EPISODE 12: Starter Homes – What do Banks Look For?
Episode 12: Transcript
Starter Homes Part 4
Mousetrap: All right. All right ladies and gentlemen. Thanks for tuning back into another episode of Doublewide Dudes. How we doing AP?
AP: I’m feeling a lot better. Feeling a lot better. I know we had to skip a week of this podcast but my kids brought home some kind of stomach bug from school. They’re little petri dishes now. Whatever they catch at school, they bring home and we’ve got four of them so our entire house is just going around and around. Unfortunately, I caught it and we had to skip an episode. I’m back. I’m feeling good. I’m ready to go.
Mousetrap: That’s good. Yeah. I’m glad you’re back. Those sicknesses man, it spreads like wildfire in a house with six.
AP: It definitely does. Everybody’s back. Everybody’s healthy and we’re ready to keep educating folks on the process of buying a home.
Mousetrap: Awesome. By the way, when I was working today I was browsing on Facebook and saw that 13-pound bullfrog article.
AP: That thing’s wild, huh?
Mousetrap: Did you see that thing?
AP: I did. I did. That picture’s a little crazy.
AP: Anybody that’s done any hunting or any fishing knows how to create those optical illusions with their pictures though.
Mousetrap: Make them look big?
AP: Yeah. Yeah. But that thing was still huge, right?
Mousetrap: Yeah. I couldn’t even imagine frogs even being a pound, much less a 13-pound bullfrog. Where did that thing come from? South Texas. Everything’s unexpected.
AP: Everything’s bigger in Texas brother, you know that.
Mousetrap: Yeah. That reminds me of La Joya Lake. My buddy caught a big bass and it was his profile picture on Facebook and the thing looked monstrous. He just held it up to the camera at the right angle and it looked huge. It was still big but it definitely wasn’t as big as it seemed.
AP: You’ve got to be careful what you buy into on the Internet. Just because its on the internet doesn’t mean it’s true. The same goes for information. We’ve had a lot of folks call us saying they’ve seen an ad online or something saying advertising one, two percent interest rates on mortgages and for 99% of the folks we talk to, that’s just not something that’s going to be a reality. That’s why I thought to be important that we cover this portion of the home buying process on this segment we’re talking about with starter homes. Just like we encourage people to shop around for the house, it’s equally as important that you shop around for a mortgage and make sure you’re getting the best possible financing terms out there.
Mousetrap: Yeah. It’s very important. It’s very important. I want to say 70 to 80 percent of the people that call in, that’s probably one of the first questions they ask.
Mousetrap: I don’t know if they get misled at other places or other locations on what they can expect or people turn away from their credit score and all types of things. So I’m excited about this episode. The financing part of a home is a bit tricky. But as long as you know what you’re going to get yourself into and what to expect and what the banks expect, you can make a good decision and make sure you do something right.
AP: Yeah. I think one of the problems out there is a lot of folks, particularly in the manufactured home industry, they try to be or pretend to be the bank and it’s important for folks to know that even you and myself Mousetrap, we’re not licensed loan officers. So when it comes to things like the exact monthly payment, the exact down payment, interest rates, those kind of things, I don’t know the answer. You don’t know the answer. Only a licensed loan officer is going to know that answer. I’m sure you’ve received calls just like I have from folks that were promised the moon when it came to a monthly payment, only to submit an application and find out that that’s not actually the case. But uniformly, whether you’re buying a manufactured home, a site built home, condo, whatever, there are some uniform things that banks look for. Like you said, I think the more educated people are on those things, the better able they can set themselves up for success and really put themselves in a position to get the best possible loan for them.
Mousetrap: Yeah. Yeah. Absolutely. We don’t make a dime off financing
AP. We specialize in getting the right home for the right family. That’s what we do. But we also do you want to give them the best information to help get a loan. Because without the loan, they can’t get a home unless you’re going to buy it cash.
AP: Yeah. It’s a big part of the process.
Mousetrap: Yeah. But let’s go through it from beginning to end, what homeowners need to know, all that the bank looks into for them to determine the down payment and the monthly payment.
Mousetrap: So what do they look for? Let’s go from start to finish.
