Tim McAdam:

Good afternoon everyone. Thanks for joining us for our Buying a Home webinar today, which was presented by the CU SoCAL lending team. My name is Tim McAdam. I’m the Vice President of real estate here at Credit Union in Southern California. And today’s presentation is just that. It’s about buying a home. It’s trying to give you some of the basic information that is helpful that you’re going to need to know and to help prepare yourself to be ready to purchase a home. Whether it’s your first home or a second home, we’re here to help with that.

So hopefully everyone can see my screen. I will be going through the slides relatively quickly. We are open to having you ask questions, but we ask that you ask the questions in the chat box and I will pause every few slides or so, so I can review the questions and hopefully give you answers that’ll assist. And if some of the questions, if you have something that’s very specific to your case, feel free to put that direct in the chat to me, to Tim, as opposed to the entire group, and I can present an answer to the question in a way that protects your privacy if you prefer that. Any questions so far? If you do have one, go ahead and put in the chat. Otherwise, we’ll go ahead and get started.

Importance of Credit

So one of the first things that is important when you’re buying a home is obviously your credit. So why does good credit matter? Obviously it affects your ability to get future loans. Besides just mortgage loans, which is a loan to purchase a home, it also affects your ability to get car loans, credit cards. More importantly, your credit score impacts the rate that you pay on that loan. The higher the credit score, the lower rate you’re going to get, the lower the credit score, conversely the rate will be higher to offset some of the potential risk. It does also affect things like your car insurance premiums, credit card, annual percentage rate or APRs. It also could affect your ability to get other types of credit like a lease or a cell phone, and even affects your ability to get employment in some cases such as a financial services job, like working at a credit union or a bank, military jobs or security clearance jobs.

There’s two measures of credit that are important. The two things are your credit report, which is literally just a report card of your repayment history at a particular moment in time and a credit score, which is like the grades you get on that report card. If you have a 720 and a higher credit score, that’s considered excellent credit. You’re going to qualify for the best rates in those cases. 680 to 719 is considered good. You’re eligible for still pretty good rates on most loans. When you get into 620 to 679 score range, that’s okay, but not great. That represents a higher loan risk and fewer borrowing options are available to you. If you do get a loan and you’re in that credit score and it is possible to get loans in that credit score, your interest rates and your corresponding mortgage payment will be higher.

And if your credit score is 690 or below, that’s considered challenged. Now here it says purchasing on credit is not an option, but there’s been some changes recently with the guidelines presented by Fannie Mae and Freddie Mac, which are two government sponsored enterprises that purchase most of the mortgage loans in the marketplace, and they’re now doing what they call a blended rate. So all the borrowers on a loan, if the blended rate or average rate between all the borrowers for credit scores above 620, then you can get the credit even if one of the borrowers has credit below 619.

The other option is FHA loans. FHA will allow you to go as low as 580 on a credit score and still be able to purchase a home. We’re not going to get into too much detail about FHA loans and specifically FHA loans in that 580 to 619 credit bucket. But we are available. All of our loan consultants are available to help walk members and non-members alike through those scenarios and explain what those would look like.

How is Your Credit Score Determined?

So how is your credit score determined? And so that’s based on several factors. The two biggest of which are your payment history, which is approximately 35% of your score and 30% is based on the amounts that you owe. And by payment history, they’re just looking at if you’re making your payments on time. And for a credit score, the definition of a timely payment is if you make your credit score within 30 days after the due date. You’re not reported as being 30 days late.

So I know we’ve gotten questions in previous seminars and webinars or there was concerns that, “Okay, well, I maybe don’t pay my payment on the due date and I pay a late charge, but I always pay it before the next payment is due.” In that case, your payment history and your credit score is typically going to show as not having missed any payments because the credit score is not looking at whether or not you’ve paid a late charge. They’re just looking at whether or not you’ve paid within 30 days. Now, I certainly recommend that you’re trying to avoid the late charges as well, but again, I know for a lot of people that’s sort of the first area of concern if they’ve had some late payments currently or in the past.

The second-biggest bucket again is the amounts that you owe on your debt. And this is more important for your credit cards more so than an auto loan or an installment loan or even student loans. But they’re looking, when I say they, the credit reporting bureaus, when they’re determining the credit score and they come up with the FICO scores, what they’re looking is how much you owe relative to the line of credit limits that you have.

So the higher balance you have relative to your credit card limit, so for example, if you have a $10,000 limit on a credit card and you’re borrowing $9,000 against that, that’s high usage. That’s what’s called a utilization ratio, is the amount you owe divided by the amount you’re allowed to borrow maximum. And so in that particular example, 9,000 balance against a $10,000 credit limit, you’d be looking at a 90% utilization ratio. So the higher that ratio is, the lower this portion of your score will be. A good rule of thumb is to try and keep your utilization ratio below 30%. Now even if you pay off your credit card bills in full every month, a lot of it’s going to depend on when your credit card company reports to the credit bureau what your balance is, because they typically report every 30 days or once a month.

And if there’s a balance outstanding on the card, it will show that balance. But it also shows on the mortgage credit report does show a trending history. So if you do pay your bill in full every month, that information will also show and that will also help with your credit score.

Length of Credit History

So the last three sections of the credit score formula or this pie is 15% of it is the length of the credit history. So that’s just how long have you had credit available to you? So if you have a credit card that you’ve had open for a number of years and you never use it anymore, oftentimes I actually recommend people to leave that credit card open because that helps you with your length of credit history. The opposite is true though. If you’ve just went out and opened up a bunch of new credit cards or bought a new car and a bunch of new credit cards, that’s all going to show shorter credit history. And so that will impact your score a little bit negatively. But again, it’s only 15% of your score and it’s also dependent on how much new credit you’ve gotten. If you’ve just gotten one new card or just got a new car loan and you’ve had a history of paying a car loan off before, it’s really not that big of a deal.

