Who Counts as a First-Time Home Buyer? PMI, Assumable Loans, and More Questions Answered

Auto-generated captions cleaned for readability. Commercial breaks, and repeated housekeeping have been trimmed; licensing information appears at the bottom of this page.

This week: your questions, answered

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom — and I believe we actually did it: I think we are live on Facebook, Instagram, and YouTube for the first time. If anything isn't working right, put it in the chat and let us know.

Once a week, Wednesday at 1 p.m. Pacific, I go live with a real estate and mortgage topic — and this is an interactive show, so put your questions in the chat and I'll read them out loud and answer them. This week is all questions and answers. Last Wednesday I did a home buyer workshop — about 30 people joined on YouTube for two and a half hours, start to finish through the whole purchase process — and I got a lot of great questions. When one person asks a question, that means many of you are wondering the same thing. So today I'm reading those questions back and giving you the answers.

How assumable mortgages work

First question from the workshop: “How can someone strategize best to get an assumable mortgage — is it worth it?”

Great topic, because sellers right now are advertising in their listings that their loans are assumable. Most assumable loans are VA loans — those are the most common. Some FHA loans can be assumed, and conventional loans can be too, but a conventional loan that's assumable is almost always an adjustable-rate mortgage. A standard 30-year fixed Fannie Mae or Freddie Mac loan is not assumable. And an ARM has to be out of its fixed-rate term first: if someone signed up for a 5-, 7-, or 10-year ARM, that loan isn't assumable until it's in its adjustment phase, moving up and down each year.

Now, say the seller's loan really is assumable and they're offering it. That is a fantastic way to get a mortgage in today's world, because their rate is most likely far below today's — if you can assume a loan at 3.5% or 4%, absolutely do it. But keep one thing in mind: a seller is not going to hand you the keys and walk away. They still want the proceeds and the equity out of their property. So work with your real estate agent to get all the details: what's the loan balance, what's the purchase price, and how much cash do you need to bridge that gap?

First-time buyer: the three-year rule

Number two: “Is it true that if you haven't purchased a home in five-plus years, you're eligible for first-time home buyer benefits?”

It's actually three years — three years without owning property. And people get confused about what "owning" means. Plenty of people are on someone's mortgage but not on the title of the home. If you're not on title, you're not an owner of real property — and if that's been the case for three years, you're considered a first-time buyer, whether or not your name was on a mortgage.

The flip side: some people are on the title of their parents' home — parents add a child to title so the property passes to them. In that situation you own real property, and even though you never went out and financed a home of your own, you are not a first-time buyer. So: no ownership interest, not on title of any real property for three years — first-time buyer. If you owned a home, sold it, and waited three years, you're a first-time buyer again. And obviously, if you've never owned anything, you're a first-time home buyer.

Buying an investment property with an FHA loan

Number three: “I have an FHA loan. What are the requirements to purchase a second property as an investment — any low minimum down payment?”

She owns her home with an FHA loan, plans to stay in it, and wants to start building a real estate portfolio. In that situation you need a minimum of 20% down for the investment purchase — there's no low-down-payment investment loan when you're keeping your current home as your primary.

But here are the ideas I shared at the workshop. The best thing you can do is buy as small as possible right out of the gate — buy what you need, not what you think your future holds. If you live in a one- or two-bedroom apartment today, go buy a one- or two-bedroom condominium. Live in it a year or two, save for the next down payment. Then make a low-down-payment purchase of a new primary residence — a townhome at 5% or 3.5% down — and rent out the condo. A year or two later, do it again: the two-bedroom single family. That's how you build a portfolio with less money down, better interest rates, and primary-residence loans at every step.

The proposed first-time buyer tax incentive

From the chat: “Can you explain what Biden addressed about first-time home buyer loans in his address last Thursday?”

Great question — and understand there is absolutely nothing final or in writing yet. I don't know that anything has even been drafted as a bill. So I can only give you what I took from what he said: they're trying to give incentive to first-time buyers, and incentive for current owners to sell and buy larger homes — to get people moving, get more inventory out there, get more transactions happening. The mechanism would be a tax incentive for purchasing a property, and the write-off is supposed to be equivalent to about $400 a month in savings.

Honestly, I don't know how that number can be thrown out there — every person has a different tax bracket, different income, different write-offs and expenses. I think it should have been stated as a flat tax credit, the way solar panel incentives work when you file at the end of the year. But that's what I took from it, and again — nothing has actually been written yet, so I can't promise my understanding is the correct one.

Selling a rental: one for your CPA

Next: “What are the tax implications of selling a rental property to purchase a primary residence?”

I will never step out of place and answer a question I shouldn't. This one truly had to go back to the listener's CPA. I'm not a CPA and I don't do taxes for a living, so I can't tell you your repercussions. What I can explain: the taxes you'd pay on selling a rental are based on what you purchased the property for, how much improvement you put in that you can show receipts for, how much depreciation you claimed over the years, and how much income the property earned while it was a rental. It's a math calculation — not a simple one — and the person to run it is whoever does your tax returns and knows what's been claimed and deducted. If you ask me something I can't answer, I'll always tell you who can.

