Paula Christine has seen many people make financial mistakes when buying a home. Just because you've been approved for a $350,000 mortgage doesn't mean you can afford it! Our guest today is Marc Edelstein, mortgage broker with Ross Mortgage. We cover all things mortgage, including:
If you'd like to reach Marc, you can do so via his website, https://www.thatmortgagebanker.com/
Or give him a call at (248) 379-6749. Marc is powered by Ross mortgage NMLS number 533706.
For bigger picture financial help, you can email Paula Christine: paula@paulachristine.com, or visit her website: https://paulachristine.com/
Paula: Welcome. And thanks for tuning into Beyond The Paycheck. I'm Paula Christine. The majority of people live paycheck to paycheck, never seeming to get ahead, and watch other people live life. I've been there. And it sucks. I hate that feeling. I know I'm not the only person who has felt that way. What can we do to change that? That's my goal. One podcast at a time.
Today, I'm joined by Marc Edelstein, mortgage broker with Ross Mortgage. He is my mortgage guru and friend, I watched people make money mistakes when they are purchasing a home. Just because they have approved for the $350,000 mortgage. Doesn't mean you can afford it. I've asked Marc to join us, to talk about making the decisions to buy a home.
Welcome. Marc.
Marc: Hi Paula.
Paula: Let's get started. So I woke up this morning and I decided I'm going to buy a home. So what is my first step?
Marc: So you decided to buy a house, right? It's a big decision. It's going to be probably your largest investment. It's a permanent decision, at least for the time being, right? You buy a house. So it's now your responsibility.
You're responsible for everything that comes along with that. So assuming that's the right time, I would look to do two things. One, determine what a comfortable monthly payment is with taxes and insurance. Two, decide on an area or a search area where you'd like to concentrate your search and move to.
Paula: Okay. So how do I determine what a comfortable monthly payment is with taxes insurance?
Marc: So the rule of thumb is no more than 28% of your gross monthly income should be allocated to housing. That's housing payment, not the utilities and the other things that come along with owning the home. That's just the payment portion.
Paula: So I come in to see you. You tell me, okay, based on your income, you can afford a $250,000 house and you can give me an idea of what that payment's going to look like. How do I determine what the taxes and insurance are going to be?
Marc: You can get a pretty good indication by looking at what the taxes are on the property presently. The city, or the township that you're going to purchase your home in only has a couple of opportunities to reassess homes for tax purposes.
One of them is a transfer of title. So if you purchase a home, there's a transfer of title. You have to notify the city or the township that you're the new owner. And so that's their opportunity to reassess the property taxes based off of what you purchased it for.
Paula: So you're telling me that taxes are going to go up from what the previous owners paid.
Marc: Yeah, definitely. So you look at what the taxes are now. And I always tell people to be on the safe side, add a third. Assume that your taxes are going to go up about a third of what they are in total. And then factor that in to here your new monthly payment's going to
Paula: lie. Just to give an example. So the taxes right now are $3,000 a year. I should just assume that it's going to be somewhere around four because I'm adding a third to that.
Marc: Correct. You're adding a third. So that's going to add in, in our public math, we're doing, which is never really a good idea, but in that case, your payment's going to adjust by $83 dollars and thirty three cents. Okay.
Paula: And I had that happen to me the first time I bought a home, but it was all affordable.
Everything was good. And then the second year into that home, the taxes went up and then it made that mortgage payment not affordable anymore.
Marc: Here in Michigan, the tax assessments are determined, or the taxable values are determined in February for the entire year. So if you purchase home after February, that taxable value's locked in for the remainder of the year.
You're not going to notice your change until the taxable value changes in the following year. And then it's even sometimes 18 months from the time or 12 to 18 months from the time that you purchased the home is when you get that letter from the servers that are saying, you got a deficit in your escrow account, here are your options.
Paula: You could pay your taxes on your own, or you can have them as escrowed. What do you recommend? And then explain what escrow means.
Marc: So escrow is an account that's set up by the borrower to deposit funds into, to pay taxes and insurance. When they come due and renew, that escrow account is managed by the mortgage servicer.