AP: Well there’s four basic things. And again, whether you’re looking to buy a site build, manufactured home module or whatever it is, it’s going to be the same four basic things that the banks look for. And really what it all comes down to, they’re looking for the overall stability of the potential home buyer. The one that everybody knows about and it is a very important factor, is credit score. Basically, what it is, it’s a number that gives the banks a snapshot of your financial past. And it’s not the end all be all into the banks approving you are not. There are plenty of banks out there that offer second chance finance or financing for lower credit scores. So definitely don’t want to let that scare you. But it is one of the things that the banks are going to look at.
Mousetrap: Yeah. On that note. People call in, the first thing they ask is, “Hey. What credit do you need to apply for a home?”.
AP: Right. Right.
Mousetrap: And then I tell them, Well. 21st Mortgage, the bank that we deal with, they can approve scores as low as 500. There are different factors that go into it that we’re going to get into. But with them thinking that they have a bad credit score, maybe because they got turned away elsewhere.
Mousetrap: So necessarily five or six, whatever your credit score may be, you can’t let that scare you from moving forward.
AP: Right. Right. Like you said, there are programs out there for folks that have low credit scores. So definitely don’t want that to stop anyone from trying and at least seeing what the bank’s going to come back with.
Mousetrap: And what you need to improve on.
AP: Right. It doesn’t cost anything. At least with us Mousetrap. It doesn’t cost anything to get the answers from the banks. Obviously, the lower the credit, the higher the down payment, higher the interest rate, that sort of thing. But you’ve got to keep in mind too if you’re renting Mousetrap, that’s 100 percent interest.
Mousetrap: 100 percent. Yeah.
AP: So even if you’ve got to get your feet wet with a little bit higher interest because of where the credit’s at, there’s really no better and quicker way to improve your credit score than having a mortgage on your credit that’s in good standing. A lot of folks want to know what goes into a credit score. Just like financing in general, there’s no easy answer. But basically, there’s a number of factors. Things such as payment history, did you pay your bills on time, are you consistently on time. What they call credit utilization. So how much of your credit have you used? If you’ve got a $10,000 credit card for instance, are you using $9,999 of that, are you only using $1,000, that sort of stuff. And then the length of your credit history. How mature is your credit? Have you had years of experience? Do you have ten years of payment history? That sort of thing.
Mousetrap: So all those three things go into the credit score.
AP: Right. Right.
Mousetrap: And then that is just one of the parts that the banks look at.
AP: Yeah. Yeah. Just one of the things. I would almost argue it’s the least important of the things that banks look at. Banks do offer programs for folks with low credit. Whereas if you’ve got low income, that might be a different story. So credit is definitely something that can be overcome. But for some reason, it’s the first thing that comes to people’s minds.
Mousetrap: Yeah. I think it’s because they do do their shopping and they’re going around looking for a home, these retailers just want to pull their credit right away.
Mousetrap: You and your brother used to work at another dealership and that’s one of the things that they trained you on, right? You’ve got plenty of homes in the lot and people want to come in and see the homes. First thing they do is say, “Hey. Well, let me pull your credit score”.
Mousetrap: “Hey. Well, let me pull your credit score”. And, “Welcome in. Let me pull your credit score”.
Mousetrap: So that’s to them it’s like, Hey. Well, this is what’s going to be the determining factor for me to get approved or not”. And really it’s just part of it.
AP: Right. Right. I’d tell you at the time, that’s what we did. Because we were brand new. That’s all we knew. Now that I’ve been in the industry, going on eight years now, I understand that’s more of a benefit to the retailer to the company than it is to the customer. What we tell people Mousetrap is really, don’t let anybody pull your credit until you’ve decided on the home. The reason being and what some folks don’t know, is you actually reduce your credit score just a little bit when you get it pulled. But if you’re getting it pulled here and you’re getting it pulled over there, in ten different places. We’ve seen customers that went to shop for a car. All of a sudden their credit gets pulled by ten different places and it drops their credit score by 30, 40 points. So you definitely want to protect your credit. It’s not the most important thing I would say when banks look at whether and give you a loan, but it is very important.
AP: So protect it and don’t let anybody pull it until you are ready. People shouldn’t have to see your credit score to justify letting you see a home.
AP: I know that’s our way of thinking. Unfortunately in this industry at least, it’s a newer way of thinking. But if someone doesn’t want to show you a home, there are plenty of companies out there that would love to have your business and be more than willing to walk you through a home and let you see what your options are before they pull credit and decide whether you’re worth their time or not.
