Tag Archives: conventional

If Only the House had …

If you’re out hunting for houses, you may be finding that not every house seems to fit your needs or your wants to a “T”.   Maybe the houses you find have 75% of what you want, but the other 25% makes it so you don’t want “that” house.  And it makes sense to not settle for something that doesn’t meet most of your needs.

Or maybe you have found the perfect house, but it isn’t up to snuff electrically or needs a new roof or just has too many things wrong with it to even consider starring in your own Money Pit movie!  It’s no fun going into a house knowing that you will spend a ton of money out of pocket just to get it structurally and mechanically livable.

There is a light at the end of this tunnel, hopefully one that gets you the house that meets 75% of your needs and with some help, gets you to 100% perfection (well, we know that really can’t happen, but it’s worth a try!).

In comes the renovation loan. There are a few options out there – both of which MidCountry Mortgage offers.

The first option is the FHA 203K loan.  This loan is specific to FHA financing and follows FHA guidelines for qualifying with a minimum of 3.5% down.  The difference is that you can borrower money to do the work that you want done and the work that the FHA appraiser says needs to be done (also known as work orders).  The work and fees get rolled into your total loan and FHA only allows this loan type on a primary residence.

There are two versions of the FHA 203K loan – one is called Limited and the other is called Standard.  The Limited version allows the borrower to finance up to $35,000 into their loan not to exceed the  FHA county loan limits.  And of course, as with all mortgage loans, the borrower must qualify for the higher loan amount.  The loan amount must include the work to be done, fees associated with the FHA 203K loan, contingency reserve (percentage of the work held aside for overages) and permits.  This usually allows for the bid to be approximately $30,000-$31,000.  The bid must include labor and materials.

It’s called the Limited due to the cap on the amount that can be financed, but it’s also limited in nature to “what” can be done. You could rehab a bathroom, finish a basement, replace shingles or windows, get new appliances or flooring and of course, anything health and safety related that FHA may require.  The house may not have running water or may be in need of a new well – both of which can be taken care of with an FHA 203K loan!  What you can’t do is anything that is considered luxury (pool – bummer, right?) or anything structurally or dealing with the foundation.

There is good news for those of you who are first time home buyers. If you utilize one of the first time buyer programs with MN Housing, you can use the Limited version of the FHA 203K loan to help make this home the way you want and take advantage of down payment and closing cost assistance!

The second FHA 203K version, Standard, has no cap other than the maximum county loan limits.  The Standard has a few additional requirements and fees, such as the need for an FHA 203K consultant.  This person reviews the contractor’s bid and also visits the home to determine the scope of the work, adding in anything that FHA would require in order to meet FHA guidelines, such as health and safety issues.

With this version, you could add a garage, move a home from one location to another, add another story to the house, move a load-bearing wall or do any and all of the things listed above. More than anything, this is going to be for a purchase or refinance that requires more than $35,000 and may possibly require work to the structure or foundation.

With both FHA 203K versions, an appraisal will be done taking into account “after-improved” value (home value given by the appraiser taking the work to be done into account). The maximum loan allowed with FHA is 96.5% of the lesser of the sale price paid for the home plus the renovation bid and 203K costs OR 110% of the after-improved value.

The second option is the Fannie Mae Homestyle.  This is conventional financing, whereas the FHA 203K is FHA financing.  This loan type is more similar to the Standard FHA 203K version in that there are no caps as to the amount of work that can be done, except by your qualifying and the maximum loan limit with Fannie Mae.

The renovation costs include the bid (labor and materials), a contingency reserve and fees specific to the renovation loan, all of which are rolled into the loan. There will also be a fee for a person to perform a feasibility study (similar to the 203K consultant).

For a primary residence, you are required to put 5% down off the lesser of the purchase price plus the cost of renovation or the “after-improved/as-completed” value.   One thing to note is that the cost of the renovation cannot be more than 50% of the after-improved value.   For example, if the after-improved value is $300,000, the renovation costs (including fees) cannot exceed $150,000.

The Fannie Mae Homestyle can also be used to purchase or refinance a second home (10% down required) or investment property (15% down) but 20-25% down is preferable with investment as the monthly mortgage insurance costs are higher on investment homes.

Regardless of using the FHA 203K or the Fannie Mae Homestyle, you will be taking a loan out for more than what you paid for the home. Almost all lenders/investors require that you use a contractor (self-help not allowed), even though FHA guidelines allow for self-help.

