HELOCs calculate interest like a credit card: based upon average daily balance.


Conventional mortgages calculate interest on a simple basis.

Interest calculation formulas used:
HELOC: Daily rate (note rate/365) x average daily balance x days in the month
Conventional mortgage: Note rate/12 x balance on the 1st

Interest over time example:
Starting balance of $150,000
Conventional note rate 5.5%
HELOC annual rate of 5.5%

To complete this side by side interest comparison, a principal and interest payment is applied on the 1st of every month. The conventional mortgage assumes a 30 year amortization. This table shows the additional cost a HELOC would carry if the same exact monthly payment were applied.

Interest tableThe flaw in this assumption is the amount of payment. In the real world, often only the interest payment is applied each month on HELOCs. The key is understanding that interest is calculated daily based upon the outstanding balance. It is for this reason that HELOC interest calculation can work both for and against the borrower. If principal payments are made more regularly than once per month, it can be of benefit to have a daily interest calculation completed. However, if principal payments are made monthly or less frequently, the total interest charge is more than a conventional mortgage at the same rate and same base level of principal payment.

Don’t forget that most HELOCs have a variable rate (some with an option to lock a rate at a cost or addition to the note rate) and are usually tied to the prime rate. So, when the Federal Reserve increases their target rate it raises your HELOC (and other revolving credit accounts) interest rate.

HELOCs seem confusing? Use this simple rule of thumb: for short term borrowing (less than 5 years, perhaps less than that) and an ability to pay more than a minimum payment a HELOC can be a good choice. For long term borrowing (more than 5 years) and a need to have a fixed payment budget, a conventional mortgage is generally a better option.

A real estate bubble is generally defined by over speculation in the housing market. That bubble leads to unsustainable price levels that are generally not affordable by the average home buyer. When prices surge beyond the affordability level it is an indication that home prices are too high.Bubble

Many factors drive affordability. Interest rates, being a primary factor, have a direct implication on affordability. A bubble could be created simply by interest rates increasing which has direct impact on decreased affordability. For example, a $300,000 home financed with an interest rate of 3% may have a total payment [PITI] of $1,725. At 6% the total payment might now be $2,240.

Certainly in the Twin Cities and around the entire Midwest home prices have risen significantly from 2017 to 2022. Coupling that with higher interest rates currently, many could speculate that we are in a bubble. However, in order to properly analyze that we have to look at affordability. If home buyers can still afford to purchase a $300,000 home at 8% rates, then home prices have more room to grow.

The Affordability Index

Per the most recent Minneapolis area Association of Realtors report [http://maar.stats.10kresearch.com/] their affordability index is 102. This is a significant decrease from a year ago (almost 30%). The decrease was driven by a combination of another year of significant home price gains and a doubling of average market interest rates. An index rating of 100 means at current interest rates the average priced home is perfectly affordable for the average income family. By our definition then we are not in a housing bubble quite yet. However, with months of supply still hovering around one month, buyers may be willing to stretch their budget and pay more than what they normally would for a new home. This could be construed as over speculation. We have a different theory.

Old house

What we expect to see happen is home sales slowing down now due to higher interest rates and lower affordability. Buyers will be more reluctant to stretch their budgets further in order to own a home. Unfortunately, home ownership will be out of reach now for many would-have-been home owners. We do not think this will cause a decrease in home prices, rather a stabilization in prices and an end to the 10% levels of year-over-year appreciation gain.

This all changes, of course, if interest rates continue to increase in to the 7-8% range or higher. No one knows what interest rates will do for sure. There are simply too many factors that determine market rates and knowing how all of

them will interact with each other in this new environment is impossible.

How is this different from 2005? 

Nearly everyone who has purchased a home since 2010 has earned it. Mortgage underwriting guidelines have actually been adhered to over the past 12 years. Up to 2006, the mortgage industry could finance nearly everyone, regardless of income, credit, or an ability to repay the loan. The last bubble was caused by over speculation, coupled with a lack of foundation in the financing instruments that fueled that speculation. Today is different – mortgages are on a solid foundation and at time of origination, the borrowers actually had to demonstrate an ability to repay their loan.

