As part of Wealth's housing week, Brad Smith sits down with William Raveis Mortgage regional vice president Melissa Cohn to outline what prospective homebuyer's need to know about preparing to buy a house.
To watch more expert insights and analysis on the latest market action, check out more Wealth here.
Well, it's housing week on wealth and we have the home buyers playbook with everything that you need to know about every step of the home buying process from the planning stages to the closing process to the first year of home ownership. And today we're focusing on the first step here, getting prepared. Joining me now, we've got Melissa Cohn, who is the William Ravish Mortgage regional vice president. Great to have you back here with us. So let's start with the basics. What are the guidelines for qualifying for a mortgage?
Well, the first thing to figure out how much of your income a bank will allow you to use to qualify. Um, for a conventional fixed rate, meaning something of under 806,500, banks will allow you to go up to 50% of your monthly gross income to cover all of your indebtedness. So that would be the mortgage payment, real estate taxes, insurance, if there's an HOA fee, and any other debt that you would have, car loans, student loans, credit cards, other mortgages. Um, if it's a jumbo loan, many lenders cap you at 43% of your monthly gross income. And if you're going to apply for a non-QM loan, meaning a bank statement loan or a profit and loss statement loan, there are lenders that will let you go as high as 55% of your monthly gross income to cover your debt.
And so, Melissa, how does qualifying for a mortgage work if you are self-employed, perhaps?
Well, you know, people who are self-employed often times, their tax returns are not necessarily reflective of what their actual income is. So we've had the advent of all these non-QM, meaning non-qualified mortgage lenders that have come out and now offer you the ability to do a bank statement loan, for example, where we could take 12 months of your business bank statements if you're self-employed, and the bank will give you credit for a percentage of all of the deposits as your stated income. We could also do it with a profit and loss statement that would be prepared by your CPA for the prior 12 months, allowing you to show or use more of what your actual income is versus what your taxable income is.
And so how does this kind of come back to your credit score? How does your credit score impact the type of loan, the type of mortgage you're going to get approved for?
Well, first of all, all banks impose some sort of minimum credit score. With an FHA loan, probably the most aggressive, you can have a credit score as low as 580. Um, but for a conventional loan, you figure you can go down to like 620 on a credit score, and for jumbo mortgages or an interest-only loan, many banks require that your score be over 700 or even higher. Um, if you're looking at the non-QM lending, which is very popular these days, you know, those banks will go as low as 620. But your credit score will determine what your rate is. The better the score, the better your rate. They'll determine the maximum loan to value. So if you have a low credit score, a bank's probably not going to let you go to 90% financing on a jumbo or a non-QM type loan, on a conventional if you can. And also, the, you know, it's going to impact the rate that you're going to get. The higher your score, the better the rate, the lower your score, the worse the rate.
So how much financing can prospective home buyers get?
Well, if you're a first-time home buyer, you know, Fannie and Freddie allow you to go up to 97% financing. Um, there are even lenders that offer, like FHA has a 100% financing, or a bank will give you a 96.5% first mortgage and then lend you the extra 3.5% financing to get you all the way up to 100%, 100% financing with the FHA guidelines. If it's a regular conventional, as I said, 97% financing. If you're not a first-time home buyer, 95% financing. And if it's a jumbo loan or a non-QM type of loan, you're probably going to get capped at 90% financing.
And so for those who are still considering if owning a home is right for them, how do they kind of go about the calculus of making sure that, you know, if they're renting right now, that that makes more sense versus if they're owning a home and kind of going about that jousting, if you will, on the way to home ownership?
Well, I mean, it's always a lot about cash flow. You know, is it cheaper on a monthly basis for you to rent, remembering that your monthly rent payment is based on your net income and not your gross income. If you buy and you take a mortgage, your real estate taxes and your mortgage payment up to $750,000 worth of interest is tax deductible to you. So it's really a question of looking at the numbers, looking at how much of a home can you afford and how long do you think you would be in that home? And if you're looking for something that's very temporary, it may make more sense to rent. But if you think that you're going to make a move and it could be for a period of time, you know, it may make more sense to buy. You get the tax deduction and hopefully real estate values will appreciate again and then you would have all that built-in equity.
Melissa, always great to see you and get some time. Thanks so much for breaking this down with us.
Oh, my pleasure. Anytime.
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