Keep in mind, these loans take a little bit longer from start to finish since each situation is different and we are dealing with a third party – the contractor you choose. In the end, though, it’s worth the wait to be able to get as close to the 100% perfect home you want and need!  I am here to help make the home you find the home you will love!

I Can Afford That, Right?

When looking at buying a house, there are a lot of things to consider. Do you NEED a two-car garage or do you just WANT a two-car garage?  Do you have a school district preference or prefer a certain city so you can be closer to work?  Do you want a rambler or a two-story and do you need a fenced-in yard for your furry family member?  Do you prefer to avoid outside maintenance, making a townhome a better option?  Is it important the house is updated or are you pretty handy at DIY?

Some of these decisions are a basic “wants” vs. “needs” analysis. Obviously, if you had a household of four people, a one-bedroom home won’t cut it – that would be a “need,” whereas having a pool in the back is more of a “want.”  Lot’s of things to take into account.  The most important though, should be what price home, or payment, that you can really afford.  Buying a house isn’t just a house payment for the next 30 years – it’s a commitment along with other financial responsibilities.

Many of you may be renting right now and, quite possibly, could be paying more in rent than what you can afford for a house payment. One of the mortgage lender’s goal is to help you get financing, but the main goal should be to make sure that whatever financing you obtain, you are comfortable with the payment.  Let’s face it, you’ll have this payment for the next 30 years and eating ramen noodles every night doesn’t sound like fun.

So how do we determine what payment/price you can afford? Lenders use something called ratios to determine your qualifications.  Ratios take a certain percentage of your GROSS monthly income, taking into account other monthly debts you have, to come up with a maximum house payment.  Sometimes, that top-end payment is NOT what you want to pay because it puts you out of your comfort-zone.  And if that’s the case, please let your lender know that!  There is no reason you should ever pay more per month than what you financially can afford.  You know your spending habits much better than your lender.  That said, if you think you can spend more than what the lender determines you can afford, we can’t increase it just to make you happy.  To make that work, your income has to be higher, debts lower or you may need a co-signor or co-borrower to bring that payment to what you feel you can afford.

Different loan programs have different guidelines for ratios. One constant is that your monthly income is looked at in gross terms versus net (after taxes/deductions).  The exception to this is if you’re self-employed.  In this situation, we look at the NET profit or loss on your federal taxes (assuming a schedule C filing) since this is what you got taxed on.  Also, different types of income might be looked at as an average over two years.  You’d want to check with your lender about how they will look at your specific situation.  For now, let’s keep this simple and use an FHA example assuming the person is salaried at $5000/month and has $650/month in debts.

In the example below, notice that there are TWO percentages being used. The first, we call the housing ratio.  This determines the maximum house payment you can make based on your monthly income.  The second is called the debt ratio.  This is based off your monthly income too, but now factors in any monthly debts you have (credit cards payments, car loans, other house payments, installment loans, lines of credit, ongoing payments to the government for taxes, alimony, child support, overdraft protection balances, etc.)  We will take the lesser of the two calculations to determine the maximum payment you can afford.  FHA guidelines allow 31% for the housing ratio and 43% for the debt ratio.  Some lenders may be willing to exceed these ratios, please check with your lender.

 

 

In this example, the buyer can afford a $1500/month house payment. The payment includes principal and interest on the loan, a monthly amount for property taxes and monthly amount for hazard/homeowner’s insurance and monthly mortgage insurance, if applicable.  If you were looking at a townhome, or something with monthly association dues, the lender would also factor this into the maximum payment you can afford.

Let’s say $1500/month puts you at a purchase price on a single family home (no association dues) at $220,000. You’ve gotten yourself pre-approved and are out looking at homes.  Did you know that you could look at multiple homes, ALL listed at $220,000, and possibly not qualify for ANY of them?  I know, I know … but your lender said you could look homes at that price.  So what gives?  Ultimately, you are getting pre-approved for a house payment, NOT a price.  The price of the property is a guide, so to speak.  In this example, if the lender used $229/month for the property taxes and ALL the homes you looked at had taxes higher than $229, then your payment would end up being higher than $1500, hence you wouldn’t qualify.  Not only will taxes affect the price you can afford, but so can the interest rates, association dues and hazard/homeowner’s insurance.  These are all moving parts to the home purchase puzzle!

