Flamethrowers and high-risk loans: just because you can doesn’t mean you should
Flamethrowers and certain mortgages: handle with care!
Elon Musk’s new flamethrowers, created and sold by his Boring Company, have exploded. For now, it’s just figuratively speaking, but it could also literally be if (when) someone does something stupid and sets their house on fire.
In the right hands, a flamethrower is probably fun, maybe even useful. But in bad times, it could be incredibly destructive. The same could be said about certain mortgage products.
Check your new rate (Sep 26, 2021)
“Qualifying mortgages” and “non-qualifying” mortgages
A few years ago, the US government reformed the mortgage industry to ban riskier loans. The remaining products were divided into “Qualified Mortgages” (QM) and “Unqualified Mortgages” (non-QM).
Ineligible mortgages transfer more risk to the lender, not to investors and taxpayers. These products include mortgages that use your bank statements instead of tax returns to verify your employment, loans that allow credit scores as low as 500, and private (hard money) loans with double-digit rates. and costing several points up front.
Interestingly, non-QM loans might not be that dangerous, as it is now the lender who typically absorbs the cost of foreclosure, not the taxpayers and investors.
QMs aren’t exactly bombproof
However, just because you qualify for a QM mortgage doesn’t automatically mean you are safe, especially if you choose the highest loan amount for which you qualify. Here are some things to consider before borrowing:
- QM loans allow debt-to-income ratios of up to 50% for those with good credit and other compensating factors. This means that half of your gross monthly income can be spent on housing, car payments, student loans, credit cards, etc. And you still have to eat, pay medical bills, and send that check to the IRS every year (or withhold every paycheck). There is a huge difference between someone who earns $ 10,000 per month and has $ 5,000 in surplus per month for those expenses and someone who earns $ 2,000 per month and has only 1,000 left. $ to cover everything. There is no safety net.
- Underwriting QM does not take into account any expenses you have that are not shown on your credit report. You may be paying for child care for more than one child – lenders don’t have to ask you about this. You might not have medical insurance and be hospitalized for bankruptcy. Your trip from your new home can be much more expensive than your old home. It’s not about your mortgage application.
- Just because you get a “safe” mortgage doesn’t mean you are immune to the inevitable wrenches the world throws into your life: job losses, divorce, your children returning home …
It’s up to you to understand that your finances are more important to you than they are to anyone else, and it’s your responsibility to take care of them.
How to buy or refinance without igniting
Fortunately, it is not that difficult to protect yourself. Realize that you don’t have to get the biggest loan approved by your lender. When you go for a mortgage pre-approval, think about how much will allow you to sleep at night and not get paid a paycheck.
- See what you pay now, whether rented or owned. If you plan to spend more than that each month on the next home (including fees like property taxes and home insurance), figure out where the surplus will come from. If the new home you want would cost an extra $ 300 per month, for example, you might want to pay off the credit card with the $ 300 payment first.
- Have an emergency fund. Life is coming, so before you buy a home, save enough to cover at least two months of bills (if you are employed) or six months of bills (if you are self-employed or rely on commissions).
- Make sure you have decent medical insurance coverage.
- If your marriage is on shaky ground, don’t think that a new home will fix this problem. Divorce is a major cause of bankruptcy.
- Take into account your “invisible” costs. The ride to the office. Expensive hobbies that you don’t intend to give up. The desire for a new addition to the family.
Finally, minimize the cost of your new mortgage by shopping carefully. Interest rates can differ 0.25-0.5% between lenders on any given day. And make sure your loan matches your intentions – if you plan to move in four or five years, an ARM 5/1, fixed for five years, could give you a much lower rate and payment than a loan on 30 years. A 97% compliant loan can cost a lot less than an FHA mortgage.
And by the way, they provide free fire extinguishers with these flamethrowers.
Check your new rate (Sep 26, 2021)