Posts Tagged ‘FHA loans’

Credit Reports and Qualifying for a Mortgage #1

October 5, 2016

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This news may shock you – mortgage underwriters actually look at a borrower’s credit report.  Notice I said, credit report, not credit score.  The score is only one component of the full report.

When we pull a credit report, the first thing we do review is the credit score.  If the score doesn’t qualify, there’s no need to spend time on the report details.  My lending guidelines state that minimum qualifying credit scores for my clients are:

  • 620 for FHA and VA loans.
  • 620 for conventional loans.

Mortgage credit scores are different from consumer credit scores people get from websites like credit karma.  Issues pertaining to past mortgages carry more weight on a mortgage score than a consumer score.  So your mortgage score may differ significantly from a consumer score given to you by a credit card company or a website.  I’ve had clients with mortgage scores higher than their consumer scores and other clients with scores less than their consumer scores.  You never know for sure until you actually pull the mortgage report.

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We look at scores from all three credit bureaus – Equifax, Experion, and Transunion.  We are required to use the borrower’s middle score for loan qualification.  And if there are multiple borrowers, then the lowest middle score is the score we use to qualify the application.  When I pull a report, if the score is less than 620, the client and I will discuss ways that they can improve their score, which may be simply waiting for their score to rise while they pay their bills on time, or contacting a credit counselor who might be able to help improve their score.

Regardless of how good the score is, I will look carefully at additional report details.  Sometimes these details can cause some underwriting questions or challenges, even if the score qualifies.  It’s usuaully best to deal with any credit questions proactively.

Home buyers deserve to know as early as possible whether they can realistically win loan approval.  There’s no need for them to waste their time or a Realtor’s time searching for a home when they cannot qualify for a mortgage.

We will review other key credit report details in future blog posts.  But for now, if you know someone looking to buy a home in Georgia, and this person may have a few “skeletons” in their “credit closet,” (hey Halloween is approaching!), refer them to me.  I’ll take the time to look at all the details, giving them the level of service they truly deserve.


 

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Q: How Do You Earn? A: Salary or Hourly

October 22, 2015

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If you saw my last post, you’ll remember that, in the mortgage world, how you earn your income is almost as important as how much income you earn.  See http://bit.ly/1KT9Snx for a quick refresher.

So let’s unpack how we underwrite the different types of income earning methods.  I’ll start with the easy ones first.

Salary Income:  If you earn a salary, we will need to know your gross monthly income.  That is, your monthly salary before taxes and withholdings.  We basically take your annual salary and divide by 12 months.

Underwriting will review your 2 most recent pay stubs and W-2 statements.  Don’t worry if you just started a new job.  So long as you are in a W-2 salaried job and you did not have a job gap of more than 6 months prior to your current job, you can qualify once you have 30 days of pay stubs.

Hourly Income:  If you are paid by the hour, underwriters will base your income on your average earnings over the last 24 months.  We will obtain a “Verification of Employment” (VOE) from your employer to document your income.  This employer-provided VOE is ultimately what underwriting will use when reviewing your application.

I know, it sounds confusing and very detailed.  That’s why it’s my job to know the details, understand the guidelines, and walk you through the process so you know exactly where you stand with underwriting.  I love handling the details and coaching my clients so that they can buy the home of their dreams.  If you are looking to buy in the State of Georgia and you want great mortgage service plus great rates, email or call me today.  We will make buying your dream home as easy as it can be.

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So How Much Money Do You Make?

September 24, 2015

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It pretty much goes without saying that everyone needs an income and most people need a job to qualify for a mortgage.  “No duh, Sherlock, right?”

Some people can qualify for a mortgage if they have an income and no job.  For example, retirees who have income from Social Security and retirement assets can use income from these sources to qualify without a job.

But the majority of us must be employed and earning a regular paycheck to qualify.  So here are some important income questions underwriting will want to consider when you apply for a mortgage.  #1:  What is your income?

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#2:  How do you earn your income?  Your answer to that question dramatically impacts your ability to qualify for a mortgage and the documentation you must provide to verify that income.  It also affects how we calculate the monthly income that we enter on your mortgage application.

Below is a quick summary of different income earning methods we frequently see in the mortgage world.  In future posts, we will review in more detail how underwriting verifies each different method of earning your wages.

  1. Salary income
  2. Commission income
  3. Hourly income
  4. Bonus and overtime income
  5. Part time job, second job, and multiple job income
  6. Self-employment income
  7. Rental income
  8. Child support, alimony, maintenance income
  9. Asset based income
  10. Social security / survivor and dependent benefit income
  11. Tip income

Not sure whether your income will qualify for a mortgage on your Georgia dream home?  No worries, just give a call to Dunwoody Mortgage Services.  We will ask you the right questions to make sure that your eligible income is recorded correctly for underwriting.  Give me a call or send me an email to start the process.  We will make sure that we do this right the first time!