The best advice we can give to our clients is if an opportunity exists to own a home within your budget, then take advantage of the opportunity.

First, we should tell you that without an expert Realtor and Loan Officer, your chances of getting an offer accepted today are lower. The number one reason to hire the Furlong Team at Mortgages Unlimited to provide your mortgage is our reputation to deliver. Realtors know we close on time, financing issues are non-existent, and they generally like us.

We recommend some/all of the following tactics for your next offer:

  1. Closing date: always use “On or before” and let the seller determine closing date
  2. Closing timeframe: 30 days or less is possible if required for us to get the house
  3. Written statement: due within 3 weeks of offer acceptance or at least a week prior to closing
  4. Increase earnest money to down payment amount or significantly higher than $1,000/$2,000
  5. Have you considered non-refundable earnest money?
  6. Increase down payment to at least 10% or more if client qualifies with a higher amount
  7. Please send me listing agent’s contact information when the offer is submitted
  8. Send me a copy of the offer
  9. Asterisk clause on appraised value – discuss options with me
  10. Escalation clause on purchase price?
  11. Leave your offer on the table as back up offer if not selected
  12. Rent back option to seller
  13. Close within 18 days- we need to have an underwriting approval first! See our Certified Home Buyer program details here: https://furlongteam.com/mortgage-approval-types/

If your credit score is holding you back from becoming a home owner, it is likely holding you back from other things as well. Credit scores are used for insurance, employment, cell phone accounts and a wide variety of things. Having good credit will not only allow you to purchase a home, it will also save you a great deal of interest and open doors for you that would otherwise be closed.

We recommend two simultaneous approaches to credit building: deal with the negative items and add positive items. We’ll review both below.

DEAL WITH NEGATIVE ITEMS

The thought that negative items will eventually just “go away” is flawed. Collections can turn into judgments, and judgments can stay with you for decades. It is important to deal with these negative items head-on. First step is determining what they are. Fortunately, you can see all the information the bureaus have on file for you for free at annualcreditreport.com. This site is the official site made available to consumers. Don’t worry about your credit score for now – you only want to know what is being reported to the bureaus. Get started here:

www.annualcreditreport.com

The next step once you know what is being reported is to create a plan. List all of the debts on a single page that you can clearly see, along with the list of creditors and their contact information. Make sure you know where the debt is coming from – was it actually yours, is the amount accurate (remember, collection agents and/or creditors may be entitled to additional fees per the original credit agreement or state law) and do you actually owe the debt?

A collection account is an account placed into a special category with the credit bureaus. The category is for debts that have serious delinquency and the creditor indicates to the bureaus that they haven’t been paid as agreed. To remove a collection, the debtor needs to work with the collection agency to bring the amount owed to $0. Settling these debts is an option, and generally any method to bring the amount owed to $0 is advised.

A judgment is a debt that is ordered to be paid by a judge. It is entered into the court system and becomes of record. Judgments do not go away until they are satisfied with the court.

Bankruptcies, foreclosures, deed in lieu, late payments and repossessions are all what they are – meaning none of these require any particular action as long as they are accurate. Some credit repair companies may claim or advertise that they can delete these old bad debts, but our advice is to acknowledge them for what they are and create a plan to ensure they don’t reoccur. Automate your monthly payments to make sure they are made on time, keep your debt within manageable levels, and track your credit on a regular basis to make sure all debts are reported accurately.

Our recommendation is to bring collection accounts and judgments to a $0 balance as soon as possible and to add positive credit. We also recommend that any inaccuracies be dealt with either through the dispute process or by contacting the creditor directly.

ADD POSITIVE ITEMS

You want to have 1 open revolving account (credit card/credit line) and 1 installment account in good standing. It’s important to do this today so you have positive credit building. The revolving account (credit card) doesn’t need to have much of a limit and you should use it regularly (gas for example), pay the balance each month, and keep the balance under 30% of the credit limit. The installment account doesn’t need to be for much either, maybe $1,000, and should have a regular payment set up for 1 year.

Secure revolving accounts require an initial deposit from you – say $300, that they hold and then give you a credit card credit line against that money. It’s a great way to start building positive credit.