And again, that ties into this next 10% as well, the new credit portion, because again, it’ll impact the length of credit history, but it also impacts that new credit bucket. So if you have a bunch of new debt, it does affect your score somewhat. But again, usually not by very much. And usually once you’ve had that new credit line open for at least six months and you’ve made six months of payments on that, that will start impacting your score positively, assuming those payments have been made on time.

And then the last 10% is just the types of credit that you’ve used. So that’ll be things like, do you only have a credit card or do you only have auto loans, or do you only have a student loan and no other type of debt, or do you happen to have all three of those on your credit bureau and you’ve been able to pay each one of them in a timely manner? Just showing that variety, again, the more variety that’s there, it helps you with that score somewhat, but again, it’s only 10% of the overall score, so I don’t recommend just going out and opening up other loans just for the sake of boosting that section of your score. Again, the most important things that you can do to impact your credit score is that payment history and the amounts owed portion.

What Else is on a Credit Report?

Okay. It’ll show your account and your debt information. So again, it shows your revolving accounts, which are credit cards, shows any type of installment accounts, which are mortgages, car loans, student loans, any type of loan that has a set payment and a set payoff date is an installment loan. It also could show medical debt and then any other payday loans or collection accounts that you may have. It will also show credit inquiries. And so anytime you go out and apply for debt, whether you’re at the mall and they’re offering you 10% off on a new credit card and you sign up for a credit card there, they’re typically going to do a credit inquiry. When you apply for a mortgage loan, that’s a credit inquiry. If you apply for an auto loan at the dealer or with the credit union or a bank, it’s going to show up as a credit inquiry.

So the more credit inquiries you have, it does pull down your score some, usually only about five points per inquiry. If you have a lot of inquiries on the same day or within a set period of time, for example, you’re shopping for a car and you go and look at three different dealerships over the weekend, typically those inquiries will only be counted as one if each of those dealers had inquired against your credit.

Other information that’s on the credit report, personal information will have your name, it’ll have your spouse’s name if you’re on a joint credit report, if you’re applying for credit together, has your social security number and date of birth, it’ll have your current address and previous addresses, and it’ll also show public records such as judgments, tax liens, any previous bankruptcies or previous foreclosures. One good thing to know though about public records, a lot of times there was challenges a few years ago where borrowers had similar names were getting judgments from someone else had the same name as them who had a judgment, that judgment was being put on the borrower who didn’t have a judgment was being put on their credit report. So the credit bureaus now have to go through a lot more hoops before they can put that type of information on a report. So if you’ve had that challenge in the past, that should be minimized now.

Credit Reporting Bureaus

So the three main credit reporting bureaus are Experian, TransUnion, and Equifax, and you are able to get one free credit report per year from each bureau at annualcreditreport.com. Again, where it says, this is the only official site, that’s the only website where it’s free. That’s where they’re legally obligated to provide you with the free credit report once per year. One thing I recommend to everyone is to go to annualcreditreport.com and pull one of those three reports every four months because this way you can get one every four months to get an idea of how your credit is trending. And you can also see if there’s any debt that shows up that doesn’t belong to you or any information that’s being reported incorrectly, because we have had instances where borrowers were being reported as late when in fact the borrower had proof that they weren’t. And we went to the credit bureau with the borrower and got the information corrected, which improved their score and helped them with their application.

So again, these three, Experian, TransUnion, and Equifax, when we do a mortgage loan at the credit union and pretty much any lender that does a mortgage loan, we’ll pull what’s called a tri-merge report, which takes all three of these bureaus and merges the information together and then provides three separate credit scores.

Types of Credit Inquiries

We were talking a few slides ago about credit inquiries. There’s two types. There’s the hard inquiry and the soft inquiry. The hard inquiry again is when you are seeking credit, you apply and the lender checks your credit, and again, it dings or slightly lowers your credit score by five points. And like I mentioned before, when you’re shopping for a mortgage, multiple inquiries within 30 days typically count just as one inquiry.

A soft inquiry is an unsolicited credit check. So a lot of different companies will check your credit for promotional reasons. It doesn’t affect your credit score when they do it, but this is how you get pre-approval offers for credit cards or for an auto loan or for a personal loan or even for mortgage loans. The soft inquiry is what those credit bureaus do. And an example of how a soft inquiry would work is a company may go out and say, “Hey, I want to get every borrower that lives in Covina that has a credit score of 700 and above and has a credit history of at least five years.” And the credit bureau will provide that information to them, and then that company though has to turn around and make a firm offer of credit where they make some sort of pre-approval offer to those borrowers on that list. So that’s how a soft inquiry works, and again, it doesn’t become a hard inquiry until you actually accept that offer and they run your actual credit report to confirm the information that was provided to them.

Any questions so far as far as credit reports or credit bureau or how the score works or how it’s calculated? Okay, seeing none in the chat, I’ll keep moving with the slides.

Types of Credit

So again, types of credit. Again, good credit, this is where all of your accounts are paid on time. Credit cards, not too few, not too many, says three or five. Again, this isn’t as important now as paying on time and or your balance is 30% or less of your total available credit. If your balance is paid off each month, that obviously is going to help you with your credit score as well. Good credit is also demonstrated by loans being paid down, that you’ve had accounts in good standing for at least one to two years. You’ve got a nice mix of accounts between credit cards, other installment loans, and there’s nothing negative. There’s no derogatory information, no 30-day lates or 60-day lates or anything like that on your report.

Challenged or damaged credit. This is where you have one or more negative items on your credit report. You’ll have late payments of 30 days, 60 days, or even 90-plus days, but it also could include collections, judgments, tax liens, foreclosures, repossessions, or bankruptcies. One thing I do want to share with you though, because I know a lot of times people think, “Oh, I had late charges, but it was like three or four years ago,” the longer it is from the time you had a negative credit thing happen to you, whether it was a late payment or bankruptcy, whatever, the farther away from today’s date is from the date that those things occurred, the less impact it has on your credit score.