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Should I consider a 15 Year Mortgage?

August 27, 2015

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Someone recently asked me, “Do you recommend a 15 year mortgage now since interest rates are so low?”  To quote a CPA friend of mine when asked if a business expense is deductible, “It depends.”  The question I will ask in response is, “How much can you afford to pay every month?”  The answer to the question depends totally on the borrower’s budget.

While getting a lower interest rate is a very good thing, amortizing a loan over 15 years instead of 30 means that you pay significantly more principal with each payment.

So let’s play with the numbers to put the question in perspective:

Your friend Sally is looking to get a $250,000 mortgage on a single family home.  She has excellent credit and will make a 10% down payment.  Let’s assume that Sally would have received a 4.0% interest rate on a 30 year mortgage and her monthly principal and interest (“P&I”) payment would have been about $1,194.  For a 15 year mortgage, let’s assume that Sally would have received a lower 3.25% interest rate, but her monthly P&I payment would have been much higher at $1,757.

Over the life of the 30 year mortgage, Sally would spend $179,674 in total interest payments.  Over the life of the 15 year mortgage, Sally would spend $66,201 in total interest payments.  Ultimately, Sally would save about $113,500 in total interest payments by selecting the 15 year loan.

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Saving that amount of money over the life of the loan is fantastic.  But, on the flip side, Sally would have to pay an extra $560 per month to “earn” the lower rate.  Only Sally can decide if that fits in her budget.  (And of course, Sally would have to earn an income high enough to support the larger payment based on our debt to income guidelines.)

So if your friend Sally, or anyone else you know, wants to buy a new home and thinks a 15 year mortgage is the way to go, have her contact me and I will run the numbers for her.  I’ll take the time to explain the details, and then let Sally make the decision that is best for her family.  There are other ways to reduce your total interest expense, even if you select the 30 year mortgage.  Curious?  Call my mobile phone or send me an email to start the conversation now.

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You Can Do It!! Part 3

July 27, 2015

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Let’s finalize our mortgage myth busting process right now.  We have previously exploded myths regarding the character and capital criteria in mortgage lending.  Now let’s deal with myths regarding your “capacity” to obtain a mortgage.

When it comes to loans, the term “capacity” is your ability to make your monthly payments.  To determine your capacity to pay your mortgage, underwriters will compare your monthly gross income (before taxes, retirement, and other deductions) to all of your monthly debt payments.  If your debt payments are not too high relative to your income, you are deemed to have sufficient capacity to obtain the loan.

A surprising percentage of people believe that if they simply have a student loan – regardless of the amount – they cannot qualify for a mortgage.  The TRUTH here is that you can still qualify for a mortgage even if you do have a student loan (or an auto loan, or an auto lease, or credit cards, or other types of debt).

The critical question here is not IF you have a student loan, instead it is, “How large are your payments relative to your income?”  Underwriters will scrutinize your “back ratio,” which is the sum of all your monthly debt payments – student loans, auto loans, the new mortgage payment on that house you want, etc. – divided by your monthly gross income.

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As long as your back ratio is not too high, say 45% or less for a conventional loan and 50% or less for a FHA loan, you will likely have your loan approved (assuming no other underwriting “issues,” of course).

So let’s summarize the mortgage myth destroying logic with this:  if your credit score is 620 or higher, and you have (or can get from relatives) enough cash for a 3% or more down payment, and if your current monthly debt payments are not excessive, and you want to buy a house, then remember, “You can do it!”

Actually, I’ll correct this as you will need help from someone licensed to originate loans, so let’s just say, “We Can Do It!”  If you dream of owning your own home in the state of Georgia, give me a call and let’s discuss your situation.  I’ll be honest and tell you what the real situation is.  Don’t believe the myths and then wait to take action.  The TRUTH is we might be able to get you into your dream home sooner than you think.

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You Can Do It!! Part 2

July 21, 2015

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In my last post, we reviewed the fact that a high percentage of Americans want to own their own homes, and we looked at the first (“character”) of three primary criteria that lenders evaluate when underwriting loans.

The second important criteria you need to qualify for a mortgage is “capital.”  You must have some cash available to make a down payment.  The lender wants you to have some equity, some “skin in the game” when you purchase a new house; therefore, the requirement for a down payment.

But there are myths about down payments.  For example, a high percentage of recent survey respondents think that you must make a down payment of at least 20% to buy a house.  That is one big, FAT myth.  The TRUTH is that you can purchase a home with down payments as low as 3.5% for an FHA loan and 3% for a conventional loan.

Now keep in mind that, with conventional loans, larger down payments can earn you a better interest rate and a better premium on your mortgage insurance.  But you can obtain a mortgage with the low down payments mentioned above, you will just pay a little more for your lower down payment.