Secure installment accounts are loans typically made by a credit union or bank. They put the proceeds of the loan into a savings account or certificate of deposit that are locked up until the loan is paid in full, then the money in savings is released to you. Think of it as a forced savings plan. The loan reports to the credit bureaus to add positive credit.

It is a good idea to check with your credit union or bank to inquire if they offer these types of accounts. Alternatively, here are two online options you might consider for each:

Open a secure revolving account here:

https://www.capitalone.com/credit-cards/secured-mastercard/

Open a secure installment loan account here (request secured, and the minimum $1,500):

https://www.onemainfinancial.com/prequalification

MONITOR

Any of the consumer credit models are ok (experian.com, transunion.com, equifax.com, creditkarma, etc), but www.annualcreditreport.com is the official consumer site. Regardless of what you use, the important detail is that you are actively monitoring progress on your bureau data. Seeing your credit score estimate is good, but more importantly watching how that score change over time will help you to know you are doing the right things.

GET HELP IF NEEDED

You don’t need to do this on your own. Free help is available from the MN Home Ownership Center: https://www.hocmn.org/search/?fwp_audience_services=homebuyer-advice. Tell them we sent you and you should get some great advice from them on getting your credit profile to a good place. We can also help you with creating a plan, reviewing your consumer report, and review your official credit report when you are ready to apply for new financing.

Introduction

When applying for a mortgage in MN, there are a number of approval processes that prospective borrowers should be aware of. It is essential that future borrowers understand the information/documentation required for each mortgage approval process in addition to the level of scrutiny that will be applied with each approval process. We will discuss three approval processes in this particular blog: Pre-qualification, Pre-approval and Underwriting Approval. While pre-qualification and pre-approval both give prospective borrowers an idea of what they can afford, they are two different processes with varying levels of scrutiny. Underwriting approval is an entirely separate, rather in-depth process that determines if a borrower qualifies for loan approval. With this brief outline in mind, we can take a more in-depth look into the specifics of each approval process.

Pre-qualification

Commonly viewed as the first step in the mortgage approval process, pre-qualification is designed to provide a general picture of a borrower’s financial situation. Pre-qualification involves a loan officer and can take place over the phone or online, often times coming free of charge. Borrowers may discuss specific preferences, special considerations and needs related to their mortgage at this point as well. As a prospective borrower, you can include as much or as little information as you want on this step, although more information will grant loan officers a better idea the particular loan that you will qualify for. This financial overview is usually not based on detailed analysis or documentation of a prospective borrower’s income, assets, debt, etc. Loan officers may conduct basic ratio analysis, however, these analysis are solely based on the information prospective borrowers choose to provide to their loan officer. After finishing the pre-qualification process, your loan officer will be tasked with issuing a pre-qualification letter. Notably, pre-qualification typically does not include a credit report review as part of the qualification process, although companies may periodically offer pre-qualification with credit reviews. Again, pre-qualification is not designed to check a prospective borrower’s credit report or determine their financial ability to pay a mortgage, it simply acts as a general overview of a borrower’s finances. Pre-qualification is often required before a seller even considers a mortgage application, serving as a foundation for the other two approval processes. Relative to the pre-approval process, pre-qualification lacks the scrutiny and in-depth financial analysis that pre-approval entails. Therefore, even if you are provided with a pre-qualified loan estimate, this estimate is subject to change due to the sheer lack of information underlying a pre-qualified estimate. With this in mind, pre-qualification should not be used to submit an offer on a new home as many details are overlooked during this process and realtors are not likely to value the offer very highly.  

