“I think we just found our dream house!” Luis and Miriam had been clients for several years and we had become friends. I have helped them with several refinance loans over the past several years. The most recent refinance was just six months ago.
“I don’t know if you remember,” I said, joking, “but we just finished a refinance on your house this year. Are you already tired of that nice loan we got for you?”
“No…but we were driving around on Sunday, and we just happened to stop at this new development close to our house. It’s perfect for us, and I think we can afford it once we sell the old place.”
Luis gave me some numbers—the price of the new home, and what he thought he’d get for his old townhome. I ran numbers for the “best case” scenario—that he would get the full price he wanted for his townhome. Even if that happened, there wouldn’t be enough for a 20% down payment and normal closing costs. Time for Plan B: a smaller down payment, with mortgage insurance.
I created a new application for Luis and Miriam with a 10% down payment. They would have to pay mortgage insurance, but we would be able to remove it once there was enough equity from appreciation. I pulled a new credit report. Their credit scores were high, as I had expected, but they had acquired a new car. Their total payments meant that they would not be able to qualify for the new loan they wanted—in lending terms, their debt-to-income ratio was too high.
I was certain their home would not sell for the high price they were hoping for, so I worked some numbers with a more realistic figure. They’d have enough money for the 10% down payment and normal closing costs, with just a few thousand left over. That would cover their moving expenses, but not much else. The new car was looking like a deal-killer.
Their new home was $500,000. If we dropped the down payment from 10% to 5%, they’d free up $25,000. By happy coincidence, their car loan was almost exactly that amount. Paying off the car loan with the proceeds of the sale brought their debt to income ratio down to a level where we could get their loan approved.
I explained our plan to Luis and Miriam. “You’ll only have to pay mortgage insurance for a couple of years,” I said. “Even with the cost of the mortgage insurance, about $250 a month, getting rid of a $500 a month car loan still puts you ahead of the game.” They agreed, and started getting their home ready for their first open house.
The builder had been willing to accept a contingent offer; this meant that they’d be able to get out of the deal for their new home if their old one didn’t sell. Two weeks later, they had an offer on their home—from a well-qualified, pre-approved buyer. They would clear a bit more cash than the worst-case scenario I had drawn. That was good news.
Five weeks later, they received the keys to their brand new home. By dropping the down payment all the way to 5% and paying mortgage insurance for a few years, they were able to redirect the cash from the sale of the old home to pay off their car. This not only let them qualify for the loan because of their lower payments, but it helped their household budget by a couple of hundred dollars a month.
The limited equity Luis and Miriam had to work with presented a challenge, but with a little juggling—and a client who listened to our suggestions and guidance—we enjoyed a very happy ending.
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