You will need to provide bank statements showing that you have the cash available for your down payment and the other cash you will need to close your loan – things like closing costs and prepaid escrow items.  In some cases, you may have to show “reserves,” extra cash available to cover future mortgage payments.

You can get these funds from your bank account, investment accounts, gifts from relatives, and, in some cases, you can borrow funds from retirement accounts (e.g., 401K).  Your Realtor can also negotiate for the home seller to contribute cash to help cover the closing costs and prepaids.

We’ll look at “capacity” and myths related to it in my next post.  But for now, if your credit score is 620 or higher, you have enough cash for a 3% or more down payment, and you want to buy a house, just remember, “You can do it!”  If you dream of owning your own home in the state of Georgia, give me a call and let’s discuss it.  Don’t believe the myths.  We might be able to get you into your dream home sooner than you think.

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Buying a home with little money down

October 14, 2014

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So you are looking to buy a home with as little down as possible. You have some savings, and would like to wait to save more money, but circumstances are speeding up the time frame on when you need to buy a home. Maybe you need a bigger home for your growing family. Perhaps you are moving into a new city for work. Regardless of the circumstances, you need to buy a home now.

Unless you qualify for a VA or USDA loan, you’ll need to make a small down payment. Then what about closing costs, prepaids, etc.? Let’s take a look at the minimum down payment and ways to cover the other costs of buying a home.

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While the seller can give money toward paying a buyer’s closing costs and prepaid items (more on that in a moment), the seller cannot give any money toward the down payment. The down payment itself can be as little as a 3.5% down payment using an FHA loan, or 5% if using a conventional loan.

What if you don’t have the down payment today? One option could include borrowing money from retirement accounts. Most retirement accounts allow for you to borrow money without penalty to long as you are buying a home AND you pay the money back into the retirement account. Another option would be to get a gift from a relative/acceptable gift source for the loan program.

Using one of those options (or a combination of them) will take care of the down payment, now let’s focus on finding ways to pay the closing costs (costs associated with buying a home/getting a loan) and prepaids (insurance and property taxes on the home).

As mentioned earlier in this post, the seller can contribute money toward paying your closing costs and prepaid items. The exact amount depends on the purchase price and loan program. FHA loans allow the seller to contribute up to 6% of the purchase price toward closing costs and prepaids. Conventional loans allow 3% of the purchase price when making the minimum down payment.

Another option would be doing a no closing cost loan. Between these two options (seller paying money toward closing costs and prepaids AND doing a no closing cost loan), we can get closing cost and prepaids covered.

As you can see, there are several options available to help someone buy a home without having a lot of assets at the start of the loan program. The best option is to work to save money up prior to making the home purchase, but sometimes “life happens” and you buy a home sooner rather than later.

This is why you need to work with the professionals at Dunwoody Mortgage Services. We can use any one or combination of the options outlined in this post to help get you into your new home sooner rather than later. If you are looking to buy in Georgia, contact me today to get started. We can talk about options, go through the prequalification process, and get you ready to buy your next home!

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You don’t need 20% down to buy a home

November 6, 2013

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I’ve often wondered why many people who talk with me about buying a home assume they need a 20% down payment. Since staring in the mortgage industry in 2007, I’ve always been able to offer a conventional loan with a 5% down payment to my clients. The only exception was a couple of months in early 2009 when the minimum down payment for conventional loans in Georgia was 10%.

From the sound of this CNN Money article published yesterday, it seems 5% down conventional loans are something new. The article says that several large banks are loosening the purse strings, offering loans with down payments that are as low as 5%.

What is frustrating about this article is that I can and have been able to offer conventional loans with as little as 5% down. Guess what? So have those same large banks. I don’t understand why media news and broadcast stories make it sound as if the only way to get a conventional loan is to come with a 20% down payment.

So we are all on the same page, here are some standard guidelines when it comes to the minimum down payment:

Conventional Loan: you need a 5% down payment and a 620+ credit score. There is PMI on the loan, but the down payment is only 5%.
Lender Paid PMI Conventional Loan: you can also qualify for this program with a 5% down payment and a 620+ credit score. There is no PMI monthly payment, but the interest rate is going to be higher than a 5% down conventional loan with monthly PMI payments.
FHA loans: you need a 3.5% down payment. Most lenders prefer a 640+ credit score though a few will still do as low as 600. The monthly PMI payments are significantly higher each month for FHA loans.

Did you notice the credit score requirements listed above? From news reports, it sounds as if you must use an FHA loan if you have an average or below average credit score. That’s not true. Lenders will now approve a 5% down conventional loan with a lower credit score than what most lenders will allow for FHA loans.

In short – don’t believe everything you see on TV or read on the internet. Contact a mortgage professional to get accurate information for the home loan process.