Any type of late payments for credit cards or mortgages or anything like that typically drop off your credit report after seven years. But again, after two years, the impact on your score is much, much less than if it was two months ago. Foreclosures and bankruptcies typically will stay on your credit report a little longer. I know bankruptcies will stay on a credit report up to 10 years, but again, I’ve seen cases where someone had a bankruptcy three, four years ago and their credit scores are already in the seven hundreds. So again, to reassure people, it’s not, yes, bad things happen to good people, but we can get past them. And if you work on your credit report and how you’re paying your debts, it can improve your opportunity to get a loan.

Mortgage Basics

So next slide talks about mortgage basics. Okay. American Dream, why is it so great when you want to buy a mortgage or not buy a mortgage but buy a home? Number one thing is that you build equity. Equity is the current value of your home minus what you owe on it. And so if you’re a renter, when you’re paying your rent every month, whose equity are you building, yours or your landlord’s? It’s ultimately your landlord that’s growing the equity and the value of that home. So that’s one reason why a lot of people want to build up equity by buying a home, because again, it’s a way to, you’re owning a piece of your own land, but you’re also building wealth for you and your family.

You could also get a tax deduction on a portion of the interest you pay and on the real estate taxes you pay. This you’d have to actually talk to your tax advisor about, and mortgages have to be relatively large to be able to have enough interest where you would get that tax deduction. But in California, we know how expensive real estate is, so most people are able to get some sort of deduction and that in turn will allow you to potentially lower your withholding on your take-home pay, which gives you more cash up front. But again, these are all things you should check with your tax advisor.

So again, what is a mortgage? A mortgage is a large secured loan used to purchase a home. The mortgage or promissory note is interchangeable with the note. It’s the document where you promise to repay the loan. It includes the terms and conditions of the loan, and it also provides details about the monthly payment, when’s the payment due? Is it once a month? How many years is it for? When’s the last payment due? Do I need to include payments for property tax and insurance with that? That will all be spelled out in the note.

And then the deed of trust is the document that pledges your home as security for the loan. That document, once it’s signed and notarized, gets recorded with the county the property is located in. And the best way to sort of compare it to is similar to how you have a pink slip when you purchase a car. The pink slip is that title for the car. And when your loan is paid off against it, the pink slip goes to you as the owner of the vehicle. Same thing with the deed of trust. Once you pay off your mortgage loan, in the future, the deed of trust will be what’s called reconveyed and it eliminates that document from your public records with the county for that property.

Preparing to Apply for a Loan

So what should you do before you apply for a loan? First thing is to check your own credit. And this is again where we talked about the annualcreditreport.com. This is a way for you to go and check those credit reports so you can see what’s actually out there, what’s being reported as credit that you’ve taken out, that you’ve paid or not paid. And it gives you the opportunity to do the item number two on this list, which is to correct any inaccuracies. So if it’s showing the wrong credit limit amount or it’s showing that you had a late payment or it’s showing that it’s closed or there’s a debt on there that you don’t even know about, it gives you the opportunity to contact the credit bureau and correct those inaccuracies. Third thing you should do is research mortgages. Part of that you’re doing today by participating in this webinar, but you want to learn about the different types of mortgages, different companies that offer them how long it takes them to put a mortgage together because that’s important when you’re trying to purchase a home.

You want to compare your interest rates and we’ll talk about the best way to do that. You’ll want to get your pay stubs and your W-2 forms together unless you’re self-employed, then you would need to also provide your tax returns and get the last two years of tax returns together. And then that’s part of item six, which is also to collect bank statements. And the reason why you want to get your bank statements ready is because when you’re purchasing a home, the lender and your seller is going to want to know what the source of the down payment is going to be coming from and that you have that source of down payment available to you. So we’ll get into more of the details of that in some future slides here.

Types of Mortgages

So again, different types of mortgages. There really are just two main types of, but then there’s different programs of mortgages as well that we’ll talk about a little bit as well. But primary types are the fixed-rate mortgages and adjustable-rate mortgages, also known as ARM loans.

Fixed-rate mortgages, when you get a fixed-rate mortgage, your interest rate is going to be the same for the entire life of your loan, your monthly principal and interest payments will never change. And then the term of the loan is typically a set period, but 15 and 30 years are the most common. And honestly, on purchase loans, a 30-year fixed-rate mortgage is the one that is most common.

For adjustable-rate mortgage or an ARM, the interest rate will be fixed for a certain number of years, that’s sort of spelled out in the type of ARM that’s described, but after that initial fixed period, the interest rate will actually move up or down in conjunction with the national interest rates. Most mortgages now are tied to constant maturity treasury index depending on which index is used, but a lot of times it’ll be the 10-year treasury. Sometimes it’s only a five-year treasury. So if that rate moves up or down at the time of an interest rate adjustment, there’ll be a margin added to that rate and that would be what your new rate is.

But the one thing about adjustable-rate mortgages is that if rates were to jump up a lot, that could make it very, very expensive for people to use an ARM. So almost every ARM mortgage has a cap on how high interest rates can go, not only at each time there’s an adjustment, but also a lifetime cap. So sometimes you’ll hear about an ARM being called a 225 ARM or a 226 ARM, and that essentially means that every time there’s an interest rate adjustment, the maximum the interest rate could go up or down is 2%, but then the maximum cap would be 2% over the rate you’re at at the moment. And then the last number, that’s five or that six number is how much the interest rate could go over where you started. So 5% or 6% higher than the original start rate.