Getting rid of PMI

Next question: “Is there a way of removing the PMI on a current home?”

Good one. First, FHA: unless you're in the rare case of a 15-year fixed FHA loan, where the MIP — mortgage insurance premium — can drop off after a specific amount of time, FHA insurance is basically along for the ride. So let's talk conventional, because those are the loans where you really have the opportunity to remove mortgage insurance.

A conventional loan with less than 20% down has mortgage insurance, period. There are ways to structure it — you can finance it into the interest rate, or buy it out completely upfront so it's not part of the monthly payment — but it exists, and you deal with it one of those three ways.

Why would you want to keep your current loan and just remove the insurance, instead of refinancing? Because if your rate is 3.5% or 4%, you do not want to refinance in today's higher-rate market. You want to keep that low rate, drop the insurance, and save the monthly money. Here's the rule: to remove mortgage insurance from a conventional loan, you have to pay the balance down to 78% of the appraised value from when you took the loan. Not today's value — the value at origination.

That's where people get confused. They call the 800 number on their statement and say "my property has gone up in value, remove my PMI." Some servicers will even order an appraisal — and then come back asking you to show the improvements you made to increase the value. They're looking for money you spent or balance you paid down, not just a market that went up. So make your payments, get that balance to 78% of the original value — 22% equity — and the insurance can come off.

Realistically, in today's market, most of you haven't paid down that far yet, so you'll stay with the mortgage insurance for now. When rates eventually come down to about where your current rate is, that's when a full refinance can make more sense — it removes the mortgage insurance without waiting to hit the payoff threshold.

HELOC or credit cards?

From the chat: “I have some credit card debt and currently have a home equity loan. I want to pay off one but I'm not sure which. My plan is to apply for another home equity loan for a higher amount — do you recommend paying off the credit cards or the HELOC?”

You can generally only have one second mortgage at a time — I don't care whether it's a home equity line of credit or a home equity loan; if it's in second position on title, it's a second mortgage. A few lenders will go into third position, but the majority won't. So if you want a larger second, what you're really doing is a refinance of the second mortgage: the new loan pays off your existing balance and gets you the additional cash to pay off the credit cards. That's absolutely doable, and it usually makes sense because a new home equity line or loan is a much lower rate than what those cards are charging.

But if you have the cash in hand to pay one of them off, the answer changes: pay off whichever has the higher interest rate — the one costing you the most, which is usually the credit cards — and keep the line of credit you already have in place. Don't extend the equity loan if cash can do the job.

Can you pay PMI with a credit card?

Also from the chat: “This may sound naive, but is it possible to pay your PMI insurance with a credit card?”

No. PMI is established at the beginning of the loan — when we take your application we're determining the loan product, how much you're putting down, and what the mortgage insurance will be monthly or what it would cost to buy out. FHA: you can't buy it out; it's paid monthly as part of your mortgage payment. Conventional: it's either part of the monthly payment, bought out upfront, or financed through a slightly higher interest rate — and I don't usually point people to the higher-rate option once we compare everything. Either way, it cannot go on a credit card.

How long self-employed before the income counts

Next, from the workshop: “How long do you have to be in business to use it as an income source?” He's newly self-employed with a brand-new business.

For the mainstream, full-income-documentation loan types — FHA, conventional, USDA, jumbo — you have to be self-employed a full two years, with two full years of filed tax returns. There are alternative-documentation programs too; typically about one year in business is needed before we can get you into one of those. If you're just getting started, call us and we'll build a game plan for the program that gets you into a home the quickest — two years gets you the full-documentation, low-down-payment, lowest-rate programs.

VA loans: spouses, surviving spouses, and co-signers

Last one: “Who besides a veteran can qualify for a VA loan as a relative?” This comes up all the time, from clients and from real estate agents.

VA loans are for veterans — if you served, you earned it. If you're married to a veteran, you and your spouse can both go on the loan, qualify together, and use the full zero-down benefit.

Where people get confused is surviving spouses. If your spouse was a veteran and passes away, that does not automatically give you their eligibility. In most circumstances, the surviving spouse can use the benefit only when the veteran was deemed disabled from active-duty deployment — if they passed during deployment, or came home disabled from that deployment and later passed, the spouse gets the eligibility. It's about what happened during service.

And the co-signer question: absolutely, you can get a co-signer on a VA loan — mom, dad, a brother. But it changes the zero-down feature. The veteran gets zero down on their half of the purchase price; the non-spouse co-signer has to come up with a down payment on their half. I absolutely love VA loans — they're my favorite loan to do. If you're a vet and you haven't used your eligibility, what are you waiting for? Give us a call.

Wrap-up

We finally made it onto Instagram today — I've been trying to make that happen for three years — so we're now live on YouTube, Facebook, and Instagram every Wednesday at 1 p.m. Pacific. If you want to know when I go live and what we're covering, text the word LIVE to 844-935-3634 — that's 844-WE-LEND-4 — and you'll get one text a week with the topic and the link to join. Same number to call if you have questions or want to get an application started — purchase, refinance, or reverse mortgage. Have a fabulous rest of your week, and I'll talk to you all real soon.