As lenders, we do our best to give you an approximate price point, but knowing the above will hopefully help you understand that some houses you look at, though you were told the price would work, just won’t. Alternately, the house you look at could be $190,000 and the taxes could be crazy high,  making the payment higher than $1500, meaning you can’t afford even THAT lesser priced home.  It’s nuts, I know.

Remember I mentioned this was a single family home? Pretend you change your mind and start down the townhome or condo path.  If that should happen, then your $1500/month payment MUST also take into account association dues, which can vary dramatically.  This will lower your purchase price power approximately $20,000, maybe more depending on the dues.  Best advice here – talk to your loan officer if you decide to change property types so you can get a more accurate price range to be looking in.

So the question – “I can afford that, right?” has the wishy-washy answer of “maybe.” First, remember your income and your monthly debts will determine WHAT payment you can afford monthly.  And second, the payment you can afford will get varying results on whether you can afford a specific house depending on interest rate, property taxes and homeowner’s insurance amounts.  Your lender will get you pretty close to the price range you can look in so you have a starting point, but at least now you have a better understanding as to why you might not be able to buy the house you thought you could afford.

My goal is to provide education and a clear understanding of the process and your goals. It would be my pleasure to help you with your homeownership journey.

A Necessary Evil and A Little History Lesson

If you are like many people buying their first home, or subsequent home, it may be tough to come up with a large down payment or much of any down payment. Whether it’s just hard to save, debts are too high or you aren’t realizing enough equity from the sale of your home, down payment savings are tough to allocate.

Ideally, a 20% down payment is the goal to shoot for in order to avoid PMI or MI– private mortgage insurance or mortgage insurance. Reality is, most people, just don’t have that, so they must contend with the necessary evil of paying for mortgage insurance in their house payment.

But is PMI/MI really all that bad? First, let’s look at some history of down payments.   In the early 1900’s, down payments were commonly 40%- 50% for conventional financing – wow!  Of course, a house back then, may have only cost $5,000 – so $2,500 doesn’t seem like that big of a deal, BUT when annual incomes were approximately  $600-$700/year, that made coming up with that money hard, maybe even impossible

To help stimulate the economy, in 1934, FHA (Federal Housing Administration) came along with an alternative to conventional’s large down payments – they offered a minimum down payment.  With it, they charged mortgage insurance on an annual basis (factored monthly into the payment) and also collected an amount upfront called the Upfront Mortgage Insurance Premium (UFMIP), which is financed into the loan.  Throughout the history of FHA, the required down payment, annual MI and UFMIP amounts have adjusted to FHA’s needs (government loan type).

In the late 1950’s, conventional financing wanted to get in the game and make housing more affordable, so in came Private Mortgage Insurance companies (PMI). This insurance, paid for by the buyer, helped lenders feel more comfortable with smaller down payments.

So what exactly does PMI/MI do? Unfortunately, it doesn’t do anything for you.  It is all about insuring the lender in case you default on your loan.  If the lender has to foreclose due to non-payment, they can fall back on this insurance to help cover some of their losses.

With conventional financing, there are certain coverage percentages which differ with PMI depending on your down payment amount and your credit score. If you use a first time buyer program, with PMI, you may even have a lower percentage, thus a lower PMI payment.

FHA’s annual amount for MI doesn’t vary on the credit score. If you put more than 5% down, you will have a lesser annual/monthly amount for your MI.  Even if you put 20% or more down, you WILL still have the upfront and the annual MI with FHA.

What about getting rid of the PMI/MI? This differs by program.  With FHA financing, you can’t get rid of the MI – it will be on your loan the entire term you have it.  Only caveat is if you start with 10% down, the MI will eventually drop off.

With conventional PMI, it will automatically go away when you reach 78% loan to value (LTV) of the original value (purchase price) of your home – or 22% equity. Fortunately, with PMI, you can be proactive and attempt to remove this sooner than that.  There are essentially two opportunities, but ultimately, the servicer of your loan (company you’re making payments to) will be the decision maker here on whether they allow this.

First, your LTV must be at 80% or less of the original value based on your amortization or actual payments you’ve made.

Or second, if you can show with a new appraisal that you have the necessary equity required by the servicer, you could request the servicer to drop the PMI.  Ultimately, cancelation is still up to the servicer.

So, the necessary evil isn’t really evil at all – it’s really a GREAT opportunity for you to buy a home without needing 20% down, without having to scrape and save every penny you earn. And, if you’re eligible, you could even get assistance for that down payment with one of the many first time/subsequent home buyer programs available in Minnesota!