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FHA needs a bailout?

August 14, 2012

I ran across this article by The Economist last week. It raises a valid point, and provides some insight into why FHA has made changes to their guidelines over the past few years. The one thing to know is that FHA loans do not need a bailout – for now. That is also the opinion of this article.

For the full article, please use this link. For a quick summary of the points:

  • FHA loans were intended to help people to secure home loans coming out of the Great Depression
  • FHA loans were a niche program until they began losing market share to subprime lending in the early 2000’s
  • when the housing market crashed, borrowers looking for subprime loans turned to FHA loans to purchase homes
  • In 2006, FHA insured loans of $52 billion. That figure increased to $330 billion by 2009. As you can see, FHA did become the new subprime loan program as I personally blogged about in 2008.
  • FHA now has some “dicier” loans, which is why the guidelines have increased with minimum credit scores and increases to monthly mortgage insurance rates
  • As long as there is not a double dip recession, it appears FHA will be OK and not in need of a bailout.

The one aspect the article ignores is going into detail about mortgage insurance. The upfront premium was increased from 1% of the loan amount to 1.75% of the loan amount. The monthly premium has increased 5 times in the past few years.

For all of you who ask “why is FHA continuing to increase its monthly mortgage insurance premiums?,” this article sheds some insight. It is to ensure FHA continues to operate and not need a bailout as it fully guarantees billions and billions of Dollars worth of loans from the U.S. housing market. The increase of premiums are designed to keep the coffers full to cover the losses from foreclosures on FHA insured home loans.

I hope this has provided some insight into FHA loans and the reason for all of the guideline changes over the past few years.

MI comparison for FHA and Conventional Loans

August 7, 2012

I received an email Monday afternoon inquiring about differences between mortgage insurance on FHA and Conventional loans. After replying to the email, I thought about it and couldn’t remember the last time I posted anything on this topic. There have been many changes to mortgage insurance for both conventional (premiums gone down if above average credit) and FHA (premiums gone up across the board) loans. Let’s take a look at mortgage insurance rates as they are today.

FHA Loan with a minimum down payment of 3.5% on a loan amount of $250,000:

  • there is an upfront one time mortgage insurance premium of 1.75% of the loan amount. In this case, $4,375 is added to the loan
  • the monthly mortgage insurance is based on a factor of 1.25% of the loan amount divided by 12 (months of the year)
  • in this example, the monthly mortgage insurance is $264
  • these insurance rates hold for credit scores down to 620

Conventional Loan with a minimum payment of 5% on a loan amount of $250,000:

  • there is no upfront one time mortgage insurance premium
  • the monthly mortgage insurance is based on a sliding scale. The higher the credit score, the lower the premium. Assuming the credit score is 760+, the monthly factor is 0.59%. That is less than half of the FHA equivalent! At a credit score of 660+, the monthly factor is 1.20%. That is still less than FHA’s.
  • in this example, the monthly mortgage insurance is $122 if excellent credit and $250 a month as long as the credit is at least 660.

As you can see from this 30 year fixed comparison, even with the minimum down payment, the numbers show a conventional loan can result in a lower monthly payment for the borrower based on:

  • no upfront mortgage insurance premium rolled into the loan
  • lower monthly rates on the mortgage insurance. The monthly payment is greatly reduced as one’s credit score increases
  • the numbers improve as the down payment increases on the loan

You might be thinking, “this is for a 30 year loan, what about a 15 year loan?” An excellent question! In the past when putting down 10% or more on an 15 year fixed FHA loan, there was no monthly mortgage insurance. This is no longer the case.

Today a 15 year fixed FHA loan still requires the upfront mortgage insurance premium and comes with a monthly premium of 0.60% of the loan amount if a 5% down payment and 0.35% if a 5-21% down payment. Assuming excellent credit, conventional loan mortgage insurance rates are either the same or slightly better than FHA on 15 year loans. As one’s credit score decreases, the rates on a 15 year fixed mortgage begin to look more attractive.

The moral of the story – generally speaking, the numbers show conventional loans result in a lower monthly payment in terms of monthly mortgage insurance costs. This becomes even more apparent as one’s credit score increases.

When should one consider using FHA? Again, generally speaking, if 3.5% is the only amount you can make for a down payment and/or one has less than average credit. That is where FHA loans may be more attractive, and in some cases, the only option.

How does one decide to go FHA or conventional? You should always talk with a mortgage professional who will ask you questions and give you a pro/con analysis of both loan programs. Be careful of working with someone who gives generalizations like “you are a first time home buyer, then an FHA loan is right for you” and then not provide any more details as to why the loan is right for you. If you are looking to buy or refinance a home in the state of Georgia, I’d be happy to help you put together a pro/con list when deciding between FHA and Conventional loans.