Is this a bad deal?

Mamagregory · April 2014

I'm living in a house with a 5 yr lease option contract. We put $8700 down for the option and $200 per month of our rent goes towards the downpayment in addition to the $8700 if we buy the home within the 5 years. We've been living here for a year, my credit is up to 695 now and I've been in my current job for a year and a half, similar job before that.

So I've started to apply for mortgages. Quicken loans was the first I've tried - they turned me down because I have a collection account for 7K for a vehicle that got impounded by my ex husband while I was living in a domestic violence shelter. My divorce states that it is HIS responsibility and his only to pay that. It will drop off my credit in December.

The next I tried was what Zillow recommended - Liberty Home Funding. Their loan just seems like a bad deal 4.5% fixed rate but they are charging almost 6k in closing costs (that includes 1800 property tax) - 1.5 points to the lender $1,175, $750 underwriting fee, $395 appraisal, $24 credit report, $9 flood certification, $946 upfront mortgage insurance, $700 attorney fee, $509 title insurance, $97 abstract/title search fee, $741 underneath that - not specified what it is for, $50 hazard insurance reserves, $1800 for 12 months county property tax reserves, $143.71 daily interest charges ($9.58 x 15 days), and $600 hazard insurance premium ($50 x 12 months). This seems like a bad deal - so many high fees! Is this normal?

My next option is a local credit union that was referred to me by a friend. If I deposit $1800 over the next 10 months, they will add in $7500 for my downpayment as matching funds. Only trouble is, I plan on changing jobs to working part time and volunteering part time to help start up a nonprofit. So I feel that I should apply for the mortgage now since later I may not qualify.

I can't apply at my bank because they require a 720 score to even look at you.

What should I do?

Sillygirl45 · April 2014

My suggestion would be to not quit your job to volunteer. At the very least, wait the ten months. How are you going to afford the mortgage? I wouldn't suggest getting a mortgage and then putting yourself in a position where you wouldn't have qualified for it. Is there someone else helping you with the bills, or is it just you?

JMalettas · April 2014

This all seems a little off. Although, maybe I'm not fully understanding. (I'm in Canada, so maybe there's a difference with the process too). So, firstly, you're in a house right now, that you're leasing to own? So you put $8500 down initially, & $200/month goes into your downpayment? Now, is this coming off the total the owners are going to sell to you for, or is this something they are holding, and you can use as your down payment when you go to purchase your home? (Here, you have to put a minimum of 5% of the total cost, down on your mortgage with the bank).

Also, have you looked into regular banks? Usually your bank stuff, and downpayment/lawyers are separate. We got our mortgage through the bank, but we gave our downpayment, property tax pay-ups, lawyers fees and all of that to the lawyer, not the bank. The bank organized the mortgage, and let us know what our payments were going to be. (You can also usually set up your property tax to be paid through the bank if you'd wish). The lawyer took care of everything else. (Setting up everything in our names, dealt with all the $, etc). Call around & get prices on lawyers fees. A lot of the time they vary, & it's all the same work to be done.

Mortgage insurance you can either pay up front, which is usually a few grand, or they can break it up into monthly instalments. (In the long run, you'll always have the monthly instalments if you go that route, and end up paying wayy more than if you had just gone with one lump sum payment route).

4.5% seems like a fairly reasonable fixed rate, but there's the option of a variable rate too, which is generally lower.

Property tax wise, you should only have to pay up for what may have already been paid by the previous owner. (So for example, we bought our house in December 2013, and the previous owners had already paid their taxes for the year. So we had to pay the portion that was paid for December). It was part of the money we gave to the lawyer, and that money would have gone to the previous owners, to reimburse them for the one month they had already paid for.

To me, this seems like a lot of fees! It didn't cost us anything to get a mortgage. We got our mortgage at 2.5%, and there were no fees or costs through the bank at all. The lawyer was about $1800. That was the total cost for them to do *everything*. The only things on top of that, that we had to pay, was the downpayment, the one month of property tax (to pay it up), and I think there was a $200 fee to transfer our names. I can't specifically remember what exactly it was for, but it was around $200. So it definitely was no where near as much as you're stating, in fees.

Also, remember that you generally have to be employed at the same place for a minimum of a year, to get a new mortgage. So you may want to apply & purchase your home before changing jobs.

Hopefully this info helps a bit! Depending on where you live, it may be different than here. Biggest thing is to shop around! There are some really crappy places out there, that are just looking to get as much $ as they can from you. Especially if they know you're not 100% sure on how the whole process works!

Good luck!

*J

Mamagregory · April 2014

I will more than be able to afford it with going to part time, even if I quit my job entirely. I'm affording it now at 800 rent and my mortgage combined with taxes and insurance will only be $600. My partner works full time also. And the nonprofit will eventually turn into an income for me also.

Just can't progress with it while working full time on something else. You can check it out on facebook at Hikers for the Homeless if anyone is curious BTW.

Mamagregory · April 2014

I think it is different here than in Canada. The bank is requiring me to have that 12 months of property taxes to make sure I can afford it I guess. I am buying it in my name only so the income looks lower than it is since my partners income doesn't count (her credit score is too low since she's younger and not as established). All the rules and fees, ugh! Maybe it is simpler just to keep renting and buy it at the end of the 5 years. Just don't want to lose out on that money we've paid already. The amount goes as a credit towards the purchase price so it's not really a down payment in that sense but the bank considers it as that I guess. Idk, that part is confusing to me too. The credit union did suggest waiting until I save another 6000 because that would mean it would be an over 20% downpayment so no need to pay PMI. But with an FHA loan you still pay the upfront mortgage insurance I think.

hoffse · May 2014

Depending on the cost of your house, those numbers sound about right to me. Your interest rate is going to be higher because of your credit score.

My credit union will also require 12 months of reserves for property taxes. The issue is that if you run out of money during the first year (which is probably going to be your most expensive year in the house unless you remodel), and you default on your taxes, the government can seize the property and the bank might be SOL, even though they were the ones offering you the mortgage. Usually the government comes before banks in the line of creditors. So the idea is you have a 12-month reserve upfront so they KNOW you aren't going to default on your taxes at least in the first (most expensive) year.

You might be able to find some banks that don't require this, but many do. My credit score is over 800, and I will still have to present the 12-month property tax reserves at closing for my bank to hold in escrow.

My guess is that the "extra" fee is probably an origination charge. I would certainly find out what that is all about - because if you can avoid paying it that would obviously be fantastic - but I didn't see an origination fee anywhere else in the list you provided.

FWIW, H and I plan to hold back $15K for closing costs, just in case. Anything we don't spend will go back to savings. Closing costs are veeeerrry expensive. If you can shop around and find other banks that charge a bit less for things like underwriting, etc. then obviously that can save you money. But what you listed for insurance, title insurance, taxes, appraisals, etc. all look about average to me. At least, it was consistent with quotes I received from several places.

Also? It sounds like your credit union is giving you a pretty sweet deal. I would truly just sit tight and go that route. If you can wait 10 months you'll get a lot of free money. That seems like an obvious choice to me. If you could easily afford the house while volunteering, then changing jobs should not affect the approval process. What's more likely to affect the approval process is the collections showing up on your credit report. But in 10 months that will be gone too. I would just wait it out.

Is this a bad deal?

Re: Is this a bad deal?

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