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My son & DIL are at a point where they would like to buy a home. They are paying 1000+ monthly rent. They have excellent credit and no debt. They have saved the down payment. While DIL has an excellent employment history, she was recently the victim of down sizing at USC, and will get another job. My son is self employed.

They are hoping to find a starter/fixer in Los Angeles county.

Any advice on how to proceed? What are the chances of securing a loan?

Thanks!

This message has been edited. Last edited by: KG in CA,

Congratulations to them as first time homebuyers in being ready with saved down payment.

Before even looking at homes, I would have them go to their bank or a bank in their locale to be pre-qualified for a loan. Anytime a self employed buyer goes to the bank to be qualified, even pre-qualified, they will have to submit two years IRS returns to the lender.

Many self-employed worker write off too many expenses and as a result write offs can cost them being able to qualify for a home loan, or for a home loan less than desired. Of course, this may not be the case, and a pre-qual will determine.

Lastly, interview buyers agents then chose one to be on their team. One will feel comfortable.

This message has been edited. Last edited by: real estate lady,

Thank you for your reply!

Sounds like your kids are smarter than the average bear.
With interest rates lower than in most folks memory and a giaganitc inventory of homes for sale (short sales and foreclosures included) it's definitely a buyers market. Plenty of time to shop around!

In addition to "good credit" and a 20-25% downpayment plus closing costs, as a business owner dependent on static income do they have a 9 month emergency fund?
Have they factored in every home owner's ongoing expenses? maintenance, insurance, taxes, possibly rising HOA dues, etc.
Have they shopped around for best mortgage - some lenders are offering zero loan origination fees and "points".

As an aside: CA residnts are eligible to join most credit unions - better loan rates and FDIC protection.

FHA is 3.5% down...and most banks facilitate. Negotiations can include seller paying for buyers closing costs and prepaids items (Ins. and Tx) or a portion thereof.

This message has been edited. Last edited by: real estate lady,

I do remember they said they wanted to avoid "PMI"?

I haven't purchased a house in 22+ years, so I have to learn all of this again...

Again, I thank you for your thoughts!

Hi KG,

Buying your first home is a huge! Congrats to your son!
My biggest piece of advice is save, save...and then save some more. Not only for the down payment on the house, but furniture, appliances, and all the things that will inevitably go wrong! After that, go to a bank and get pre-approved to see how much he can afford. I know it's going to be harder to get a large loan for someone who is self-employed. So be ready for that!


I've recently created a great website for first time home buyers/owners that will provide you and your son with a lot of useful info. Check it out:
www.younghomeownersguide.com

Best Regards,
Tony

Sorry, Tony, you may very well mean well BUT NO ADVERTISING IS ALLOWED HERE and that does mean you!

This message has been edited. Last edited by: Idaho Resident,

Update of sorts...

I haven't been questioning DS & DDIL since I know they will ask if they need advice. So apparently they have their ducks in a row as I was just informed that they have been making offers...15 of them so far! In general, their offers may be higher, but the deal is going to cash offers.

Now they are looking at a HUD property...once again I know nothing about that route, but I am sure they are doing their homework.

When we sold our last house I must admit we accepted the cash offer of $20,000 less than list without skipping a heart beat. It is just so clean and fast that way.

Tips and Advice for Mortgage


Different Types Of Mortgage

There are many different types of mortgage, I will list the basic ones here and a brief description:

Capital & Interest: More commonly known as a 'repayment' mortgage. You make a payment to the mortgage company each month which consists of Capital and Interest (hence the name). As long as you pay what you are asked, on time, for the term of the mortgage you have an absolute guarantee that you will owe nothing at the end. It does assume however that you will remain with that mortgage for the entire term. In reality most people will change mortgages / lenders / move home etc at which point the balance and repayments will be re-calculated to reflect the payments to date.

Interest Only: As the name suggests, you only make a payment consisting of Interest Only to the mortgage company. It is then your responsibility to ensure that, at the end of the mortgage term, you have the means of repaying the mortgage balance which will NOT decrease throughout the term (unless you make capital overpayments). In the past this would have been via an endowment policy or similar. The monthly payments will be less that the identical repayment mortgage but remember that you are merely 'renting' the money. Most buy to let mortgages are on an interest only basis.

100% mortgages: Quite simply it means that you are borrowing 100% of the purchase price or valuation whichever is lower. It means that you have to put no deposit down, however you will generally pay a higher interest rate for the pleasure.