End result: the necessary AWESOMENESS is that you can get into a home sooner than later due to this little necessary evil!

Need Money for Closing Costs?

Most of the first time buyer assistance programs require that the assistance you receive, for down payment and/or closing costs, is paid back. Usually it’s paid back over a period of time or the repayment of it is deferred until the house is sold or no longer your primary residence.  Either way, the entity providing the funds gets their money back to help the next home buyer in need.

MN Housing just announced a new grant program which doesn’t require any money to be paid back!  As with all MN Housing programs, there are eligibility requirements.  These vary depending on WHICH MN Housing program you use and there are three of them – Start Up, Step Up and MCC (Mortgage Credit Certificate).  The grant works with all three of their programs AND you can pair it WITH the assistance!

In any case, you still must meet guidelines set forth by the underlying loan type you are securing — FHA, VA, RD (Rural Development) or conventional. If you meet those guidelines, then we look to see if we can layer the loan type with the MN Housing program.

Generally speaking, they have income limits that your household must be under, and as with the underlying loan program, there are minimum credit score requirements. Being a first time home buyer is a pre-requisite for two of the three programs – Start Up and MCC.  And the definition of a first time home buyer is not having ownership interest in a principal residence in the last three years.

The grant is only available when using a conventional loan with your MN Housing program. It cannot be used with VA, FHA or RD.  The grant amount will differ depending on which guidelines your underlying loan is following – Fannie Mae or Freddie Mac.  Who are Fannie and Freddie you ask?  These are the agencies that provide the guidelines lenders follow for conventional financing.  Your lender will determine the best underlying loan for your needs and situation.

To be eligible for the grant, you must have annual qualifying income under $72,320. Qualifying income is the income your lender uses to determine your qualifications for your loan.  For instance, if you are the only one on the loan, but your spouse is not, then the qualifying income is just your income.  This limit is for the 11-county metro area, which encompasses Anoka, Carver, Chisago, Dakota, Hennepin, Isanti, Ramsey, Scott, Sherburne, Washington and Wright Counties.  Income limits are lower in the remaining MN counties.

If using Fannie Mae, the grant amount is a flat $1,500 to use toward your closing costs only.

If your lender determines Freddie Mac guidelines are your best fit, the grant will vary based on the loan amount you’re securing and qualifying income – (which still needs to be below the aforementioned limits).  The grant can be used for BOTH closing costs and down payment.  Minimally, you would be looking at ½% of the loan size, but you could be eligible for a larger grant if your income meets lower limits set for the program.  Any lender participating with MN Housing can give you further details.

As always, when working with a lender, make sure they offer these great programs with MN Housing and any other agencies to help you get into your house with as much assistance as possible. And who can say “no” to grant money!?!

You ARE Worthy!

Life is hard, and at times, just not fair!  Things happen – whether it’s a job loss, divorce, decline in home values, medical emergency or death in the family.  These things wreak havoc with our financial well-being.

The above reasons, and I am sure many more, played a large role in people filing bankruptcy, losing their home to foreclosure, or for some, having to sell their homes as a short sale just to get out from under.  It’s tough, and for those of you who experienced these major set-backs, I am truly sorry you had to deal with such devastation!

ID-100142021You might be thinking your chances of owning a home for the first time, or ever again, will never happen after these experiences.  I am here to tell you that we all have second chances and you are worthy of being a homeowner!  But how?

First, it helps to know the general guidelines for loan qualification after a short sale, foreclosure or bankruptcy.  The guidelines vary by the type of loan you take out.  FHA, the Federal Housing Administration, will be more lenient than Fannie Mae or Freddie Mac, which offer conventional loans.  Sometimes, there are extenuating circumstances that could lessen the wait period, but those are considered on a case-by-case basis.

Bankruptcy – home financing eligibility date is taken from the date the bankruptcy was discharged from the courts.  It is also dependent on the type of bankruptcy – Chapter 7 or 13.  I will advise for Chapter 7 bankruptcies, but the wait period may be less with a Chapter 13 if certain requirements are met.

  • FHA & VA:              2 years
  • Conventional:   4 years

Foreclosure – eligibility date is taken from the latter of the sheriff’s sale date or the date the claim was paid to FHA.  The claim date is only applicable if the loan foreclosed upon was FHA financing.  This date is usually 3-6 months after the sheriff’s sale.  Conventional financing could have a shorter waiting period depending on circumstances and other criteria.

