It's pretty well-known that when you apply for a mortgage, a lender is going to look at your income when deciding whether to approve you. But you may be surprised to hear that your commute can also be a major factor. Here's what you need to know about getting that mortgage.
Occupancy is an integral component of any home mortgage loan. An owner-occupied home is considered to be the least-risky for a mortgage loan. Second homes and vacation homes follow, with investment properties being the most risky type of financing. The lender assumes if the borrower somehow came into dire financial straits, they would be more likely to walk away from an investment property than the roof over their head. For this reason, lenders charge more — in some cases considerably more — for properties that aren't owner-occupied.
Now, home lenders go to great lengths to ensure they have met all the credit criteria set forth by Fannie Mae and Freddie Mac. If it's discovered after the loan is sold that the originating lender made a material oversight in the creation of the loan, the lender may be forced to buy back that loan. A buyback is incredibly costly to a mortgage company's bottom line. This is why underwriting is necessary and documenting everything is paramount.
So mortgage underwriters (the decision-makers on approvals) thoroughly review each mortgage application questioning "Is this loan scenario plausible?" Mortgage underwriters are incredibly sharp. They are specifically trained to mitigate risk for a mortgage company by documenting, questioning and leaving no stone unturned.
And the proximity of your job from your prospective new home is something they will scrutinize.
How a Long Commute Can Affect Your Mortgage
Let's say you'll work two hours away from your new home, leaving you to commute four hours per day, five days per week. Such a scenario would be difficult for an underwriter to believe without some additional layer of support detailing the unique circumstance.
Maybe in this type of scenario you have the ability to telecommute, where you commute a few days per week and work from home on the other days. Perhaps your job description letter from your human resources department could explain the nature of your occupation, how important traveling is to your job and what percentage of your job requires traveling. This is the type of documentation mortgage companies want to see. If your job proximity is an unexplained factor on your loan, then an underwriter could change your transaction to an investment property. This would come at a cost of higher rates, fees and a subsequently higher monthly payment even if your intention is to live in the home.
Generally speaking, an hour commute from where you work to where you will be living is acceptable. Anything beyond an hour commute will open up questions, prompting the need for detailed explanations and more paperwork.
Be clear and upfront with your mortgage company about what it is you're trying to accomplish. Make sure your documentation supports your scenario well. Alternatively, in some cases, it might be better to structure the home as a second home, especially if you live in one property the majority of the week and an alternative home on the weekends, for example. What you have to reveal within your proposed scenario will dictate the loan structure.
What's Considered a Primary Residence?
As long as the scenario can be justified on paper, documented and explained, and if your true intention is to live in the home, it is a primary residence transaction and is considered as such on your loan application. The more unique your scenario is, the more specific you'll need to get in documenting that the home you are financing is in fact a primary residence. The following things would be needed to document such a scenario:
- letter of explanation
- job description specifically identifying travel time requirement
- documentation supporting the commute time
- offer letter from new employer stating job acceptance if relocating
What's Considered a Second Home?
Your transaction could be considered a second home if the property is more than an hour away from work and is in a resort-type area. If the underwriter determines it to be a second home, you'll be required pay at least 10% down.
What's Considered an Investment Property?
This can be the most dreaded scenario for someone who's intending to actually occupy the home. Let's say a loan is sent to underwriting as a primary home or second home, but something in the file with the location does not jibe with the believability of the transaction – then the underwriter determines it to be an investment property, which requires 20% down.
Typically, it would not make sense if the property you are planning to buy is right down the street from your primary home as secondary residence; it's an investment property. The home would have to be a reasonable commute time from the primary home — up to an hour away — for the loan to hold water as secondary residence. If the property is a vacation rental, for example, it could be a tough nut to crack if you plan to finance the home as second home, especially if tax returns identify the property as a rental. Tax returns hold all the cards in residential mortgage lending. As far as proximity to your home, an investment property has no limitation; it could be a few miles away or hundreds of miles away.
Because the way the loan is structured can greatly affect the cost of your home, it's important to have a good idea ahead of time to know how much house you can afford (this calculator can help you figure that out). This is why it's also important, if your loan has any "outside the box"-type structure to it, to make sure you work with a loan officer who has a thorough knowledge of the underwriting process, which can only be acquired through years of experience.
Your credit score is also a big factor in how much your mortgage can cost you, so check your credit far in advance of shopping for a home to determine whether you need to take some time to build your credit. You can get your credit scores for free from many sources, including Credit.com, to see where you stand.
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