Pre-approval

The pre-approval process goes beyond the reach of pre-qualification and is based on financial documentation that the loan officer receives and reviews. At a minimum, the loan officer will review documentation regarding a borrower’s qualifying income, available assets for down payment and credit report to ensure that they meet the loan guidelines. Prospective borrowers will need to complete a mortgage application at this stage prior to receiving pre-approval. Other key actions undertaken by loan officers at this stage include credit history checks and down payment estimates. Ultimately, prospective borrowers will receive a specific loan amount estimation and they may also receive interest rate estimates towards the end of this process. Finally, loan officers will run prospective borrower applications through an Automated Underwriting System, providing a means of approving the mortgage. After this stage is complete, prospective borrowers will be given a pre-approval letter and conditional commitment for the loan amount. Request your preapproval today here: Get Preapproved. Theoretically, the home search can begin at this point as the borrower has knowledge of what they can obtain in financing. It is also worth noting that pre-approval letters are only valid for a certain amount of time, usually 90 days. Mortgages Unlimited’s pre-approval letters are valid for 120 days, providing a wider search window for those seeking out their ideal home. While the pre-approval process is rather in-depth, there are certain pieces of financial information up for interpretation that could be viewed differently by the underwriters compared to the loan officer’s final decision. The importance of moving to the third level of approval is highlighted here as it provides another level of scrutiny and risk assessment. With this is mind, we can discuss the third and final approval process: Underwriting approval.

MN Mortgage Approval

Underwriting approval

Underwriting approval is the third and most thorough approval process available to prospective buyers. Loan officers will compile a prospective borrower’s financial documents which can then be given to an underwriter. The underwriter assesses risk and ensures that a borrower matches the criteria to receive a loan by reviewing the buyer’s financial documents and accuracy of such documents. Aside from conducting an additional credit report analysis, underwriters may review tax returns, W-2s, pay stubs, credit reports, income statements, employment verifications, asset statements, calculate debt-to-income ratios and other relevant financial information. See typical documents needed here: Documentation Requirements. Mortgages Unlimited provides the added benefit of having underwriters review and verify loan amounts and terms, adding another layer of review to solidify the approval process. Ultimately, underwriters will deliver one of four final decisions after thoroughly reviewing the prospective borrower’s financial documents: Denial, Suspension, Approval with Conditions or Approval. If a prospective borrower is denied approval then the underwriter will include a specific reason as to why the denial occurred and when the prospect can re-apply for approval. This is a rarity, as often the loan officer will see that denial is likely and not submit the file to underwriting. In the case of suspension, a prospective borrower often needs to provide further financial documentation/information. The prospect can then reactivate their application after providing the necessary documentation/information. Approval with conditions indicates that a prospective borrower’s application has been approved but the borrower must meet certain conditions to finalize the approval. It may be that a prospective borrower has accounts they must pay-off or bank statements they must provide, for example. Completing these conditions will lead to the conditional approval of the borrower’s application. Finally, prospective borrowers may receive an approval indicating that their application has been entirely approved with no additional conditions. A Certified Home Buyer Commitment™ will be granted at this point and the approval process is complete. Generally, underwriting approvals may speed up the approval process due to the comprehensive nature of the underwriting process. Additionally, underwriting approvals provide a greater level of certainty to Realtors that the borrower will gain final approval on their mortgage. If time permits, an offer should always be submitted with an underwriting approval letter and not a pre-qualification or pre-approval letter.

Bringing it Together

As stated at the onset of this blog, prospective borrowers should be aware of the various approval processes and their nuances before moving forward with a mortgage application. The more in-depth the approval process, the greater the likelihood is that your application will be approved. For example, Mortgages Unlimited offers an underwriting approval process in which your income, assets, employment and loan program are reviewed are verified. Additionally, your loan will be personally reviewed by a Mortgages Unlimited underwriter and the buyer will receive a Certified Home Buyer Commitment™. In providing these services, we hope to provide an in-depth and transparent path to approval that reduces your anxieties and maximizes your chance of approval. For more information the approval processes available through Mortgages Unlimited, submit your preapproval request today – www.furlongteam.com/apply!   

Buyer must qualify under program guidelines. Not all borrowers will qualify. This is not a solicitation and not a commitment to lend. Mortgages Unlimited is an Equal Housing Opportunity lender.