  • FHA:                          3 years
  • VA:                             2 years
  • Conventional:    7 years

Short Sale – eligibility date is the date the sale of the home took place.  The waiting periods are the same as a foreclosure, except with conventional, where the waiting period can vary depending on the circumstances, as well as the amount of money you have down.

Once you’re over that waiting period, then what?  As lenders, we certainly want to see that you’ve re-established credit.  We understand that your credit and finances took a beating during that time – it happens!  But, we want to see that you came out in a better place.  We’re looking for on-time payments and a lack of derogatory credit, such as collections or charge offs.

Long and short of it – you ARE worthy, and after having a bankruptcy, short sale or foreclosure in your past, there is hope of becoming a homeowner!  We’d love to help!

*Image compliments of Stuart Miles — freedigitalphotos.net

 

A Wolf in Sheep’s Clothing?

Lately, I have been helping a lot of people purchase their home and it hasn’t been a traditional single family home.   Many MN first time homebuyers opt to purchase a townhome or condominium because it works in their price range or their lifestyle.

When I say “condo,” what do you visualize?  Do you see a high-rise building that resembles an apartment complex?  These are typical versions of condos, and believe it or not, many apartments have been converted to condos, which may explain why they look like your first apartment!  These properties are perfect for many people, but some might prefer a traditional townhome.

Be aware that some condos are like a wolf in sheep’s clothing — on the outside they look like townhomes and feel like townhomes, but on the legal description of the property, they’re condos.  So what does this mean to you?

Simply put, the difference between them has to do with ownership of the land beneath the unit.  You own the land if it’s a townhome, you don’t if it’s a condo.  This differentiation is really a moot point since both properties are part of an association which governs what you can do to the property, or what you can’t do, such as bulldoze it down and build something new.

Most condos have a shared water line.  Water comes into one meter at the complex and then individual lines go to the units.  The water is part of the association dues you pay on a monthly basis.  Usually, in a townhome, you will have your own water meter and will be responsible for this utility on your own.

The most important differentiation may come with financing.  Getting a loan on a condo can be tougher than a townhome.  Many years ago, condos got a bad rap.  Investors would buy condos as rentals and if their rent was not paid, they would let the properties fall into disrepair. Now there is a stigma tied to condos that’s been hard to shake!

Some loan types, such as FHA, require the complex to be approved by FHA in order to be eligible for financing.  If it’s not approved, you may have a difficult, or drawn out process buying a condo in the complex using FHA financing.  For some, conventional financing may be the only option available in this situation.

Regardless of financing types, even IF it’s FHA approved, the lender will receive a questionnaire completed by the association to make sure the complex is financeable.  The lender will consider how many units are rented, how many are owned by one person, what their budget looks like, and most importantly, if the association is currently in litigation.

The biggest thing to take from this is many townhomes are really condos in their legal descriptions.  And to be clear — just because it’s a condo doesn’t make it a bad property type to purchase, or make it a bad investment, it just means there may be some extra hurdles with financing.   Make sure you work with a lender and realtor who can help you be sure what you purchase is a sheep, and not a wolf in disguise!  It will make the financing process go that much more smoothly!

 

Dakota County + Conventional Financing = Happy Homebuyers

Shout out to our partners at the Dakota County CDA!  For as long as I can remember, they have only allowed FHA or VA loans to be used in conjunction with their MN first time home buyer program.  They now allow a 30-Year fixed conventional financing option via the HFA Preferred conventional program and this is great news.

As a refresher, all MN first time home buyers must qualify for a basic loan program — FHA, VA or conventional financing.  I look at this as the cake.  As long as you meet the parameters for credit, income and assets for the specific program, you can qualify for your loan — the cake.

One step further, if you meet the parameters of the first time home buyer program, such as the one in Dakota County, you could then get down payment and closing cost assistance — which is the frosting on your delicious cake!  Now wouldn’t that be sweet?

There are guidelines for the conventional loan that must be met in order to qualify.  First, ID-10039817there is a minimum credit score of 640  to even be eligible for the Dakota County  program.  The required down payment is at least 3% and you must contribute $1000 of your own money (no gift) to the transaction.

Since you have less than 20% down, you will be required to have private mortgage insurance, also known as PMI.  The good news is that the PMI for this first time buyer program has reduced coverage requirements which may result in lower monthly PMI payments.