And they're the ones that receive the bills and disperse the moneys out of that, paying them out of escrow, or in escrow is more personal preference. If you're not making a 20% down payment, you're going to have the escrow account forced on you. So the privilege to waive the escrow only starts when you make a 20% down payment or greater.
Paula: So what's the smallest down payment I can make?
Marc: 3% for straight up first time, home buyers, conventional financing. If you are doing conventional financing and you own an existing home then you're limited to 5% down. Government loans, depending if you're a veteran it's 0% down. FHA is three and a half percent down.
It's not a large down payment percentage, but depending on the price, it could be a decent chunk of money.
Paula: So I know if I don't put 20% down, I'm going to have something called PMI. What is PMI?
Marc: PMI is short for a private mortgage insurance. It's basically a insurance policy that the lender takes out on behalf of the borrower or to recover some of the costs in case of default, only on a conventional loan.
And the government loans, they have different, it's not really called PMI. It's called MIP for some of them, but for conventional financing, it starts when you're at less than 20% down, it moves in 5% down increments like the premium amount or premium percentage changes for every 5%, more or less ,that you put down.
And it's part of your monthly payment. It gets paid to the mortgage insurance provider, just in case you default on that mortgage, the lender then goes and makes a claim and recovers some of their losses. Not nearly all of them. It is not permanent though. It goes away. It goes away at a certain point in time. That time is when the balance of your mortgage reaches 78% of the original purchase price.
Paula: Okay. So I'm going to switch subjects on you for a second. So I come into your office. I gathered whatever necessary documents that I need, and I know that my interest that I'm going to pay on that mortgage is based on my credit score. How do I look at my credit score?
How do I clean it up if I need to have things cleaned up?
Marc: So you can review your credit report. You don't necessarily get the scores on the free credit reports. If you really want your credit scores, you have to pay for those. But then again, if you pay for them, they might not be the same scoring model that's used in the mortgage world.
So you have to be careful on where you're getting your scores from. So you should review your credit report, not so much for scores, but for accuracy. There's a lot of times where things are on there, that either A) are yours because you have a common name in something appeared on your credit report because your name's Joan Smith or B) there's something on there that has been resolved, paid, not reporting correctly, whatever the case may be.
So it's good to review it annually, check it out, make sure that the accounts that are open, are open. The accounts that are closed are closed.
Paula: So let's say I have bad credit. I have a low credit score. How do I fix it?
Marc: It all depends. It depends on what led to the bad credit. If it's medical collections predominantly, there's some relief coming in that regard.
We'll talk about that in a second. If it's just a history of, or not really history, but just not understanding how personal credit works,,and the benefits and value of having good credit and just not having that education. And I don't want to say misusing it, but just not using credit properly. And you got yourself in a little bit of trouble.
I've advocated for and recommended talking to a bankruptcy attorney with several people and bankruptcy, while it doesn't sound all that appealing, it allows you to get a fresh start. I mean, if you're buried in this. And if your goal is to buy a house and you're in such a deep hole that you just can't get out, consider it because it wipes everything away and you start off fresh. Sure. You can't get a mortgage right away. You got to wait at least two years after the bankruptcy discharge, but what a relief to have a fresh start.
Paula: Okay.
Marc: So let's talk about some of these things that are happening credit related when it relates to medical collection specifically.
So medical collections, we see it a lot. Some are small, some are large. We can never, ever, ever, ever, ever, ever ask what happened for them to incur that medical collection, but there's some changes coming effective July 1st of this year. So the three credit bureaus, Experian, Equifax, Transunion, as of July 1st, are no longer going to report paid and closed medical collections.
So those are the ones that you paid and show up on your credit report is being paid, but they're still there. So those are all gonna be removed. The amount of time your medical bill has to be in collections before it gets reported to the credit bureau has been increased doubled from 6 months to 12 months. So you can have an unpaid medical collection for up to 12 months before it ever hits your credit report.
That's also starting in July and then starting 2023 third quarter, fourth quarter, all three credit bureaus are no longer going to report medical collections with a $500 or less balance. So that's going to help out a lot.
Paula: So let's talk about everybody out there with that student loan debt. How does that affect getting a mortgage?