BUILDING WEALTH

Mortgage Lender Bloomington, MNWhen I was 24 and a single guy I bought a four-bedroom house in Bloomington. It wasn’t because I needed four bedrooms for myself, it was because I had three other college roommates that were all looking for a place to live. I thought to myself “what an opportunity – I could charge each one of them $500 a month for a room and have $1,500 a month coming in.” The corresponding mortgage payment of $1,400 per month was covered and I had $100 to spare. Granted that was 2004 and the recession was right around the corner. Had I been smarter I would have sold the house after a couple of years and taken my gains, but you can’t really time the market. So, fast forward 15 years and now property values have reached an all-time high. Sure, the short-term gain wasn’t there, but over the long-term I built a great amount of wealth. And let’s not forget about all the rent money that I had coming in from my roommates all those years. Now I have four rental properties, Partner in a residential real estate development company, and a full-time role as a MN Mortgage Loan Officer. For most Americans owning real estate is the number one way to build wealth. So how do we get included when most of you feel precluded from homeownership? This is where strategy comes in.

AFFORDABILITY AND QUALIFYING

Who says you have to be able to afford a home all on your own? Some mortgage programs allow for rent from roommates to be counted into your income to help you qualify. On a duplex, if you can find one that’s reasonably priced right now, you can use the rent from the other unit to help you qualify. If you buy a big enough house and have enough rooms it is very possible to have your entire mortgage payment covered by the rent and you live there rent-free. Use that money to work aggressively at paying off some of those student loans or other debts that you incurred while starting out your career. It only takes a little bit of strategic planning to make homeownership possible for many who thought that it wasn’t. We have far too many scenarios to play them out Dave Ramsey style here, so the best thing to do is get started with a preapproval request. We’ll go through the strategic planning customized to your scenario.

THE STUDENT LOAN BATTLE

I know many millennials are straddled with student loans. We hear it on the news all the time. I couldn’t tell you the exact statistics, but let’s say on average a millennial has $20,000 worth of student loans. We think this is a exclusionary factor for homeownership, when in fact it’s really not. Consider that mortgage underwriting requires us to use 1% of the student loan balances in a monthly payment analysis – that’s $200 a month. Some programs allow us to even use those income-based repayments to help you qualify for a mortgage. So if you have a salary job making $48,000 a year, have a student loan and a car payment, the student loan is 20,000 the car payment is 400 bucks, that means you could still qualify on your own for a $1,400 mortgage payment. That could still get you a $200,000 home. I know a few Realtors that could find a plethora of $200,000 homes with three bedrooms, you rent out each room at $600 a month and presto you’re living large for a $200 mortgage, less than rent, less than your roommates pay, and now you’re sharing in equity appreciation.

WHY NOT?

Now your parents might say go for it and “get the heck out of our basement.” Your Uncle Larry the financial planner might say “well you’re not considering utilities, or what if something breaks, or or what if one of the roommates doesn’t pay, or moves out, or worse yet trashes the place.” Yes those are all risks but they can be mitigated. Your roommates would have to pay a deposit anywhere else that they move to, and try to pick respectable roommates with a decent job. If they trashed the place you can sue them. As far as something breaking, there are home warranties that you can negotiate for the seller of a house to buy for you to cover everything major. And utilities? – divide them three ways. You’re going to be paying utilities anyway if you’re living with Mom and Dad, and if you’re not paying utilities now – share shame on you.

THE VERDICT

It comes down to a matter of alternatives. Maslow’s Hierarchy of Needs has shelter right there on the basic level. Food, water, shelter. You have to live somewhere. It might seem exciting to live in a tiny home out in the woods, but do you know someone who owns woods? Would they let you just camp out there indefinitely? And do you know anything about building a tiny home? Youtube might have the step by step, but it isn’t going to save you when you wire something wrong and the whole thing burns down. Let’s get real – the alternatives are renting from someone or owning. For some, renting makes sense. Maybe you are planning to move to warmer climates (not far from my mind after this winter, trust me!). Perhaps you want to travel the world and not be bogged down with maintenance (associations have maintenance agreements to take care of it for you). Or, you want to rent because you want to help make people like me richer.  Either way, renting does nothing to help you build wealth. Let’s get on the train, take a fresh view at what homeownership has to offer. Stop reading into the news, all the bogus online articles about how homeownership isn’t affordable, or you can’t do it – you can. The American Dream, as we see it, should be available to attain for everyone who has the desire and works for it. Start a conversation with us today and we’ll customize a plan for tomorrow. We’ll review, advise, create a plan, and guide you free – all things you won’t get a from a bank. The age-old wisdom used to tell us every wealthy person has a great attorney and CPA. I would add a damn smart mortgage expert and a Realtor that has the mindset of Indiana Jones to that short list.