You can learn more about the Dakota County program here, but as a quick recap, they offer three different down payment options.  These are dependent on your household income, but range from 3.5% of the purchase price (max of $7500)  up to 10% of the purchase price (max of $10,000).  As with all MN first time home buyer programs, the assistance is a second loan against your property.  If you sell or refinance your home, the second loan becomes due and payable.

Another requirement for this program, as with other MN first time buyer programs, is to attend the Homestretch class.  This is a worthwhile, 8-hour class that will teach you everything you need to know about buying a home, the process, as well as keeping your home.  You can find classes at the Homeownership Center. Costs for these classes will vary on the location you choose, such as directly from Dakota County or another provider.

I am an advocate of the in-person class because you can learn so much from other attendees.  If it doesn’t work in your schedule, you can “attend” the class online via their Framework class.  If you go this route, you will also need to set up a one-on-one meeting with a first time buyer specialist at the Dakota County CDA.

I am excited we can now offer conventional financing with Dakota County.  They have a wonderful program and for those of you with higher credit scores, it may be a much better financial option to FHA financing in terms of your monthly payment.

As always, it would be a pleasure to discuss your situation to see which cake you qualify for and what type of frosting we can layer on top!

*photo courtesy of  Salvatore Vuono, freedigitalphotos.net

 

MN Housing Makes a Few Changes

So many of my blogs have to do with MN Housing and their great programs.  It’s true, I love working with MN Housing.  They have fantastic programs for MN first time home buyers and even NON first time home buyers.

They offer quite a few different assistance programs to help buyers with down payment, as well as closing costs.  They even offer a conventional loan program with just 3% down and NO monthly private mortgage insurance (PMI).  That’s a huge savings — and another blog post!

up down arrowAs with all MN first time home buyer programs, there are income limits and purchase price limits.  To be eligible for these programs, you need to fall under the household income limits.  These limits have just been revised DOWN a tad.

The new income limits for their Start Up, Step Up and MCC programs have been revised:

  • $82,900  1-2 person household
  • $95,335  3+ person household

Household income is calculated differently depending on the program.  The Start Up program looks at ONLY the income of the people on the loan.  If the person is married, and the spouse is NOT on the loan, the spouse’s income is STILL counted.  All income is counted, even if the lender isn’t using it for qualifying.  For instance, if the borrower gets overtime, but it’s been less than a 2-year history, the lender will not use this in qualifying.  BUT, the income must be calculated for household income purposes.

The Step Up program uses “qualifying income” for the household income.  That means, if the spouse is not on the loan, their income is NOT calculated.  It also means if we don’t use overtime, like in the example above, then that income isn’t used in calculating the household income.  The benefit to this is more people will be eligible for this program!!

As a point of differentiation, MN Housing actually has TWO programs under Start Up which have DIFFERENT income limits than the above.  These limits have not changed and can be found at their site.  The respective programs are the deferred payment loan and the Home Help loan.

They made another change to the purchase price limits.  The maximum price of the property has been increased to $310,000 for the 11-county metro area.  This means if you purchase a home for $310,001, it will disqualify you for the MN Housing program — just make sure you purchase it for $310,000 and you’re golden.  Less is good too!

As with all programs, guidelines change.  That said, some of my older blogs may reference income limits or purchase price limits that are out of date.  Please always check with me, or the respective first time buyer site, on the current guidelines to make sure you’re eligible for the program you want!

You … from the Underwriter’s Perspective – The First “C”

Do you cringe or shudder when you hear the word “underwriter?”   Do they seem like an untouchable person?  Almost like the Wizard of Oz?  It’s not a bad word and certainly not someone to fear.  As a matter of fact, good underwriters are actually our allies.  They want to help people buy homes.  But how do they do that?

In the mortgage world, we have something called the 4 C’s.  These are the things that an riskunderwriter reviews to determine your credit worthiness and ability to get a loan.  The first “C,” and I would say the most important “C,” is Credit.

The first step is looking at your score.  Score requirements differ based on the loan type you’re doing.  In general, a 620 middle score is required for FHA financing and usually we need 680 for conventional financing.  Some programs,  including first time buyer programs, require a 640 score.  Scores aren’t created equal — in general, the more history and on-time paid accounts you have, the better.  This isn’t a suggestion to go open accounts to get more credit; that could actually bring your scores down. And so you know, scores can range from about 300-900.  The higher the better, of course!

