ISO mortgage 95%, no pmi, 50% dti

I just bought a house and there is no way to avoid PMI without putting 20% down. Believe me, I tried!

They have really strict rules now, and almost all banks are going to require either PMI, or points to pre-pay the PMI.

So you could do this, pre-pay the PMI in the form of points or interest increase. Essentially the bank pays the PMI on your behalf, because you're paying them more in interest. The benefit to you is that all the interest is tax-deductible. Here's the down side. Interest rates are at an all time low, so instead of paying PMI until the house hits 80% equity, you're paying an increased rate for the life of the loan. In a few years when you do get to 80% LTV, chances are the rates will be higher and you won't want to refinance.

IE, $40 a month now until you hit 80%, or $20 a month for the life of the loan tax-deductible. It depends on when you think you'll have it down to 80%, but definitely don't count on refinancing.

It's great if rates go down, but not if they are expected to go up over the next 10 years or so.

So, either pay 20% down, PMI in the monthly payments, or a higher rate / up front PMI.

Same thing with closing costs. Pay an increased rate and they'll reduce or remove the closing costs. It's what we just did. .25% rate increase to remove the closing costs. It had a 12 year ROI, so we took it.

OP, Fannie Mae limits their ratios to 45% and while Freddie Mac will go to 50% you need to be very careful not to go over. Are you using proposed rental income in those ratios? Be careful as there are restrictions and strict guidelines that may prohibit the use of proposed rental income depending on the equity of that future investment property.

In addition, depending what State you are in, some MI companies limit the dti. For example, in Florida Genworth will limit MI loans to a dti of 41%. So, even if Freddie may go to 50% the MI company may not.

In respect to Mortgage Insurance, MI used to be much simpler, but the truth is there are many more options in the way an >80% mortgage can be insured.

I can write a separate paragraph about each option, but will try and summarize it, as well as refer you to a MI company link where you should do your own due diligence: http://www.mgic.com/is/html/ratefinder.html

Borrower Paid MI can now be structured in a variety of ways; with the most common being:
a) Monthly MI ; which is the most common and traditional method
b) Split Premium: which combines a partial Up Front Premium with a Monthly Premium
c) Single Up Front Premium (one large lump sum, so no monthly MI; and this can be financed into the loan amount).

Then there is lender Paid MI where the lender will absorb the cost which they recoup via a higher interest rate to the borrower.

Each individuals scenario is unique and must take into account a variety of factors when trying to decide which option is best for them.
There are MANY factors to consider, and each has pros and cons.

How long will you be keeping this loan?
When do you estimate you may have enough equity to have the MI removed?
Can the Form of MI you choose be removed? If so, when? Is there a minimum period of time you must maintain the MI?
Is the lowest monthly payment more important than the up front costs?
etc., etc., etc.

Most choose the monthly MI, with optimism that in 2 years their equity position will reach 20% and they can get the MI removed. (Monthly MI must be in effect for a minimum of 2 years on conventional financing, and 5 years on FHA financing).

Another borrower may prefer the up front lump sum, as it can be financed into the loan and then even though the loan amount will be higher the monthly payment will be lower. (This works well if you do not anticipate your equity reaching 20% in 4-5 years and a lower payment is preferred; or good for those with high ratios.)

Then there is also the Split premium, which is a combination of the monthly and upfront.

Another borrower may prefer the Lender Paid MI in the form of a higher interest rate as that interest is tax deductible (while MI is not) and is not concerned with removing the MI in the future.

In addition to Loan To Value also keep in mind that good credit also makes a big difference with conventional MI premiums. Better credit = lower premiums.

Every case is different and there are plenty of factors not covered here, but hopefully this gives you a good start to determine what may be best for you.

-Adam
Old Hippy & Mortgage Pro

Rules are very strict. You can't report rental income unless you have been doing it for a year and can document it via tax return as additional income. If your income levels won't meet the mark without that rental income you might have a problem.

Additionally, if you plan to rent out your first unit and get a new mortgage - you would need to demonstrate your rental income covers all expenses so include taxes, insurance, and existing mortgage (if those two aren't escrow). Some lenders also deduct a percentage of your rental income for if you think 12,000 annually will report as 12,000 think again they deduct some percentage of that (not sure of hte formula).

