an appraisal expert, he’s also a professional member of our Service Rewards program that offers home discounts for honorable service. Why?

“The Service Rewards program appeals to me because it benefits many people who work in the community in careers which help so many people,” he said. “I see it as an opportunity to say thank you for their service.”

If you have questions related to the appraisal of your home, give us a call at 231-799-2606 or visit our website. As always, we’re here to help!

Could an FHA loan be the loan for you?

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What is an FHA loan?

FHA stands for the Federal Housing Administration, which is a government agency. The FHA was created by the Housing and Urban Development Department (HUD) to increase homeownership in the U.S.

This loan was designed to allow more home buyers to qualify for home loans by allowing for lower credit scores and lower down payment requirements. FHA loans only require 3.5 percent down payment and in some circumstances, allow for credit scores as low as 580. The borrowers are required to pay mortgage insurance monthly (calculated at .85 percent of the loan amount) as post of the total payment.

FHA Credit Score Requirements

To qualify for a loan, the FHA may allow for credit scores under 580, but the borrower typically has to put more money down as most lenders do not wish to assume the risk, especially after the housing crisis of 2008. If your credit score is below 580, it is highly recommended that you improve your credit score before applying for a mortgage.

Who are candidates for FHA loans?

  • Borrowers with a low credit rating
  • Borrowers that cannot afford a large down payment
  • Borrowers using a gift for a down payment
  • Borrowers with high debt-to-income ratios
  • First time home buyers

Down Payment Requirements

Perhaps the most significant benefits of an FHA loan is the 3.5 percent down payment requirement. Many conventional programs require down payments ranging from 5 percent to as high as 20 percent.

As an example, if you are purchasing a $200,000 home, a private loan will require no less than 5 percent down, or $10,000. With an FHA loan, at 3.5 percent down, the down payment would be $7,000 for a $200,000 home.

Each home buyer has a unique set of circumstances that impacts the type of loan that will be best. Make sure you work with a local lender that spends the time to educate you so you are able to choose the best loan for your situation.