125% mortgage: This is similar to the above however it works in as much as you will have a total loan amount of 125% of the purchase price divided between a Mortgage and an unsecured loan, with the same lender. Beware of anything offering you over the purchase price. In the case of a 125% mortgage your property must increase in value quite healthily before you can sell with enough to clear the existing mortgage and loan, and have some profit for a subsequent deposit. Personally I very rarely recommend these to clients, and on the occaisins that I do it is in conjunction with in depth discussion and warnings about borrowing more than the property is worth.

Negative Equity: Not a type of mortgage but I think ties in with the last 2. Simply means that you owe more than the property is worth.

Base Rate: The rate set by the Bank Of England from which mortgage rates are calculated. Think of it as a wholesale rate, you cannot go to the Bank Of England for this money. Tracker mortgages are based on this. They will mirror or 'track' the movements of this rate with a percentage difference.

Standard Variable Rate: Each lender has it's own variable rate. It is a no bells or whistles, no tie in, basic mortgage which is variable and can be whatever rate the lender chooses to set. Discount mortgages are based on the individual lenders standard variable rate, where they offer you a 'discount' off their normal rate.

Fixed Rate: Your rate will be set at the outset to a level stated by the lender for a set period of time (2,3,5 years eg). The rate you pay will not change in this period, then at the end it will revert back to the lenders Standard Variable Rate.

Self Certify Mortgages: This is a type of mortgage suited to people who are unable to prove their income. It does not change or increase the amount you earn, merely allows you to declare without evidence. Useful for recently self employed people with no accounts, or an employed salesman paid mainly on variable commission. The penaties for falsely stating your income are severe and may even land you in prison for up to 10 years.

Remember. Capital & Interest or Interest only are the types of Mortgage, to which all the above variations such as Fixed, Tracker, Discount etc can be applied.


Setting Up A Mortgage

Finding a Broker: This can be done in may ways. I usually suggest that it be someone who is know to you or has advised you satisfactorally in the past. You could ask friends and family for a recommendation or look in your local pages. Brokers will either deal face to face or via phone/email/post, or a combination of the two. Either is fine as long as you are fully comfortable with what you are putting your name to.

Usual upfront costs: Depends really on the type of mortgage and which lender you are going through. An average though would be:

Valuation (basic survey) £300-600
Booking/Arrangement fee (Charged by the lender and can be added to the loan) £300+ (some lenders charge as much as 1.5% of the loan)
Deposit (obviously) if you are using one.
Solicitors fees including all associated costs £1000-£1500 (based on a purchase of £120,000-£200,000)
High loan to value fee. If you borrow over 75% of the value, a sinlge premium indemnity policy is required by the lender to protect them against financial loss should they need to reposess. Up to 90% most lenders pay this for you. Over 95% the vast majority will charge it and add it to your mortgage. Varies dramatically from lender to lender but an average on a mortgage of £150,000 would be about £2600.
If possible I also recommend that you ahve an emergency fund of about £1000-3000 to cover misc costs.

What will they lend you: Again this varies from lender to lender, and the individual case (credit history, deposit size, employment history etc) however the average is 3.5-4x single income or 2.75-3x joint income. When calculating the borrowing amount you must first deduct the annual costs of any loans outstanding from your salary before applying the multiples. Ask me if you want examples. Some lenders will work on affordability, where by the look more at your net income monthly and calculate an affordable amount based on that.

Credit Score: This goes hand in hand with credit history, Credit history is how you have conducted your financial affairs over the last 6 years. Credit score is a combination of this along with detailed information regarding payment histories and certain points given for your individual circumstances. You can obtain your credit file at any time from one of the credit reference agencies such as Experian or Equifax.

Information you need to supply:It never hurts to carry out a simple credit search on yourself however just make sure that you dont do it too often.

Prior to my initial meeting with any client I always ask them to provide the following:

Driving License
Passport
3 year address history
3 year work history
3x payslips (latest)
Latest p60
last 3 bank statements
Current mortgage details / original offer
details of any outstanding loans/credit
details of any credit problems in the past 6 years

How long does it take to get the mortgage: Depends again on the lender and the type of mortgage you are getting. As long as the lender/broker has all the info they need you should expect the mortgage offer within 2-4 weeks.

Buying A House

Pretty much all the info you ask for here is in my other post Housebuying Moneysaving Tips

If not then simply ask me for more info

Hows this to be going on with?

Apologies for the length of the post

Anything else you need, just ask me.

Will cover the insurances a bit later.