Mousetrap: Yeah. And a good thing for people to do just to find out your credit score, not too many people are savvy and they just don’t pay attention to these things. For some reason, it’s not really taught in school, to know your credit score.
AP: Yeah. It should be. It’s weird. It’s not. They have trigonometry in there though.
Mousetrap: That’s kind of odd. The thing that I did when I bought my car is just go to Credit Karma or any service that provides you your credit score for free.
Mousetrap: That’s going to be a good indication to give you an estimate of what your credit score is.
Mousetrap: That way you know what you’re working with. There’s really no need to get your credit pulled at the dealerships just to see homes. Just to touch on the three credit bureaus. It’s Equifax, TransUnion and Experian. Actually each of these bureaus, they allow you to pull your credit once a year for free.
Mousetrap: And this is going to be the actual source of where your credit lays.
AP: Yeah. Even if you’re not looking to buy a home, it’s actually a good best practice to pull those bureaus at least once a year just to make sure someone else isn’t using your credit.
AP: But depending on the type of loan you’re going for, some banks may look at all three and take the one right down the middle. Other banks just look at one, depending on what’s most used the most reported on in your area. But a number of different scenarios. So the biggest rule of thumb when it comes to credit, first and foremost like you touched on Mousetrap, don’t let your credit score scare you. Because there are loan programs out there for just about any kind of credit profile. And also to know that it is important to pay bills on time when you can. Because the higher the credit, the better loan program you’re going to get from the lenders.
Mousetrap: Yeah. That’s just one of the things that a bank looks at. Another one is going to be current debt versus income. They’re going to see what you make monthly. They’ll take a percentage of that and separate that amount for your bills, in essence, car payment, mortgage, things along that matter. They look at what you make and determine if you can afford the house.
Mousetrap: Why don’t we elaborate on that a little bit?
AP: Yeah. Yeah. I would say this out of the four things the banks look at Mousetrap, is arguably the most important. Like we’re talking about, you can overcome battered challenge credit. Banks legally are not allowed to lend people money that, based on these ratios, what they call debt to income ratios, they determine aren’t able to afford the home. Basically what it is are your current debts versus your current income. But it’s important to keep in mind, it’s not just the current debts you think you have. It’s the current debts that are on your credit report. So even if you cosigned for a car for your brother three years ago and forgot about it. When the banks go to run a home loan application, they’re not going to forget. That’s going to be right there front and center.
Mousetrap: Yeah. Yeah. That’s right.
AP: Things like child support, student loans are going to be on there, back taxes or anything like. All that’s going to come across on either your pay stubs or your credit report.
Mousetrap: Yeah. And also keep in mind what’s not in your current credit report. But when you’re going to get a new home, the banks are going to look at the land payment or the park payment.
Mousetrap: They’re going to want to know where the homes going to be set. Without that, they won’t even do the application.
Mousetrap: So if you’re going to go into a park, you’re going to have to look at what the park’s going to charge you for rent. If you have land and it’s paid off, what are the taxes going to cost at the end of the year? Anything that’s going to need to be done to the land for the home to be set, they’ll also take that into consideration. Sometimes people use the land as down payment because they need water, septic, and electric. That can be anywhere from ten to twenty thousand dollars bill, right?
Mousetrap: So they’ll roll that into what your debts are. A really really important factor is that, you’ve got to make sure you disclose that up front. That way when the banks are going to finally close on the loan, that’s not going to be surprised and you might end up losing the possibility of get a house.
AP: Right. That’s just an overall best practice when dealing with the banks. It’s important to keep in mind that they only get paid when they approve you for a loan. So it’s not like they’re sitting up there in some magical office trying to figure out ways to not help people get into houses. But if folks don’t disclose things upfront, chances are it’s going to come out at the end. The last thing we want to do is have a family get all excited in thinking they’re ready to get to the closing table. Just to find out that they’ve got a $350 a month owner financed land payment that they weren’t telling anybody about and all of a sudden they’re out of budget can’t get a house.
Mousetrap: Yeah. Those small numbers can really be the difference on getting approved or not.
Mousetrap: So any car payment, land payment, student loan, anything that is required for you to pay on a monthly basis, you have to disclose that up front.
Mousetrap: That way the banks know what you make and what you pay. They’ll take that into consideration to approve you for a house.