This is just part of what the underwriter looks at.  It should go without saying that your payment history is key, so making payments on time is incredibly important.  The underwriter is primarily concerned with the last 12 months.  Consistent lates are a problem, but sometimes, if they are confined to window of time, you may be able to write an explanation to tell the underwriter the “why” it happened and the “why” it won’t happen again.

What about that collection account that was put on your report years ago?  This depends on the size of the collection and what it was from.  Medical collections are something we can ignore, but a collection that was in the last 12 months or so, may require that you pay it off.  Lots of collections are a cause of concern for an underwriter. There are items called profit and loss accounts too — which means the creditor wrote off the past due amount.  Next step is for this to go to collection.  These typically need to be paid.

How about disputes?  Most people aren’t aware they have disputes.  You may have one if you disagreed with a bad mark on your report or disagreed with anything that the creditor reported.  Disputes  stop the account from affecting your score – positively or negatively.  This is why lenders don’t want to see them on the report and will require, that with your lender’s help, the verbiage is removed from the respective accounts.  While in the loan process, make sure you don’t dispute anything.

Are you an authorized user on an account?  This means that someone, usually your parents, may have added you to an account to help you with credit, like a gas card.  You’re not responsible for this account or this balance, so it’s not actually helping or hurting you.  It doesn’t affect your scores, but is something lenders remove from their reports or we will have to count the monthly debt against you.

And last, what about major derogatory items — bankruptcies, foreclosures, short sales or judgments?  These can absolutely be deal breakers.  Judgments will actually need to be paid and typically prior to closing on the house.  Regarding the other items, each loan type has different waiting periods from the date the event occurred.  Not only that, the underwriter will look for a good letter of explanation as to why the it occurred and you must have re-established good credit.

This isn’t an all-inclusive list of what the underwriter is looking for, but it’s a good start.  Knowing and understanding your credit is the first step to homeownership.  I am happy to help you prepare for meeting today’s credit guidelines.  And come back to read about the next “C” — Capacity. 

Deferred Loan with MN Housing = MORE Assistance!

MN first time home buyers now have a better opportunity to get down payment assistance! MN Housing recently increased the available assistance on their Deferred Payment Loan program, making this down payment assistance program an option for many more MN first time home buyers!

Currently, there are three types of assistance with MN Housing via their Step Up program. The first, and most popular, is the Monthly Payment Loan.  Just as the name implies, there is a monthly payment tied to this assistance, but it offers the most money for down payment and closing costs.  The assistance is equal to 5% of the sale price with no maximum loan.  The monthly payment for this loan must be taken into account when your qualifications are determined.

my houseRates on the second loan assistance are the same as the first loan and the loan is amortized over 10 years.  As with all MN Housing loans, there are no pre-payment penalties on the first loan OR the second loan assistance.  This is the most used assistance because it has the same income limits as the general MN Housing program — household of 1-2 people is $83,900 in the 11-county metro area.

The new change, which is very exciting, has to do with the Deferred Payment Loan, which is the second type of assistance with MN Housing.  Again, as the name implies, it’s still a loan, which is interest-free, but it’s deferred.  That means, when you sell the home, or the home no longer is your primary residence, you have to pay the assistance back.  Ready for the new changes that will open this to more people?  First, the income limits have been increased from $50,000 to $60,000 for a 1-4 person household in the 11-county metro area.

Second, they raised the amount of assistance.  It used to be 5% of the sale price, with a max loan of $4500.  Though this is helpful, it just wasn’t enough.  The assistance is still 5% of the sale price, but now the maximum assistance is $7500!  This is HUGE.  The main reason — you can get more assistance and there is no monthly payment to consider when determining what you qualify for.

The last assistance program with MN Housing is Home Help.  This is also a deferred payment, interest-free loan which has a forgivable feature.  As long as you live in the home as your primary residence for six years, 50% of the loan amount will be forgiven.  Nice, right??

The Home Help loan has different income limits, lower than the the Deferred Payment Loan, which can be found on their site.  It also has a different calculation for the loan amount, which is determined by their online calculator, but it could be as much as $10,000!  There are some specific guidelines with Home Help which I would be more than happy to guide you through to determine if Home Help is the program for you.

MN Housing has many down payment assistance programs for MN first time home buyers.  For the most part, the appropriate program will be determined by your household income.  Since there are many factors that go into figuring household income, as well as whether the program works for your situation, you need to work with an expert and I can help!  I look forward to guiding you through the MN Housing programs and on your way to homeownership!