Buyer must qualify under program guidelines. Not all borrowers will qualify. This is not a solicitation and not a commitment to lend. Mortgages Unlimited is an Equal Housing Opportunity lender.

Mortgage Company Bloomington, MN
Mortgage Company Specialist MN and WI

Several options are available for construction financing. The first option is a new first mortgage intended for rehabilitation finance – the programs are called HomeStyle and 203k, are offered by Fannie Mae and FHA, respectively, and allow up to 97% of the as-completed value of your home in total financing. The benefits to these programs are that you can do one loan instead of two, they are 30-year fixed loans, and potentially provide for all of the rehab funds that you will need.

The second option is a construction line of credit. With a construction line of credit you can keep your existing first mortgage and add a credit line for the improvements. The benefit with a construction line of credit is that it uses the as-completed value of your home. The disadvantage is that it has to be refinanced when the construction is done.

The third option is a home equity line of credit. The benefit to a home equity line of credit  is that you can keep your first mortgage as-is. The disadvantage is that the interest rate is variable, and the current amount of equity is all that is available to borrow.

It might be helpful to get the details of your existing mortgage together with the amount of improvements that you want to make and then we can put figures to this.

As-completed value compared to current value

The as-completed value is an estimation that an appraiser will make based upon the improvements intended for your home. When an appraiser does an as-if appraisal based on an as-completed value, he or she will want to see a bid from a contractor detailing the improvements that will be made. The appraised value that is calculated is then based upon the physical attributes of your property with the to-be-completed repairs included compared to other homes in the area that have sold recently. If the as-if value supports the improvements that are going to be made then financing is available for the project as long as other qualifying criteria are met (credit, income, etc). An example of a repair/improvement that drives value is a kitchen remodel. A repair that doesn’t necessarily drive value is painting to change the color of the property. The appraiser is looking for material changes to the property that drive value. The current value of the property is determined without any of the potential improvements being completed.

Fannie Mae Homestyle

This program allows for financing of renovation/repair funds. The loan amount can be up to 97% of the as-completed value. The financed repair costs cannot exceed 75% of the as-completed value. What this means is the loan program can be used to purchase or refinance a home and include funds to complete the purchase or pay off an existing mortgage.

Here are some commonly asked questions on details:

https://www.fanniemae.com/content/faq/homestyle-renovation-faqs.pdf

The benefit to Homestyle over the FHA 203k program is that mortgage insurance is not required if the amount of financing doesn’t exceed 80% of the as-completed value. If mortgage insurance is required (loan amount > 80% of value), then it comes with options.

Fannie Mae loan limits apply (currently $453,100 for a single family home in MN), and the application must gain approval through the Fannie Mae automated underwriting system. Contact us for details on what we need to submit the application.

FHA 203(k)

FHA has two programs under the 203k umbrella. The 203k Full allows for major remodels that include structural changes (additions, tearing down walls, etc). The 203k Limited does not allow for structural changes, but includes the ability to finance most other types of repairs/improvements.

FHA 203k Limited allows for up to $35,000 in included financing for repairs. Some of this goes towards construction inspection costs, title updates and potentially permits (unless the contractor obtains them). This amount also needs to cover the contingency reserve, determined by the age of the property, and is generally 10-20% of the repair estimate. We advise keeping the contractor bid below $27,000 if you plan to finance all of it.

FHA 203k Full allows for up to $100,000 in repair costs, again including inspection/title and contingency reserves, but also including the cost for a HUD inspector/project manager.

FHA loan limits apply for these programs, currently $356,500 in MN for a single family home (higher for multi-unit homes) and FHA underwriting applies. Contact us for details on what is needed for approval.

Frozen credit should be “unfrozen” before you submit a loan application. This can be done easily online:

Experian: https://www.experian.com/freeze/center.html

Equifax: https://www.equifax.com/personal/credit-report-services/credit-freeze/

Transunion: https://www.transunion.com/credit-freeze

 

or by calling the three credit repositories here:

Experian: 888-397-3742

Equifax: 888-298-0045

Transunion: 888-909-8872