First time buyers, good credit, interest only?

Question

My partner and I are purchasing a new home and we are receiving several mortgage offers. His score is 755, mine is 780, we have no car loans, no cc debt, I have 20K in grad school debt only. We make about 55-60K and currently pay $1400 in rent a month. We are trying to figure out if a 80/20 is right for us to avoid PMI. Do you pay two closing costs?
My partner is self-employed, so we need to go stated?
We can "borrow" 15% from my parents (but have to pay back with interest). We are trying to figure out if we can afford 250K and the best rate we've gotten is 6%. Taxes in the FL area we are moving to are going to be 4K-5K and we are having a hard time figuring out how much home owners insurance is going to be, as no one wants to give quotes in FL. At what point do you need to get homeowners insurance?
If the sellers have already paid the yearly taxes, do we pay them next year?
We are working with two different brokers and just trying to find the right mortgage. Any thoughts?

Answer 1

Your asking all of the right questions. First, you do not have to go stated income even if self employed, you can provide tax returns however if your tax person did their job right then tax retuens will most likely not work for you. With your scores there should not be any real penalty for stated income.

To determine if a single loan with PMI is right... Have your broker give you the payment with PMI and as an 80/20. Which ever payment is best is the way to go. You will pay additional closing costs for an 80/20 but not all that much more... You'll have 2 recordings (1st lien/2nd lien) etc... Your loan officer should be able to get you the closing numbers from the closing agent going either way. This will allow you to make a smart decesion.

You will need to have homeowners insurance at closing, however the lender will not fund the loan without the insurance in place so now is the time to get it. Find an insurance broker or a direct agent (State Farm, Allstate etc...) for your quotes. They will issue a binder with a policy start date the same as your closing date. You can either pay them for the year when your at the office or have it paid through escrow. I would elect through escrow just in case the purchase falls through you won't have to wait for a refund from the insurance company. I have several agents I have worked with in Florida if you would like thier info.

Regarding the taxes... the sellers portion will be prorated up to the date title transfers. You will see taxes on your closing statement as it is a part of closing costs. You will most likely receive a supplimental tax bill at the end of the tax year which will be charging you for the difference in the tax base from the seller to you. Your taxes for the remainder of the tax year will be calculated at the rate the sellers paid. You will owe a difference as your taxes will be calculated based on your purchase price.

As for insterest only... Your interest rate will be higher for IO then if you amortize although your payment will be lower since your only paying interest and not any principal. I would look to see if you can comfortably pay an amortized payment first. If not then go with the IO. Keep in mind that when the water heater breakes at 3am and starts to flood your going to have to deal with it. It is always wise to make sure you are not really dumping all of your money into your payment. With stated income loans this is easy to do since the lender does not verify your income. They just make sure what is stated is reasonable for the job title/industry.

As for borrowing the monies from your parents... this may actually be better for you. They will need to secure a lien against the property in second position and your lender on the 1st will make sure that your DTI works with that note but I will bet your parents will give you a better interest rate than a bank! Just make sure that you pay them on time every month, with a check. Write mortgage payment in the memo line. When you try and refi one day the new lender will need copies of the cancelled checks since your parents won't be reporting your payments to a credit reporting service. The checks will prove you were never late on the payment.

If you need additional assistance, drop me a line.

Kevin 866-562-6838 x 106
[e-mail]

Answer 2

As a Florida Mortgage broker I will offer my 2 cents worth. Interest Only loans are still strong bets in our market place as even though we are not gaining the 20-30% in equity we were 2 years ago- Florida is still a very strong market. In addition there is no rule that you can't pay additional towards the principle balance should you want to at any time.

The 80/20 is the way to go to avoid PMI, but it does make your rate a bit higher. But the other answers reporting that PMI is tax deductable are also correct- as is the interest on your 2nd mortgage. In a self employed tax situation you might choose to take the 2nd mortgage to be able to deduct that interest as well. You do pay closing costs for each loan- but the 2nd mortgage is generally very small other than the taxes due on that portion of the loan- The taxes would be the same in total between the 2 loans as they are on a single loan- though 2 of them are figured against the amount being financed so the 15% from your parents could make it a bit cheaper. With your credit scores there should not be any difference in rate for going full doc or stated income.