Mousetrap: Yeah. So credit score, debt to income ratio. Those are just a few things that the bank looks for. But why don’t we touch on income itself? We have to let them know that the banks look at provable income.
Mousetrap: They’re going to want to see the pay stubs, last two years W2, or your previous two years taxes if you’re an independent contractor. They want to see what you report and what you get paid, because that’s how they prove the income. If you get paid cash under the table, you have to keep in mind that that’s not going to be provable income.
AP: Right. Yeah. This is something that’s changed recently. Used to be even ten years ago that they had what’s called stated income which is basically, you could tell a loan officer here’s what you made and you know if they wanted to, they could just take your word for it and let you get into a house. But a lot of that’s changed because it was things like that that led to the housing crash just a few years ago. So yes, it’s kind of a pain in the butt. There’s a lot of paperwork and a lot of things you’ve got to turn in and hoops you’ve got to jump into. But it’s in everybody’s best interest, especially the home buyer. The last thing we want to do is see folks get into a home just to foreclose a few months down the road because, like we’re talking about in the previous episode, that they bit off more than they could chew.
AP: So it’s very important that folks keep in mind, it’s got to be provable income. If you’ve got a fantastic accountant out there that’s letting you write off this, that and the other, and on paper, you don’t make any money, well then that’s what the banks are going to see and that’s what they’re going to budget you off of. If you just started your company last month and on paper you made money in the last month, the bank’s not going to count that towards your income. Typically, they want to see two years of self-employment records, two years of overtime records, two years of commission records. Things like that, they typically want to see two years, some sort of stability, so they feel confident that is going to continue to go on.
Mousetrap: Yeah. Let’s touch on the two different options and. You’re W2 employee. You get paid in checks. They’re just going to want to see your W-2’s to verify your work history.
AP: Right. And your most current pay stub.
Mousetrap: Okay. So say, “I’m working at car dealership. I’m a mechanic there, I’ve been doing that for a year or two. And then I move to another city and I’m in the same profession, just with another dealership and I’m a W2 employee that counts. Now let’s say I’m a W2 employee and I decided to branch off on my own and start my own business, the banks going to want to see two years just on that business alone?
AP: Right. That’s the biggest distinguishing factor when it comes to what they’re going to look at as provable income. If you’re a W2 employee, all they want is a two year work history. Not necessarily at the same place. Not necessarily in the same line of work. Just a two-year history that you’ve been working.
AP: Now when you’re self-employed, whether you’re a 1099 contractor or you own your own business, then, in that case, they’re going to want to two-year tax history of that specific business. There’s a lot of things. I’ve been doing this eight years Mousetrap. I still learn new things about financing. So we don’t want to get into too much detail and confuse people. But we also don’t want folks who want to buy a home to branch off and start their own business tomorrow and come to find out that because they made that decision, they can no longer secure financing, right?
Mousetrap: As well as buying a new car. Sometimes I see that that puts people out of the budget, right?
AP: Yeah. Yeah. We see that way more often than we’ve liked. If you haven’t gotten your first house yet, maybe you don’t need that brand new $80,000 Ford pickup truck. It’s not just folks that buy the car from themselves. We see a lot of people cosign for family, friends, and whatnot on the cars and these huge purchases which end up putting them out of budget.
AP: So definitely important stuff to think about whether you’re looking to buy a home two years from now or you’re looking to buy a home tomorrow. Protecting your debt to income ratio is the most critical component of securing a loan for a house.
Mousetrap: Yeah. The bank has to see that you can buy it.
Mousetrap: See that you can afford it month to month.
Mousetrap: Yeah. So we have job history, debt to income ratio and as well as credit. Another thing to keep in mind is, when you’re about to buy a home, you’re going to have to have your down payment saved up. That’s a frequent question that I get asked all the time. They call and, “Hey. What’s the down payment on this house?”, or, “How much am I going to have to come up with to secure a home?”.
Mousetrap: And I always tell them, it’s really up to you. The more you’re going to pay upfront the less your monthly payments going to be and chances are you going to have a lower interest rate, right?
Mousetrap: But it’s really up to you and what you’re comfortable put down.
AP: I think a lot of times when people call in with that question, what they’re really trying to ask is, what is the minimum I can put down to get this home? And like we said at the beginning, we’re not licensed loan officer, so we really don’t know that answer.