Marc: Well, they can't be ignored, right? It's a loan. It's meant to be repaid regardless of the status, whether it's in deferment or forbearance, it's still meant to be repaid. So the agencies, whether it's Fannie, Freddie, VA, FHA, USDA, they all have guidelines as it relates to student loans and how we have to account for those, for conventional financing with Freddie Mac, it can be a half a percent of the balance is used as the estimated monthly payment.
With Fannie, it's a full percent. The only way it's not a full percent is if you can show that it was in an income-based repayment program and had a zero payment. The hard part about that is, is for the past two years plus, student loan payments have been permanently deferred as part of COVID relief and no payments have been made.
So it's difficult to get that documentation to show that before COVID you were in an income-based repayment plan and your payment was zero. We're trying to get documentation from a student loan servicer from two and a half years ago. Good luck.
Paula: Hm. That's tough.
Marc: So it's half a percent for Freddie. A full percent for Fannie. FHA is a half a percent, and these are just other balances to estimate for the monthly payment.
Paula: I hear what you're saying, but to make it easier for me to understand, put numbers to that.
Marc: Oh, you have a hundred thousand dollars in student loan debt. It's a thousand dollars a month minimum monthly payment that we'll use to qualify you for your home financing as a monthly obligation.
Paula: Okay, perfect. I understand that. Now I'm sitting with you. We've collected all the paperwork. We've got our preapproval. How do I determine if I should go 10, 15, 30 years?
Marc: It's tough. It all depends on your financial goals, where you are in life, how long you intend on staying in the home. If it's your forever home, your goal is to have the house paid off as quickly as possible.
So you can get to retirement as quickly as possible. Then maybe a shorter term mortgages is for you. If you're a first time home buyer or somebody who is payment conscious, 30 year financing is probably better. The longer the term, the lower the payment. Kind of really all depends. I've seen plenty of first-time young home buyers do 15 year financing, but the point is it all depends on your own personal situation.
What's best for you? Predominant number or amount of mortgages that are originated are 30 year fixed. FHA is 30 year fixed predominantly. VA is 30 year fixed predominantly.
Paula: So what are some additional costs that I may occur when I'm applying for a mortgage?
Marc: Well, additional or what's standard?
Paula: Standard.
Marc: So standard is going to be your loan origination fee from the lender and appraisal for the financing, title, insurance. Settlement fee to the title company or attorney depending on your state and whether or not you're an attorney state. And then the rest of the fees are all kind of small ancillary fees, credit report, small fee, recording fees, small fees. Realtor may have a compliance or an administrative fee that they charge on every transaction. That could be also one.
You'll have a home inspection. You want to get a private home inspection. That's an additional fee. And then if you're purchasing a home that is on a private water system and a private,sanitary system, like a well and a septic, you might want to incur the cost and get a water test done to make sure that your water is safe for drinking.
You might want to get a septic test done to make sure that the septic field and septic tank are working properly. That's a major cost. If that has to be replaced. Like five digits to repair.
Paula: Okay, Marc, is there anything else that you would like to share with us?
Marc: I would just say, if you're getting ready to purchase your home and make one of the largest investments you're going to make in your lifetime, make sure you work with somebody local.
It's very important to work with people in your local market and to build a team. Not only mortgage lender, but also realtor that are local and working for you. It is so easy to get lured in by some form of online advertising. And now you're calling a call center in Arizona or North Carolina or someplace like that.
And you have no personal connection with this person. Sure. Can they originate your mortgage and probably close on time? Probably, but that local lender and local realtor team is the best combination to get your offer accepted in this crazy real estate market. And to accomplish that goal of purchasing a home.
Paula: So, Marc, thank you for joining us today. If somebody wants to get ahold of you, if they have any questions, how can they contact you?
Marc: Well, I have a website like everybody. It is thatmortgagebanker.com. I am here in metropolitan Detroit. Phone, text. Phone number is (248) 379-6749. I am powered by Ross mortgage NMLS number 533706.
Paula: Okay, Marc, we'll include your contact information in our show notes for this episode. Thanks everyone for tuning in. If you have any questions or would like to reach me, you can reach me at paula@paulachristine.com or visit my website, PaulaChristine.com. Thanks and take care of yourself.