Thanks so much for taking the time to help me with this. It is so hard to get a mortgage loan officer with good information on the phone.

Here is what I have in response to what you are asking:

I'm not including rental income in my DTI ratio, I know you can't do that except with FHA. FHA was problematic because of their high PMI and the possibility they would not appraise my house high enough.

Assume the seller will pay fees they are allowed to pay, but I would probably have to increase the purchase price for them to agree to that. Also assume I need a low monthly payment to get under the 50% DTI. What are the most effective ways to lower the monthly payment? For example, what form of MI gives you a lower monthly payment? Or should I consider points?

Another question on some of my wife's Schedule C income. She consistently makes about $7500/year on Schedule C that we've never used to qualify for a loan. How can we figure out how much of that could count towards monthly income for the 50% ratio?

Last question involves student loans. Could I make two years of student loan payments to take that out of the DTI formula? At $134/month I would only have to pay about $3200.

Planning to be in the house for at least 7 years and my credit score is 802.

So gracious for anyone to help me come up with some good ideas, or if they know a good mortgage product for me to use.

The appraisal shouldn't be much different between FHA or regular loan as it is compared to regular market rates not a government chart. This would be new to me unless doing a special FHA like 203K.

I don't understand the student loan as DTI would use the monthly figure as it exist when they pull your credit report. That figure is a monthly debt no matter if you pay $10,000 next month to it unless you cancel it out the monthly figure will remain while you have the loan. Fixed monthly payment

Lowest monthly fees is only achieve by longest loan term and lowest rate. I wouldn't suggest interest only (if they even sell them anymore) but check out ARM for 7 yr and see if monthly payment is low enough to make a difference. At the current rate of 30 FRM - if that isn't low enough probably you can't afford the home.

If you use a reputable bank/broker they are very strict with paperwork and documentation. They want the loan because of the fees but want everything perfect so they can flip/sell it.

The way the appraisal was explained to me was that it was not ordered, but someone estimated the value of your house in the underwriting process. No way to no for sure what value they came up with.

My thinking on the student loan was that you might be able to create the same effect as a deferment by paying two years ahead of time. When you defer student loans they don't count as debt towards your DTI. Thought maybe they would let me do the same thing by paying two years in advance.

I know an ARM is cheaper than a FRM, but I was trying to see what combination of MI, paying fees up front, etc. gets you the lowest monthly payment.

Regarding your wife's Sched C, if she is a borrower and is currently continuing to earn income from that line of work it can be utilized. IN fact, if she writes off any depreciation that can be added back (as it is a paper writeoff).

Good to hear you are calculating your ratios with fully obligating yourself for your current home. That is much cleaner.

Re: Student Loans.
a) If a student loan is deferred for at least 12 months from the date of your first new mortgage payment it does not go into your ratios.
b) if you pay down your student loan, where there are less than 10 payments left to pay it off in full, that does not get calculated in your ratios either. This applies to all types of Installemnt loans (not revolving/credit cards, but installment loans with a fixed amount of payments remaining).

Most Loan Officers are not familiar with Underwriting guidelines, but if you find yourself an experienced and knowledgable mortgage broker they can accurately qualify you.

-Adam
Old Hippy & Mortgage Pro

Something to remember is that you'll need 6 months reserves for both payments (old home and new home) after your down payment. This is required with a departure residence.

If you have 30% equity and a contract to rent your current home, then you can use that to offset your payment.

Quote from Boomancini : Something to remember is that you'll need 6 months reserves for both payments (old home and new home) after your down payment. This is required with a departure residence. If you have 30% equity and a contract to rent your current home, then you can use that to offset your payment.

I was in a similar situation as the OP and didn't have to have six months of reserves. No one brought that up.

Thanks everyone. Sallie Mae said I could defer student loans for a year, so that might help. Also, I thought 401k money counted as having cash reserves. No one has brought up needing cash reserves to me either, but I still thought they basically give you credit with a 401k.

Amazingly I found a local lender who will count 75% rental income. Unusual I know, but I'm still waiting to get approved by him with my fingers crossed. Determined to find someone to help me make this happen.