I have an underwater mortgage but would like to move up. Will I qualify?
I purchased a condo in 2006 that, of course, has greatly depreciated. Even though I put 20% down, half of the neighborhood foreclosed and the condo value depreciated from $ 120K to about $ 40-50K! I still am underwater by about $ 30-40k.
Since then, I met and married my wife and she moved in. We would like to move out of my “bachelor pad” and start a family. We want to keep the condo to avoid selling at the bottom of the market and taking a bath, while still qualifying for a new house. I could easily rent my condo to cover most or all of the costs. We are hoping to close this fall (October 2011)
As always with these types of questions there are a lot of parameters, so I’ll lay them out for you:
Our monthly gross income is $ 8,000 – this is solid w-2 income, not self employed or any other type of income.
Our monthly debt is as follows:
Mortgage: $ 618
Association fee: $ 124
Property taxes: $ 133 (and dropping)
Car payment 1: $ 583 – 0% loan will be paid off in March, 2012
Car payment 2: $ 421 – 0% loan will be paid off in May, 2014
Student loans: $ 20
Credit: the lowest of both of our credit scores from any of the 3 bureaus is 720.
Down payment: We will have $ 47,000 available for down payment and closing costs.
Loan amount: We are interested in homes valued around $ 250-260k, so the loan amount would be around $ 210-220k depending on closing costs.
Other assets: approx $ 40K in non-liquid or retirement assets.
Doing the math, our current debt-to-income back ratio is 24%. However, if you exclude car payment 1, which will have 5 payments left by the time i apply for this, its about 16.8%. I could even use some of my cash to just pay it off if a lender wanted to include it as debt.
I think this leaves a lot of wiggle room for us to qualify for a new mortgage, even if I have to pay PMI I would love to get out of here. Note that I did not include rental income in the equation because
I do not want to rely on having a tenant 100% of the time, I want to be able to afford both payments on my own.
Short selling,strategic default, etc. are last-resort options at this time. I feel they are unethical since I can pay the bills comfortably and I do not want to ruin my credit.
So all of my math seems to point to qualifying for a loan in my desired price range, without pushing the DTI above the limits.
I plan on speaking with an advisor on this but I wanted to know before i start this process if we are likely to qualify based on this information? Sometimes it seems that honest people who save and pay their bills on time are getting screwed in this world, and I just want to make sure I’m not off base with anything.
update: thanks for the response – the insurance is rolled into the association fee, which is why it is excluded. The larger car payment can be excluded because it will be paid off.
Sorry but you have to much debt. Plus you left out payments you are currently paying such as Homeowner’s insurance. Pay off the cars since that is sucking up 1k a month.
You can’t include the 7k closing costs in your loan so your down payment is 40K
Stay at 200k home price and avoid the PMI
Don’t see any Emergency Savings Account either. That should be at 9 to 12 months of living expenses
Lenders are really tightening up the requirements. Would help if you got your credit score to the 750 so you qualify for a conventional loan.
Was this answer helpful?
LikeDislikeThe mortgage on the condo is going to hurt you until you have at least a full year of stable rental income, preferably from a single tenant. At that point most lenders will look at it as a wash if your rents cover most of your outgoing cash on the rental unit.
A $ 200k note will run you about $ 972 P&I per month at 4.15% (assumes a 750+ FICO) so figure $ 1,300 a month for PITI. That pegs your DTI at close to 40%, well outside the affordability target of 34%. That’s partially offset by a housing cost ratio of around 17%.
Once you have a tenant in the condo for a year the condo costs will drop from the ratio (they won’t consider the income, just treat it as a wash) and with the higher car note being paid off your total DTI drops to below 22%.
While the numbers look to be a bit of a stretch right now, things are moving in the right direction. Although most lenders have tightened lending criteria the ones who are being shut out are those with no chance of being able to afford the payments. You’re not in that position if you keep moving in the direction that you are so you may be able to find a lender who will work with you.
I would like to see some rainy day savings too. If you use the $ 47k for down payment and closing costs, your emergency funds will be wiped out. That’s never good. I did a re-fi while I was unemployed back in 2009 largely because I had over a year’s worth of income in readily available liquid investments, so having (or not having) a significant emergency fund can impact the lending decision.
Was this answer helpful?
LikeDislikeI think you have covered all your bases and you should be able to do this. I tried to be conservative with my calculations since taxes and insurance can vary depending on your area and preferences and we don’t know what interest rates will be by then. I assumed 2% of the purchase price for taxes and assumed conventional rates will increase 1% from today with the higher end of your price range to reach the following numbers:
$ 1337 P&I $ 220K @ 6.125%
433 Tax
98 Ins
59 PMI – per MGIC rate card
$ 1926 total payment – housing ratio 24%
$ 875 Condo expense
421 Auto
20 Student Loan
$ 3242 total debt pmts – total ratio 41%
Monthly PMI for FHA loans is about to increase, and would add about $ 150 to this estimated payment. Lenders will exclude your car payment with 5 or fewer payments left. Your $ 47K should be enough for your down payment and closing costs and while you didn’t say it was all you had, you still have some retirement funds for reserves. I have allowed for a 1% jump in rates, so unless something really crazy happens between now and October it look like your plan will work fine. Good Luck!
Was this answer helpful?
LikeDislike