So again, if you’re interested in an ARM, you’d want to ask the questions of the lender, how long does the initial interest rate apply? Is it a one-year ARM, three-year fixed rate period, a five-year fixed rate period, seven years, 10 years? What are those options? How high can the interest rate go? And they’re legally obligated to tell you what the maximum interest rate would be.

Does it have a minimum interest rate? Or you’ll also hear it described as a floor rate. So that’s the opposite. If the rates go down, is there a certain point where the rate’s not going to get any lower than this minimum interest rate?

And then ultimately too, what is the maximum monthly payment you could pay? If for example, the interest rates went up the maximum amount each time there was adjustment, what would be that highest payment at that future point that you would have to pay, because this again is going to help you determine whether you’re comfortable with an ARM and whether you feel confident that you’d be able to make the payments on that loan.

Mortgage Terms

So different mortgage terms. Principal, that’s the original loan amount. That’s the amount you borrowed to purchase your home. The interest is obvious, the fee you pay the lender to borrow the money. The term is the length of the loan and is the period of time. So again, that’s a 30-year term, 25-year, 15-year, that’s the actual term of the loan.

An impound account is an account that’s opened by the lender and it holds money for your property taxes and insurance. And so this is an area where I mentioned earlier in a fixed-rate loan, your principal and interest payments don’t change, but if you add an impound account to the loan, those amounts could change because taxes and insurance always change. They pretty much always go up. There are some rare instances where taxes will go down, but that’s usually only in a declining market. And even then, once they go down, they typically go right back up when the economy improves again.

And then finally, equity. That’s the amount of principal you’ve paid down. Plus of course, any down payment you did. That’s the portion of the home you own. So again, when you’re paying a mortgage payment versus rent, every time you’re paying rent, you’re building equity for the landlord, every time you’re paying your mortgage payment, you build equity for yourself.

Loan to Value Ratio

Other mortgage terms that you’ll hear bandied about include loan to value ratio. This is a ratio that determines your down payment. So if you hear about an 80% loan-to-value ratio or LTV, you’ll hear, that means you’ve put 20% down payment on the property you’re purchasing. Several first-time homebuyer programs allow you to put or allow you to have a 95 to 97% loan to value, which means you could put as little as 3% down to 5% down in those cases. FHA loans are a great one of those that help with that lower LTV amount, or excuse me, lower down payment amount.

Points. That’s two different types of points. One is a loan origination fee, and that’s typically just a fee that a lender will charge to help cover the overhead of the processors, the underwriters, the document funders, the systems that they use to put your loan together. Sometimes the loan origination fee is spelled out as a dollar amount; other times it’s rolled into your rate. And then there’s discount points and those are points that you can use to lower your interest rates. So you’ll hear on the radio or television about someone advertising a 30-year fixed-rate mortgage at 3% with no points, or you’ll hear about a 2.75% mortgage with two points. And so point is basically just a percentage of your loan amount. So one point equals 1%. So if you’re getting a $400,000 loan, a one-point discount point to lower your interest rate would cost you $4,000. But a good way to sort of determine which is a better deal based on the rates and the fees and everything else that you’re going to pay is this next item here on the list, which is the annual percentage rate or APR.

And if you’re really truly comparing loans from different lenders, this is the number you want to see. You don’t want to worry just about the rate; you want to worry about the annual percentage rate or the APR because this gives you the total cost of the loan. So this is the amount of interest you pay, plus any loan fees you have to pay, plus any mortgage insurance if it’s required, plus any discount points that you might pay if you’re trying to lower the rate. And again, this is the best way to compare the options that include all fees because you could hear someone advertise a 2.7% fixed rate 30-year fixed loan, but the APR may be 3.125, where someone else may advertise a 3% fixed rate loan, but the APR is also 3%. So that’s a 3% fixed rate loan. Even though the interest rate, the rate that’s listed on the note is higher than that 2.75 example, it’s actually a less expensive loan to you because the APR is lower at 3% than the 3.125% that the interest rate of 2.75 had in that example.

I know it’s sometimes hard to grasp that how it works, but again, if you look at the APR only and just kind of ignore what the actual rate is going to be, the APR is going to give you your best apples-to-apples comparison as to which deal is going to be the best.

Questions on Mortgage Terms

Any questions on the mortgage terms so far or what I’ve covered so far? We’ll take a break here. It looks more like a comment here than a question about printing out… Is this a question? Will printing out the credit report lower… I’m assuming you’re asking if you’re printing out your credit report, will it lower your score? It will not. Especially if you go to that annualcreditreport.com, that’s not a hard inquiry. It’s just you getting the information for yourself and there is no impact to your credit score in that case. So hopefully that answered your question or I believe that’s what your question was. If not, try and rephrase it in the chat section again and I’ll be happy to take another shot at it. So let’s continue on.

Insurance and Mortgage Terms

Other mortgage terms that you need to be aware of is insurance. You need insurance on your car. You also need insurance on your home. It’ll typically be described as hazard insurance and you’re insuring against any hazards to your home like fire, like a tree falling through it, like someone driving a car into your house. That’s the type of thing that you typically insure against.

Some properties do also require flood insurance if they’re in a flood zone. Whether or not the properties in a flood zone is actually determined by the federal government and they have FEMA maps that show the flood zone areas in California, even though we have this big drought, you’d be surprised there are quite a few areas in California that are in flood zones and do require some form of flood insurance. And you typically will find every lender that lends on a property in a flood zone area will require flood insurance. But it’s not necessarily a huge area of Southern California that has it, but if you’re close to the beach or close to a river or a flood control channel, or if you’re up in the mountains and you live near a creek or something like that, those are kind of properties that typically would require flood insurance.