Borrowing the 15% from your parents might also be a good idea to keep your interest rate down. You should be able to list it as a gift from your parents regardless of the need to pay it bac Just keep that agreement between you or simply draw up a repayment agreement and have it notarized.

Insurance is tough in Florida and most companies will not give you a quote without the first 2 pages of the appraisal. I would be planning on 1-1.5% of the home value for the premium price though. You do have to have it in place prior to the closing and you must pay for a full year in advance- the payment can be done at closing though.

As for the taxes- the sellers will get refunded for the part of the taxes they have paid. But since taxes are paid in arrears- this doesn't really afffect you. Typically you will need 3 months worth in deposit for your escrow account if you are including them in your payment. If not- you won't have to make a tax payment until they come due again next January- though you get a discount by paying them early.

A 6% rate is good right now if you are paying 1% or less as an origination fee. If you are paying more than that- just complain a little and they will bring it down.

Hope some of this helps...

Answer 3

Do not ask your realtor which loan is best. Most don't have a clue, and none will be as deep into your finances as the brokers you are already working with.

There are some 2nds where the bank pays your closing costs for you, but as the costs are so stupidly high in FL, they may not pay all of them. The title insurance and taxes alone are just ridiculous compared to other states.

Your loan officer should be able to show you, very clearly, on paper, whether one loan at 100% with mortgage insurance is cheaper than an 80/20. The 2nds are always higher rates than 1st mortgages, so that's a factor. Also, for any loan application taken in 2007, mortgage insurance is tax-deductible, so that could make PMI the more attractive option.

If FL home values start to climb again, you could be able to drop your PMI in just a couple years. If you do an 80/20, the 2nd rate won't drop.

Get your two brokers to map out your options in a clear format, including payments, the time you think you'll be in the home, closing costs, etc... That's their job. Not your realtors.

And property taxes are pro-rated to the day you close. So if the seller has already paid them, you will reimburse them for every day you own the property that they've already paid for, at time of closing. This should also have been explained by your broker, and shown clearly on any good-faith estimate.

Answer 4

I don't know about your 80/20.The traditional rule of thumb, I'm sure you know is 3xyour annual income (between you AND your partner I assume is 55-60K), which you are breaking. But it's just a rule of thumb. It doesn't mean anything for the lenders. Regarding your insurance,just call the insurance companies and sit down with them as you would if you needed coverage, get your numbers and take some time to think about it. There shoudn't be any money or signatures until you are both happy with the numbers.Or go through your agent and inquire as to what the seller pays now. You must have insurance before closing because the lender wants to know that their investment is protected. Your insurance company will sign your policy effective either the day of your closing or the day of move in. Either way the property will be covered by either you or the seller. The motgage officer also needs to know who your insuarnce company is so thay can input the monthly payments into your contract and an escrow account. This ensures that the insurance premiums are getting paid and their investment is secured. If the seller has padi taxes, you don't need to pay them until the next year. What will happen is that part will also be configured into the contract and the same escrow account. Every month you will pay a certain amount. This will include your actual principle,monthly payment,taxes and insurance premium. Everything except for the taxes goes out. The taxes are collected and paid out to the state or county when they are due. This also enures that taxes are paid when they are due. Your mortage officer is responsible for determining how much will be taken for taxes every month by looking at what your annuals are. 6% is a good rate. I had a fico of 767 when I purchased my home. I recived a 5.58%. I was offered a lower rate, but I anticipated rates would be dropping within weeks so I waited and they ended up rising, so I locked in the 5.58%. So far I am calculating this to be very expensive and beyond the rule of thumb of purchasing a home, this is not including your 15% loan (with interest) that you will incur from your parents. I am just looking at the home loan alone. You still have to consider taxes, closing costs(which can be added to your home loan) your insurance and your down payment loan. However, if you each take 55-60K to the bank every year, then it's a different story. In most cases, the seller pays closing costs. If not, the cost of the loan goes up for the buyer, but the asking price goes down.

