Seeking Family Room
Rennis Wilkerson Jr. never minded living with his parents. But all that changed in September when the 25-year-old loan executive married his high school sweetheart. Now Rennis, his bride Giovanna, 25, and their 6-year-old daughter, Cortnee, are living in Rennis’ childhood home--using the dining room for a makeshift bedroom.
“We’re kind of cramped for space,” Rennis said. “[We] need our own place to live so we can have family time of our own.”
But several obstacles may prevent him from reaching his goal of buying a home. Rennis has changed jobs frequently since graduating from high school in 1994 and has only logged four months at his current job. That means his commission earnings--about $1,000 a month on top of his salary--won’t be considered in qualifying for a loan.
And while Rennis has managed to put away some $10,500 in savings and has an excellent credit rating, Giovanna doesn’t.
She has two charge-offs--which occur when a creditor eventually takes a loss due to nonpayment--and numerous outstanding payments being sought by collection agencies.
Instead of staying put, the couple want to buy a duplex and use the rent from the second unit to help pay their mortgage.
“It’s a wonderful idea and it will help [the Wilkersons] be able to afford more,” said Lydia Pepito, president of Fallbrook Mortgage Corp. in West Hills.
Using Rennis’ base salary only, Pepito was able to qualify the Wilkersons for a 3% down, 6.75% 30-year fixed FHA loan for a duplex priced at $138,000.
She was able to do this in part by estimating 75% of the future income the couple will make when they rent out the second unit of the duplex.
“[Anticipated income] allows people to buy who normally wouldn’t be able to,” Pepito said.
She estimated the Wilkersons could expect to bring in an estimated $650 a month renting the second unit, a conservative estimate based on current Los Angeles duplex rents. Seventy-five percent of that--or $487.50 a month--can be considered now as income to help the Wilkersons qualify for a loan.
“That really surprised us,” Rennis said. “We really needed that extra money.”
Because of Giovanna’s credit problems, her $1,700 gross monthly income, which would have given the couple an estimated $765 more a month toward a mortgage payment, cannot be used in qualifying the couple for a loan.
But Pepito was able to qualify the Wilkersons for a larger loan using automated underwriting, a loan approval process created in the mid-1990s that uses a computer program--not a human being--to evaluate an applicant’s credit history, income, savings ability and employment history. The result is that the loan approval process is faster and more flexible, enabling more moderate-to low-income buyers, who might have been seen as risks by a loan officer in the past, to more easily qualify.
In Rennis’ case, for example, the computer won’t know how many jobs he has held, but will recognize his excellent credit and savings ability.
“It only looks at data,” Pepito said of automated underwriting, “at the big picture.”
Without automated underwriting, Pepito said the Wilkersons would have only qualified for a loan on a $93,000 purchase based on the maximum 41% income-to-debt ratio allowed for FHA loans. This would have bought them little in the Los Angeles area.
After about $9,000 for a down payment, and closing costs, the monthly mortgage on the $138,000 loan will run the couple about $1,114 a month, including taxes and mortgage insurance, exactly the maximum that Rennis and Giovanna feel they can afford.
“I think we can handle this with Giovanna’s income and mine, plus my commissions,” Rennis said. “It’ll work.”
Still, the Wilkersons worry that a suitable duplex, one with at least two bedrooms in a family oriented area of Los Angeles, Hawthorne or Inglewood, will be financially out of reach.
“We want a lot of room for Cortnee to play,” Rennis said. “We want grass ... some flowers and a white picket fence.”
Finding a dream house is not realistic, said Javier Covarrubias, a 10-year real estate veteran who works for Re/Max 100.
In fact, Covarrubias, who specializes in finding homes for first-time buyers, was only able to locate a handful of properties in the $125,000 to $139,000 price range that met the Wilkersons’ criteria. The couple is now considering making an offer on one of the properties, a 1924 duplex in need of minor repairs and less than a mile from Rennis’ boyhood home in South-Central L.A.
But Covarrubias isn’t convinced that now is the right time for the Wilkersons to buy. Sales prices on Los Angeles area duplexes have increased 15% to 18% in the last three years, he said. “The property they could have qualified for three years ago is now in the $160,000 to $175,000 price range.”
Covarrubias also cautioned the couple to consider the negatives of being a landlord.
“When you are dealing with income property you have to be ready to deal with tenants--when they move out and when you have to come up with their rent,” he said. “Most first-time home buyers don’t want that extra pressure.”
The Wilkersons have some options though. They can buy now if they find the right property and take advantage of interest rates, which are at a seven-year low; or wait and give Giovanna time to clean up her credit, which could help them qualify for a larger loan.
With Givoanna’s improved credit, Pepito estimated the couple might be able to qualify for a loan of up to $150,000 for a more expensive duplex. But because Giovanna is a financial risk, even with an improved report, that loan might carry a significantly higher interest rate.
“Your credit means everything,” Pepito said. “Everything you do is affected by it. You can lose a place you really want because of it.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Month’s Make-Over
Make-over subjects: Rennis Wilkerson Jr., 25; Giovanna Wilkerson, 25
Occupations: Account executive for Ames Home Loan; assistant program director for Work in Progress, an El Segundo-based mental health day-care program
Gross monthly income: Rennis: $2,000 a month base; another approximately $1,000 in commissions that can’t be used in loan qualification because he is new in his job; Giovanna, $1,700, but money that cannot be used in loan qualification because of poor credit rating
Goal: Buy a duplex in Los Angeles, Inglewood or Hawthorne area and use rent from second unit to increase income to qualify for a bigger loan and to help pay off monthly mortgage
The Problem: Rennis and Giovanna are not seasoned in their jobs and because of Giovanna’s poor credit rating, her income cannot be used to help the couple qualify for a loan. The couple worries that duplexes in the areas they are interested in are more than they can afford.
* Purchase a duplex now, while interest rates are at a seven-year low and use 75% of the anticipated rent on the second unit to help qualify for a larger loan.
* Use automated underwriting--a loan approval process that removes subjectivity from the process and makes approving loans easier for qualified lower-to mid-income buyers.
* Consider waiting to give time to clean up poor credit by: paying off minor claims, offering to pay all or at least half of any charge-offs and dispute claims that might be illegally listed on a credit report if they were incurred more than seven years ago.
* Add spouse to an existing credit card to help him or her start building their credit.
Meet the Experts
Lydia Pepito is president of Fallbrook Mortgage Corp. in West Hills, owner and president of New West Realty and is a 26-year veteran in the mortgage banking industry. She has been a real estate broker since 1988 and is past president of the Southern California Mortgage Banking Assn., chairwoman of the Los Angeles chapter of Habitat for Humanity Committee and has served on numerous advisory panels.
Javier A. Covarrubias joined Re/Max recently after nine years with Century 21. He works in the Re/Max 100 office in the Mid-Wilshire area specializing in working with first-time home buyers in South-Central Los Angeles, Compton, Watts and Long Beach.
Allison B. Cohen is a Los Angeles freelance writer.