AP: What we typically do, is we do our absolute best to help folks put together a good solid application, make that best first impression we can with them. And we typically submit for the minimum that the banks look for, 5% But after that, we’re going to let the banks be the banks. The cool thing about the banks we work with Mousetrap is, they’re not going to just come back and say no. They’re going to say no, but here’s what will work.
AP: And that’s the best we can do on our end.
Mousetrap: Yeah. It’s important to keep in mind that the retailer is not the bank.
Mousetrap: Not every retailer is the same but us personally we don’t make a dime off financing like I was mentioning. So if you have outside financing or another source to get the money, even better. Or whatever you’re comfortable going with, whether it’s a family member to lend you the money, going to your local credit union, your own bank, whatever it is you’re going to have that option as well.
AP: We always loved outside financing Mousetrap. It says us a ton of paper work.
Mousetrap: The past couple families that I’ve helped, they’ve gone that route. They’ve found their own personal finances.
AP: Yeah. Yeah. It’s important like we said at the beginning, to shop around, do your research and make sure, not only are you getting the best deal on your home, but again, that you’re getting the best deal on your financing.
Mousetrap: Yeah, right and another thing I want to touch on before we wrap this up AP, you shouldn’t have to pay to get these answers. We hear quite too often that local retailers in and around the state of Texas or really anywhere, that the practice is to take a deposit from a customer. Their excuse or their explanation for it, is, its going to let the banks know that you’re more serious, or it’s going to be earnest money for them to hold for you to get a better rate or whatever it may be.
Mousetrap: I just wanted to touch that. That’s really really unnecessary. It doesn’t exist. The bank doesn’t require a deposit for them to possibly help you get to a loan.
AP: Yeah. To me, it’s nuts Mousetrap. I couldn’t imagine giving someone my money before I know what my monthly payments going to be, what my down payments going to be. But like you said, that is a standard practice in this industry and it’s important for people to realize that you don’t need to pay money upfront to get these answers.
AP: They’re plenty of companies out there, us included, that are more than willing to help get you all the answers you need to make a good educated buying decision without taking a dime of your hard-earned money out of your pocket.
Mousetrap: Yeah. Yeah. Absolutely. That’s going to be the best way to do it. And I think they the reason they did do it, is just to lock you in. With the majority of the industry not disclosing their pricing upfront, they want to get you in and lock you in. That’s one of the reasons that they require the $500 bucks because if you’re a smart consumer and you go out and shop and you find somebody is going to be less expensive for the same home, or you’re going to that retail and be like, “Hey. Thanks for everything but I’m going to go with another company. I found this home for less expensive”.
Mousetrap: In turn, what are they going to? They’re going to be like, “Oh. Okay. Tell me more a little bit more about that”. What they’re going to do is, either want to talk bad about the company or match the price.
Mousetrap: They want to lock you in because they’re terrified of you shopping around and finding a better deal.
AP: Yeah. Now with that being said, if you are one of those shoppers out there that did put money down upfront to get these answers from the bank and you’ve continued to shop around and found a better price out there on the same home, it is important to keep in mind that in the state of Texas, they are legally obligated to refund that deposit money if you ask for that money back. Don’t feel like you’re tied down just because you put $500 down to do an application. I can’t stress it enough Mousetrap, this is the single most important financial decision of your life and you owe it to yourself and your family to do as much research as you possibly can.
Mousetrap: Yeah and every dollar counts.
Mousetrap: When you go out and find the home that you want and you’re ready to pull the trigger, every dollar counts. That’s why the explanation of where your money’s going to be going to is really important. Finding out what cost goes where versus you paying a deposit. Then they show you homes and you fall in love with the home and try to move forward or you didn’t really know what that home cost in the first place.
Mousetrap: So you don’t even really know what you’re getting for what you’re paying. And I know this a lot of information guys and financing could be a bit tricky. But I do encourage you guys to call in. Talk to me, Jason, AP, Ernest. We’ll be able to answer any question that you have. There’s no such thing as a silly question. So don’t be shy. Feel free to give us a call. We’ll be glad to point you in the right direction. All right. Well, that does it for this series on Starter Homes. Tune into the next segment where we’re going to talk about the home buying process from start to finish. Thanks again and we’ll talk to you in the next one.