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Some Very Specific Mortgage Questions — and Answers

Three housing questions today.

Name: Brad Makela

Question: I am 57 years old, and recently married. Both my wife and I own homes. In the next few months, she is going to sell her home. I currently have a 30-year mortgage at 5.75 percent. My credit rating is average due to some late bills, and a lot of credit card debt. My wife’s credit rating is outstanding, and she has very little debt. I would like to re-finance under her name, and get a fixed, 10-year mortgage. Could I sell her my house for $1.00, and let her re-finance it under her excellent rating? We both earn around $70,000, and the mortgage is $165,000.

Paul Solman: Hmmm. I must be missing something. Your assets will not be co-mingled, yet you would give her the house with no legal claim on it?

But let’s assume that’s okay with you. In that case, after you’re married, why do you have to go through the exercise of selling her the house? Why not just give it to her with a quit claim deed? She’ll then own it, and be able to use her credit rating to refinance. We’re not talking huge differences, though. According to MyFICO.com, here’s the relationship between rating and rate:

score           APR             Monthly payment

760-850           4.144%            $1,457
700-759           4.366%            $1,496
680-699           4.543%            $1,528
660-679           4.757%            $1,566
640-659           5.187%            $1,645
620-639           5.733%            $1,747

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Name: Brian Wall

Question: I have a mortgage and a frozen line of credit with Chase bank. I would like to sell my town home and buy a single-family house. Between the line of credit and the closing cost with selling my place, that eliminates any and all equity I have in the home. That leaves no money for a down payment on a new home. Is there any way I can avoid moving in with the in-laws to save money for a down payment? If I stay with Chase for my new loan will they transfer the line of credit to the new property? Any suggestions or ideas?

Paul Solman:
No, Chase won’t transfer. “Yes,” said my wise-cracking real estate broker brother-in-law, tongue in cheek, when it comes to suggestions or ideas: “Buy a tent.” But he has less cheeky, more useful advice as well. The FHA (Federal Housing Authority) is doing much of the new home financing these days and is offering loans with only 3 ½ percent, for owner-occupied homes, income-tested to make sure you can cover the payments. Is that an option for you? If not, perhaps it is for some readers in a similar situation.

According to the FHA website, you:

  • Must have steady employment history or worked for same employer for the last two years.
  • Must have valid Social Security number, lawful residency in the U.S. , and be of legal age to sign a mortgage in your state.
  • Must make a minimum down payment of 3.5% on the house, or 10% down if your credit score is between 500 and 579. The money can be gifted by a family member (conventional financing does not allow gifting).
  • Must have a property appraisal from an FHA-approved appraiser.
  • Mortgage payment (including principal, interest, property taxes, property insurance) needs to be less than 31% of your gross monthly income.
  • Monthly debt (mortgage, credit cards, auto, student loans, etc.) cannot be more than 43% of your monthly income.
  • Must have a minimum credit score of 500. A credit score of 580 and above requires a 3.5% down payment and a credit score of 500-579 requires a 10% down payment. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
  • Must be two years out of bankruptcy, with good credit.
  • Must be three years out of foreclosure, with good credit.

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Name: Merritt Dunn

Question: How about this for solving the housing crisis? Instead of 20 percent down, just 2 percent down and then one year’s principal, interest and taxes in escrow. This way if a person loses a job, they have a year to get a new one or sell the home. In addition, more insurance could be bought that would pay a second year’s payments after the first. Banks would lend if a year or two’s payments were in the bank, homes would be bought and built. And this is much less onerous than 20 percent down. What you think?

Paul Solman: As the above answer notes, you can already get FHA loans for only 3.5 percent down. And if you live in certain rural areas, the Department of Agriculture has a zero-down program, my in-laws assure me. (See their website for details.)

The problem right now is all the homeowners underwater in America to whom your plan doesn’t apply. That is, all the people whose homes are worth less than the money they owe to maintain ownership. They are the housing crisis. On June 7, the financial information firm CoreLogic released “negative equity data showing that 10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011, down slightly from 11.1 million, or 23.1 percent, in the fourth quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the first quarter.”

Here are two charts from CoreLogic that summarize the situation for underwater Americans as of January-March 2011:

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