The other type of insurance that you’ll need to know, and this is especially important if you do put less than 20% down, is private mortgage insurance or PMI. PMI is mortgage insurance that essentially insures the lender on the difference between the 20% down payment and whatever actual amount of down payment you put down. So if you put 5% down, for example, private mortgage insurance will cover the lender for that other 15% should something go wrong and you not be able to make payments on your loan, it covers them for that additional loss because if a lender has to foreclose on a home and then turn around and sell it on the market, this private mortgage insurance helps cover that cushion between the 5% and the 20%. Now, in most cases, if you’re doing a conventional loan, that private mortgage insurance will drop off automatically once a loan to value gets below 80%. Typically, it’s automatic at 78% loan to value. Sometimes you can get that PMI removed quicker if the value of your property goes up, but you typically have to get another appraisal to eliminate that.

The difference on an FHA loan, we talked earlier about an FHA loan going even lower on the credit score as far as an option, and it’s also FHA loans can be very good for some of the low down payment loans. Private mortgage insurance on an FHA loan doesn’t go away unless you refinance that FHA loan. So even if your loan to value is less than 80% on an FHA loan, private mortgage insurance will always be there until that loan is refinanced later on to eliminate it on an FHA loan.

And then the qualifying ratios also, they’re known as debt-to-income ratios or you’ll hear people describe it as DTI. In case you haven’t noticed all types of banks and credit unions, financial institutions, we love our acronyms. So DTI is another one of those acronyms, but the debt-to-income ratio that’s used by the lenders to determine how much you can afford. And we’re going to get into in a few slides how those DTIs are calculated, and this will also help you get a general idea of where you think your DTI might be and what work, if any, you may have to do to improve those DTIs.

Monthly Payment Structure

Your monthly payment is made up at four and possibly five sections. First, so the main thing you’d hear about is PITI or your principal interest taxes and insurance. So when we qualify you for your home loan, when we think about your mortgage payment, we’re not just thinking about the principal and interest amount only, but we’re also figuring out one-twelfth of your annual property tax bill and one-twelfth of any insurance bills that you may have to pay, whether it’s that homeowners or hazard insurance we talked about, whether it’s flood insurance we talked about, and whether it’s that private mortgage insurance that we’ve talked about.

The additional thing here are the A, the homeowners association dues, which I don’t know why they didn’t put it as H for homeowners, but they did it for association. Homeowners association dues are fees that you would pay if you live in a condo complex or certain townhomes. Even areas of single-family neighborhoods where there’s community amenities that are available just to those homeowners like a pool or certain parks that are open to just those homeowners or they’re behind a gated community, for example, there’s typically going to be homeowners association dues that contribute towards the upkeep and maintenance of those common areas. If you live in a traditional single-family home and it’s not in a gated area and it’s just a regular neighborhood, there’s typically not the homeowners association dues.

But again, if you’re in a condo complex, townhomes, a lot of planned unit developments, or in gated communities or in a lot of the newer construction areas, there’s almost always going to be homeowners association dues. So again, the same thing. Those homeowners association dues are due monthly, and so we’ll calculate that into this PITIA payment amount, which determines your housing payment, which leads to how we determine the housing ratio.

Qualifying Ratios

Okay, so here again, qualifying ratios. We talked about DTI or the debt-to-income ratios, your front-end ratio, which is also known as the housing ratio. This is the percentage of income that the lender allows you to spend on a house payment. So the way you calculate that is take your PITIA divided by your gross monthly income. And so the gross monthly income is that top line amount on your payroll. It’s the amount that you’re paid per pay period before they take out taxes, before they take out any money for union dues, before they take out any money for healthcare or FSA accounts or your 401k. It’s that top line number, not the take-home pay. So that’s another thing that’s important because a lot of times people think about this is how much I take home every day or every week or two weeks or however frequently you get paid and they think, I’m never going to be able to afford a payment based on that number, but it’s actually based on that gross number.

So usually historically that’s going to be in the range of 26 to 33%. But I will share with you, that is a conservative number and we have been able to, and several lenders are able to lend at a much higher housing ratio than that. In many cases, we can go up to 43%, even up to 50% if it’s a very highly compensated borrower. So again, that’s sort of the rule of thumb or a good place to start is that 26 to 33% because again, you want to think about it in terms of how much of your income do you want to have go to your housing. Again, the good rule of thumb is 33%. When you hear about people calculating how affordable it is in certain areas and they calculate the average person can afford a house of X dollars, those calculations are usually using 33% as the housing ratio in those areas. But again, we can stretch that. We can make that go further.

The backend ratio or your total debts income ratio is the percentage of income that the lender allows you to spend on your total debt. So this is your PITIA or your housing payment, monthly housing payment, plus any other monthly debt payments you have. And so this is minimum payments due on your credit card. This is your auto loan, this is your minimum payment due on your student loan. Any other type of debt or loan that has a payment will be calculated here and then divided again by your gross monthly income. One thing to note is if you have student loans and they’re in deferral, we will calculate 1% of the balance of your student loan as the monthly payment. So even though you’re not making a payment on that loan, now we still factor in that at some point in the future, you will probably have to make payments on that student loan again. So that’s where that 1% rule of thumb comes in.

But if you are actually on a payment plan, whether you’re using an income-based payment plan or just a traditional payment plan for your student loans, we’ll use whatever the actual payment amount is. We don’t bump it up to 1% if your actual payment happens to be less than that amount. But again, it has to be a loan that’s not in deferral for us to use the actual payment amount. So again, these debts include your car payment, credit cards, any other loans. Again, usually in the range of 31 to 43%, we can actually go as high as 50% in many cases. One thing to consider though is that the higher that back end ratio is, the more down payment you’re typically going to have to put down to be able to qualify for the loan because the debt to income ratio is going to be higher. The higher your debt to income ratio, it does present a slightly higher risk to the lender. And so that’s why there’s typically more of a requirement to have more deposits or other assets available to you as reserves.

Getting Ready to Qualify for a Loan

So I just threw a lot of information out there about qualifying ratios and how they’re calculated and what’s included in them. Any questions about anything I’ve shared so far? We will give it a minute while I take a quick drink of water here.

