Ellicott City Realtor Catonsville Realtor

Recently, I've been working with a Buyer who was Pre-Qualified for a VA Loan.  (My Buyer agreed that I should share her story in the hopes of educating others).  My Buyer had a past Bankruptcy, about 5 years ago.  After the Bankruptcy, she was late on two mortgage payments, which was about 4 years ago.  Clearly, she was experiencing some financial distress.  She subsequently sold the home and has maintained a clean credit history since.

Now she's saved enough money, and is ready to purchase another home.  She went to a lender and got Pre Qualified for a VA Loan.  The lender told her that based on her situation, that she was Pre Qualified, but that the loan may or may not go through.

Based on what a Lender is seeing from my Buyer, they told her they could do the loan, and provided her with a Pre-Qualification Letter.  This is where my Buyer stopped listening, and that was her error, she knows.  Because this does not mean that the Lender will do the loan.

My Buyer, however, hears this as Lender legal-speak, and proceeds to look at homes under the assumption that she has been approved for a loan.  Together, we find a house.  Now that we are approaching underwriting, the truth is out.

My Buyer meets all of the VA Loan Programs qualifications for income, assets and credit history and score.  But because of her past financial difficulties, this loan cannot be automatically underwritten - it must be underwritten manually.  We are finding out that Lenders are backed up with manual underwriting, and these loans typically take much longer to fund, if they fund at all.

Here are the real questions:  Was my Buyer really Pre Qualified?  Should she have waited to look at houses until she got an approval?  (The problem is that you have to have a house under contract in order to get an approval).  The answer is probably.  The issue is not that she doesn't meet VA Guidelines;  the issue is that, unlike the past, the Lender is concerned that this loan could not be sold on the secondary market.

What we as Realtors need to understand, and what we must convey to our Buyers and Sellers is that when a Lender says that a Buyer is Pre Qualified or Pre Approved but that the loan may or not fund, unlike loans of the past, this time they mean it. 

You may have heard of FHA loans or FHA Mortgages - but do you know what it's about?  An FHA Loan is a loan that is guaranteed by the Federal Government.  It allows a buyer to put down as little as 3.5% on a property, which is very helpful in our market where home prices can be high.  FHA Loans are very common in our area, especially since the zero-down lending market has disappeared, and since the Government raised the limit to as high as $625,000 in some areas.

Other benefits of FHA loans are that they offer relaxed credit score guidelines, lower PMI (Private Mortgage Insurance) than Conventional Loans, and non-occupant co-borrowers.  Further, the Seller can contribute a substantial amount toward closing, as much as 6% of the Selling Price.

Graph A

It is a common misconception among borrowers that a 15-year mortgage is a better use of their money than a 30-year mortgage, but for the disciplined borrower, that is not necessarily true.  Take the example illustrated in Graph A. 

At the end of 15 years (180 months), the borrower with the 15-year mortgage, will have paid off his mortgage in full.  At the end of the same period, however, the borrower with the 30-year mortgage will still owe $217,677.  On the surface, it appears that the 15-year borrower is in a much better financial position.

But let's look a little closer. The 15-year borrower has been paying $676 more every month than the 30-year borrower. If the 30-year borrower were to invest that same $676 and, over the long term, earn an average of 10% interest, at the end of 15 years (180 months) that investment would be worth $280,207. Taking this into account, the 30-year borrower, who still owes $217, 677, actually comes out $62,529 ahead of the 15-year borrower.

Graph B

Now, let's look at the second 15 years to see the true opportunity cost of the 15-year mortgage. Let us assume that the 15-year borrower begins investing the entire $2,572 he has been spending on his mortgage payment and the 30-year borrower continues making his mortgage payment and investing $676.06 a month.  In Graph B you can see that by the time the 30-year borrower pays off his mortgage his investment account will be valued at $1,528,225 while the 15-year borrower's account will be valued at $1,066,130.  Due to the 15 years of missed investment opportunity the 15-year borrower ends up missing out on a potential $462,995 in growth.

This article was written by one of the Mortgage Bankers I work with, Robert Reilley of Vision Mortgage.  You can visit Robert's website by clicking here.

I know many people have different opinions regarding paying off a mortgage as quickly as you can afford, or using the above strategy.  I wanted to share with you that I believe that the above strategy is a real option, and it's something that makes sense.

Everybody's situation is different, and everyone feels differently about the mortgage interest deduction.  It's important, though, to consider all of the options you have available when making a decision about your financial future.  I'm always available to talk to you about your situation, and your options.  Right now, 10% would be a really great return, and returns fluctuate, so the above information is just an example of what is possible.  For a complete discussion, give me a call.