Answer 5

I would suggest not to do the Interest only loan mainly because
when you purchase your house the actual amount you pay for it and your down-payment are the key. Interest rates are going up. If you plan on staying there for 10-20 yrs Interest rates will go up and down over that time so what you pay for the house is more important than the interest. You should have homeowners insurance which can easily be obtained from your auto insurance agent (most will offer some type of discount) 10-15% off.
If you can afford putting 20% down with at least 2 months mortgage payments in the bank- do that. My wife and I looked at houses in the Boston area for over a year- we ended up buying a new condo about a year ago. But we made the right decision as the market up here now for single family homes is spiraling downward. Some houses have dropped $60-70K in a very short period of time. Hope to have helped out.

Answer 6

1) DONT do the 80/20 to aboid PMI. People often think this is somehow "smarter" because you can deduct the interest. But here's the problem: Say you break even right now because the higher interest balances the PMI. But in 3-4 years, maybe 6-7 years, you'll have some great equity- you'll pay down your principal and the home values will have gone up. Your PMI can disappear with an appraisal. Your 80/20 doesn't.

Yes, you'll have 2 sets of closing costs-- equaling thousands. yes, you'll have to pay two different companies payments each month.

You need to get home owners insurance prior to closing.... the sooner the better in order to be sure its affordable.


There ARE banks that do 100% financing and you still dont have PMI. . . see if any in your area do. Bank of America is doing that in my state, and even paying all my clsoing costs for me.

No, you dont get a 'freebie' on the property taxes. If the current owners paid for all of 2007, say, $5,000 already in taxes and you move in 3 months into the year, they get 9 months or 75% of that 5,000 back FROM YOU, at closing. You pay them back for the taxes-- which will dramatically increase your closing costs. If you plan to have your taxes/h.o. insurance paid in your monthly payments, the bank will also require 2-5 months worth of taxes to go into their account at closing.....

However most home owners break the tax year in 2 and pay one in April and one in November, so its unilkely you'll owe a bunch to them..... its rare to pay the year's taxes up front like that.

Its good to work wtih 2 brokers and see what options you have. 6% for a stated income loan is quite good for a 30 year fixed.

Answer 7

Taxes are prorated to the day of closing. Seller pays everything due up to that point in time. You are responsible for everything that. There may be a credit on on the settlement statement if the taxes were paid for 2006 and the seller is responsible for taxes to the day of closing in 2007. I would have the purchase price increased enough to cover your closing costs so they don't come out of your pocket. Any money you pay at closing should go to down payment and not the closing costs. 5% down may result in a lower rate. 6% is an ok rate. I can offer 5.875% 30 year fixed. Unless you have to, keep away from interest only. That would mean having to refinance at some point in time, it costs a lot in FL. Why set yourself up to have to refinance when you can have a 5.875% or 6% fixed rate mortgage?The 80/20 is ok to keep away from PMI "mortgage insurance". Once again an 80/15/5 = 5% down payment may result in a lower rate.

Answer 8

Getting a 6% rate right now is extremely good. It's actually below the average on a 30 year fixed. One thing that might give you some info on the market is cnnmoney.com. Go to the real estate section. Also, PMI is now tax deductible. So, It might be an option to not use an 80/20. Check this website out. www.rmic.com it's an article on PMI being tax deductible. Good luck!

Answer 9

yes you would paid two closingcost, but the 2nd should not be more then 400. you may what to look at 1 loan with PMI, it is know tax deducable. 6% is a good rate, just make should our not paying points and it should be fixed.

Answer 10

Ask your realtor all of these questions! Have your realtor suggest who to get your loan from and which loan to choose. They are there for this very purpose.
I strongly advise against any interest only loan. The obvious reason is that you are never establishing any equity in the home.
That rate doesn't sound bad to me. Especially if it is a fixed rate. do not get an adjustable rate. Now is not the time for such a loan. Rates are on the rise, your payment can escallate quickly.

Good luck!