Okay, seeing no other questions in the chat box, I will continue to move on with some of the slides here. Again, so what do you need to do now as far as qualifying for a loan? What do you need to get ready? You want to have your income information, your employment history, your debts, your assets, your credit history and credit score, and the value and type of property you want to buy. Again, on the income, again, this is going to be for most people, it’s going to be their W-2 forms from prior years and any current pay stubs they have for their property. We’ll want information on the employment history. We typically would prefer to see borrowers have at least two years of steady employment, preferably with the same employer, but it’s not required to be with the same employer if it’s in the same job field.

There are exceptions to this. If someone’s been out on maternity leave, that’s an example of an exception. Another one would be college students who just finished up a degree and are now just starting work and maybe you’ve only been working for a year. That’s another area we could potentially not need the two years history in the same job.

Again, knowing about your debts or what debts that are being paid, this is important. This is why it’s important for you to review your credit report ahead of time, but it’s also if you have debts that you’re paying on that do not show on your credit report, this is the time to figure out to disclose them.

One other thing I forgot to share when we were talking about calculating the total debt, one good thing about when we’re doing mortgage loans is if you have an installment loan, like a student loan or like an auto loan, if there’s less than 10 payments remaining on that loan, we actually exclude that from the payment calculation when we’re determining your overall debt-to-income ratio, because we figure in less than a year those loans will be paid off and you’re not necessarily going to go run out and get another loan right away.

The exception to that is a lease. If you’re on a car lease and you have no other vehicle or anything like that, even if there’s less than 10 payments on the car lease, we will still hit you for that payment because typically when you’re done with your lease, you return the car and have to do a new lease for a new one. So that’s an example of one area where we don’t do that. But it is something that’s helpful to know because we have had several cases where members think they’re not going to be able to qualify because they have this $500 car loan payment or another $300 worth of student loan payments, but all of them are going to be paid off in less than 10 months. So we can exclude those and it helps you get better qualified for a loan.

You’ll need to have your asset information ready. So this is things like your deposit accounts. Do you have any type of investment accounts like through Charles Schwab or a 401k with your employer, or do you have an IRA account or any other kind of stock funds or anything like that where you’re saving money for your future? Again, knowing the credit history and the credit score is going to be very helpful.

And then finally, the value and type of property you want to buy. That property value does ultimately involve getting an appraisal and a home inspection as part of your purchase, but that’s what you do after we pre-qualify and pre-approve you for the loan. But the type of property that you want to buy is important to know because certain property types do have slightly higher interest rates. If you get a condo, for example, and your loan to value is going to be greater than 75%, the interest rate will be a little bit higher on that than it would be if the loan to value was less than 75% or if it was a single-family home. And that’s just because of years and years of lending, whether it’s Fannie Mae or Freddie Mac or any lenders, they typically see that condos with lower down payments are slightly riskier, so they charge a slightly higher rate to offset that, again, if the loan to value is greater than 75%.

Next Steps After Gathering Information

So once you sort of get this information together, what are the next steps? So the first thing is just to do a pre-qualification. This is where you go over numbers with a loan officer, a loan consultant that’ll see how much you qualify for. Again, this does not require pulling credit. This does not require providing all those pay stubs and all that information to a loan consultant.

Any of our loan consultants at the credit union are happy to have a conversation with you and just talk in general terms, how much money do you make? What’s your gross monthly income, and what kind of payments do you have now? “Well, I’ve got a $400 auto loan payment and $100 in student loans, and I have three credit cards that each have a $25 minimum payment.” And then they’ll use that information. They’ll also ask, what kind of money are you putting as a down payment? What’s the loan amount you’re looking to do? And they can sort of what I call the back of the napkin calculation. We actually use our system to calculate it so that the math is more accurate. And again, it’ll give you a general idea of what you can qualify for.

So then if you like that number, then you want to go and get an actual pre-approval letter. And there’s a difference between pre-approval letter and pre-qualification. Again, pre-qualification is just a conversation. Pre-approval letter means we’ve actually gone out and collected your income information. We’ve collected your bank statements that show your deposit history and the amount of money you have on hand for down payment. You’ve given us your employment history, where you’ve worked, how long you’ve worked, excuse me, the value of the property you want to purchase, and then we will actually pull your credit report.

But once we’ve done that, we can go out and put it on paper that you are qualified to purchase a home up to X dollar amount with a loan of this amount at this credit interest rate. And then that letter is what you use to work with a realtor to find the home. Because if you go down and try and buy a home today, especially in this market where there’s not a lot of inventory, and you just go and say, “Well, I’ve been pre-qualified,” but you don’t have any letter to back that up, most sellers aren’t even going to consider your offer at all, if they’ll even accept it in the first place. But if you have that pre-approval letter, that’s what gives the seller and the seller’s agent confidence that you have the ability to purchase that home and makes you more likely to have your offer accepted. So this is why it’s very critical to have pre-approval letter in place ahead of time.

Examples of Mortgage Costs

So any questions about the difference between pre-qualification and pre-approval? Okay, well, if you do think of some, again, please feel free to type that question or any other question into the chat. And what we’re going to do now is just go over some different examples of mortgage costs, like what it would cost to pay for a mortgage depending on different interest rate assumptions and different front-end ratios.

The first one here at mortgage cost, example one shows that if interest rates were 5% in a 30-year term and your front-end ratio is only 33%, and again, we can go higher, we can go to 43, 45% in several cases, just shows where your annual income is, and again, this is the gross income, what your maximum monthly first mortgage payment would be, and how big of a loan you could get at that payment amount. So you see at $50,000 annual income, the monthly payment is $1384, but it gives you a loan amount of $192,650, which again, in California’s market seems very low and it can be very low. But again, if you had a large down payment saved up, that may be something that works.

But as you go higher up the income, $75,000, $100,000, $150,000 annual income, and again, this is the gross income of all the borrowers, it doesn’t have to just be you as an individual borrower, your payments go up, but then the amount of loan that you can afford at that interest rate is significantly higher. So if you get to $100,000, you’re at $385,300 and then up to $200,000 combined income, you’re at almost three-quarters of a million dollars, actually just over three-quarters of a million dollars for a loan amount.

But you can see as the interest rates go lower down to 4%, the amount of money you can qualify for at each of those incomes rises significantly. So at $50,000, you’re now up to $210,000 loan. At $100,000 annual income, you’re up to $420,000 loan. And up at the $200,000 annual income amount, you’re up to $840,000 loan.

And then finally, if you assume interest rates are at 3%, which is where mortgage rates are right now on a 30-year term, and again, the 3% rate, that’s going to be your higher credit scores typically. But even if the credit scores aren’t as good, the highest rates we’re typically seeing right now are 3.25% or 3.375%. So they’re still very, very affordable. Meaning historically, these rates are among the lowest of all time. But you can see when the rate drops down to 3% at a $50,000 annual income, we’re now up to $230,000, a $100,000 annual income, we’re up to $458,800. And at $200,000, you’re at $917,600 or nearly a million dollars in loan amount. And again, this is using a conservative 33% front end ratio. If we use a higher front end ratio, those loan amounts can grow higher.

Pre-Approval Letter Process

So I do see a letter here in terms of where to get a pre-approval letter. Again, this is where you’d work with a real estate loan consultant at the credit union or any other lender. Once you submit your application, which includes your W-two forms, your pay stubs, the source of down payment, that’s when the loan officer, loan consultant will review it. They’ll put the program together, they’ll make sure you qualify, and then they will issue that letter for you. And that’s something, again, you can use with your agent to help start making offers on the property. You can always make offers on a property without a pre-approval letter. Again, in a seller’s market, it’s critically important to have that pre-approval letter available to help strengthen your offer.

How Much of a House Can You Get?

So then obviously the big, big question here is how much of a house can I get? And this again, ties into how much cash you have available for a down payment, which also then leverages how much the credit union can lend to you. One thing to consider in terms of the cash available for down payment. I know several of our previous attendees for the seminars and webinars have been saving some money for themselves, but then they also have parents or other family members that are willing to contribute gift money towards the down payment. And that’s definitely something we can include in the process and include in the calculations.

But one thing I want to make sure everyone is aware is that when you do get a gift provided to you from someone else, whether it’s a parent or other family member, we do have to document where that money comes from, where it’s sourced from. So we typically will get a gift letter from whoever provides the gift, and then they also typically have to show us a bank statement or some similar type of statement to show us where the money is coming from. And that’s typically going to be required of almost every lender around. There are some that don’t require it, but the ones that don’t require that typically charge a lot higher interest rate on it because they’re not validating the source of the income.

But again, it is something that we can leverage to help you be qualified for a higher loan amount and a higher purchase price on a home. But despite all that, I mean, we could qualify you for the maximum amount possible, but ultimately, it really comes down to the question that you need to ask yourself, which is, how much can you afford? And you certainly can afford it based on the calculations, but when I say, how much can I afford, that is more, what is your comfort level with that payment?

Because we have people that we can qualify for significant loan amounts, but they just don’t feel comfortable paying a $5,000 monthly mortgage payment. And so because of that, even though they’re qualified for that high of an amount, they typically will try and find a smaller home and or maybe wait a little bit to purchase a home because they’re just not comfortable with it. So again, affordability can mean multiple things to multiple people, but just make sure you’re comfortable with that amount that you’re going into on this. It’s a huge decision for most people, especially when it’s a first time. It’s going to be one of the biggest purchases, if not the biggest purchase that you ever make in your life. So it’s important to make sure you get yourself educated by attending seminars such as these, as well as just asking questions of our loan consultants or any of our loan officers, or even the realtors we work with.

CU SoCal Home Rewards Program

And so that’s the next thing I wanted to share on our next slide is our CU SoCal Home Rewards Program. And this is a way where you can save thousands of dollars on your home purchase. And so our Home Rewards program is free for anyone to sign up for. You don’t even need to be a member of the credit union yet. But this is a way where you can get instant access to the complete multiple listing service, or you’ll hear it called MLS offerings. So I know many of you, if you’ve already been looking at homes or have friends who have bought, you hear about different apps or websites like Realtor.com or Zillow or Trulia or Redfin. There’s some of these types of sites out there that will have these online listings of properties, but not every agent participates in every one of those services. So some agents that are listing a property for sale may only use Realtor, Zillow and Redfin, but they don’t use Trulia or they only use Trulia and none of the other three. But they all typically will place those properties on this multiple listing service, so the MLS.

So our Home Rewards program gives you access to the entire MLS. You can use this to customize your home search by property type, the location, even number of bedrooms and bathrooms that you want, and even more. So you can drill it down by a certain zip code you want to live in or a certain city or even a certain region. For example, if you wanted to look in the Whittier, La Habra, La Mirada area, you could put all three of those cities in, all of those zip codes. You could say, “Hey, I want to look only at houses that have at least three bedrooms, but I’m not as concerned about the number of bathrooms.” Or you may say, “Hey, I don’t care about the number of bedrooms, but the place has to have two bathrooms.” Those are all the types of details that you can put into this search.

And then what the search system does is you’ll get a regular email or text depending on what parameters you put in and which way you want to get notified of any new listings or price changes in the area that you’ve set up.

We will also pair you up with an expert real estate agent that specializes in the area you work with. And if you do work with that agent, you’ll get up to 20% of that agent’s commission back to you once the sale is completed. So that 20% can help offset different closing costs. It can be used towards your down payment. And again, it’s 20% of what the agent earns as a commission on the property because every time there’s a property sale, the seller pays commissions to both the agent that they list as well as the agent that helps the buyers. And so getting that rebate is something that can help out, especially with first-time home buyers because again, you can use that money to help offset closing costs or contribute towards the down payment. It’s really a nice program. There is no obligation though. You can sign up for this system and go with your own agent later on. But again, your own agent may or may not provide that type of rebate to you.

When you initially sign up, you will typically be assigned again to an agent that specializes in your area who will reach out and introduce themselves to you, and they’ll just ask you a few questions about where you’re looking and how quickly you’re intending to move, and then you determine how frequently you want them to reach out or just whether you want them to reach out to you at all. They do not pester you or hound you with repeated phone calls or emails, unless you tell them you want them to. Same thing, we’ll also assign a real estate loan consultant to you who will reach out and introduce themselves to you, and you can start the process with that assigned real estate loan consultant. If you’re interested in getting pre-qualified or even going full-blown and getting the pre-approval letter, any one of those real estate loan consultants are available to help with any questions you have about loan programs as well as providing a pre-qualification or pre-approval letter.

So again, an excellent, excellent program for us. It’s again, free. There’s no cost, no obligation. It’s just a service that we provide to our members to help out with that home buying process.

Conclusion

So that primarily completes the end of the slides that I have for the presentation. It looks like I went through them a little bit quicker than I normally do. There weren’t too many questions in the chat, but again, I’ll put up a slide again here. I will open it up for any additional questions that anyone may have. Please feel free to put them in the chat. Again, I think we’re scheduled to two o’clock, so I’ll stay on at least for another few minutes if anyone has any additional questions they’d like to ask.

And again, if there aren’t any questions, I can’t remember, I just sent the message to our host, I do believe we make these slides available to anyone who attends. So if there are notes you want to take or you wanted to fall back on this information, I am fairly certain we’ll make this available. I do know there is a recorded version of this presentation on our website as well.

I do see a question in here about pre-approval letter. Does getting a pre-approval lower your credit score if you later decide not to purchase a home? Since we do pull credit to do a pre-approval letter, again, it does. It’s like a small ding report. It may knock five points off your score. But again, all hard inquiries, that’s one thing I forgot to cover on a previous slide, all hard inquiries on a credit report drop off after two years. And again, even if you’ve had four or five inquiries, usually once it starts to get above five inquiries in a two-year period, again, minimal impact on your credit score overall. You may just get an extra question from the loan consultant about, “Okay, I see you have a bunch of inquiries on here. What were they for?”

And again, we sort of look at the whole picture because we also know typically because when you have an inquiry on your report, it’ll say who pulled credit? Which company pulled credit? So we can typically tell right away was it an auto finance company? Was it another mortgage lender or was it one of the credit card companies? So if we see two or three of them and they’re all with mortgage lenders for example, we’ll take that into account, and again, it won’t impact your credit score very much. So I hope that answered your question.

My pleasure. So again, I’ll stay on for another few minutes if anyone has any other questions. And again, if you’re not comfortable putting your question out in front of the entire group, you can message me directly to, I believe I show up just to Tim on the chat. And if not, I will put up our final screen here as well, which has some thank you information. But it also has how to get a hold of us in the mortgage lending department, the real estate department. We do have the toll-free number here, (866) 287-6225. And if you dial extension 1132, that’ll get you right to our home loan team. All of our real estate loan consultants at 1132 extension rings on their cell phones or desks, depending on wherever they are at that particular moment in time. You can also email us at homeloans@cusocal.org and that email goes directly to myself and the other managers in the real estate team. And we’ll make sure that a loan consultant reaches out to you as quickly as possible.

And again, there’s no obligation with us at all. I mean, we’re happy to talk to members and non-members alike to really kind of help you out on your home buying process and experience. We are excited to help members get into homes. One thing with the Home Rewards program, I think we’ve already this year given away, I shouldn’t say given away, but rebated from the agents, I believe over $25,000 in fees that normally would go to the agents that was in turn returned to members that use one of our agents as part of that program. So again, I do think it’s an excellent opportunity.

Again, we’re available here to help you out. I know it’s been a challenging time for a lot of people who are trying to buy a home right now because prices are high and inventory is low, but we are still getting members approved and getting them into homes. It does take a little bit longer, but it is something that we’ll pursue. I mean, we’ve done it cases where we started pre-approval letter 18 months ago and then we refresh that pre-approval letter every couple of months and we finally got someone into a home and they’ve been looking for 18 months, but we got them in.

I do see a question about here, do we help first-time home buyers out of state if they are a CU SoCal member? We can. We do even offer loans out of state. The out-of-state loans, though we don’t underwrite here though at Credit Union in Southern California. We work with a partner that’s licensed in all the other states. I believe the only state we can’t help a member purchase in is New York. But likewise, if you’re a member that lives out of state and you’re wanting to move back into California, we can help in those cases as well.

The only thing that you’ll need to be aware of is that either way, if you’re moving to another state or moving into California, we are going to want to know what your source of income is when you are in that particular state. So if you’re being transferred for a job, we’re going to typically ask for some sort of letter or from your employer that says you’re still going to be able to work from that new location. If you’re relocating to California, when you’re starting with a new employer, we’re going to need an offer letter from that new employer. But again, it’s things that we certainly can help out in those cases and definitely help them out. So I hope that answered your question.

Final Questions and Closing

Alright, we’ll give it another one or two minutes here. And if I don’t see any other questions in there, I want to thank everyone again for attending today. We really appreciate taking your time. I know it’s always tough on a Saturday, especially on a beautiful fall Saturday like today. But again, we do appreciate you taking the time to talk to us or listen to me anyway. I know you’re not talking to me, but I’m talking a lot at you. But again, thank you so much for your time today.