Tag Archives: credit score

You Through the Underwriter’s Eyes — Credit

Credit is super important in financing a home, and these days, even more so.  In my previous blog,  I introduced how underwriters make a loan decision based on four criteria – capacity, credit, cash and collateral.  That blog went over capacity – otherwise known as your income and employment.  Today, we will get to know what role credit plays in your loan decision.

Credit score trumps many things in today’s lending. For instance, you could have sufficient income, plenty of assets (money in the bank), but you don’t have the necessary score set forth by the investor.  Because of this, you might not be eligible for financing until your score meets investor requirements.  These “certain” scores will vary depending on program and lender.  Your individual credit scores are generated through three credit bureaus – Experian, Equifax and TransUnion.  Not everyone has scores and some people may have less than three scores due to a lack of or length of credit history.

As a consumer, you have the right to look at your credit report annually for free. You can visit www.annualcreditreport.com.   Getting your scores will cost you though, so be prepared to pay something to see your scores (costs vary).  A best first step is to visit www.myfico.com to learn from the best!  Your score may be available via other methods, such as your credit card company or outside companies you may pay to monitor your score.

The important thing to know here is that most mortgage lenders use the FICO scoring system, created by Fair Isaac Corporation in the 1950’s (source).  There is another major scoring system called Vantage, established by the three credit bureaus (source).  While Vantage scores are accurate under Vantage, they are not what the majority of lenders use for your score, so they may not be an accurate indicator when it comes to mortgage financing.

To unintentionally confuse matters, BOTH scoring systems pull from the three bureaus, one of which is Experian and their score is actually called a FICO score. Under the Vantage system, your Experian FICO score may be different than the FICO score under the FICO scoring system. Always best to know what system is being used to generate your score, especially since your lender is probably using the FICO system.

We now know score is the starting point, but it’s not the only point. In a previous blog, “No Credit = No Loan” alludes to, you don’t necessarily need a score.  But, we still need to look at your history.  Your score is an indication of how well you pay your bills, how much you use your credit (allowable limits in relation to actual balances), types of credit you have (revolving vs. installment), length of time credit has been established and recent inquiries (credit checks) into your credit.  And by the way, your score is literally a snapshot on the day it was pulled so it could vary daily.

Lenders are trying to determine your willingness and ability to repay the loan. Sometimes the score doesn’t tell the whole story, so they do look at other things.  Have you had any late payments in the last 12 months (may go back 24 months depending on program)?  Are there any outstanding collections or any other major derogatory things like judgments, bankruptcy, foreclosure or short sale?  If you have had one or more of the major derogatory items, the waiting period for new loan will differ depending on the loan program you use.  And guidelines for collection accounts will vary by program too – whether they must be paid or not.

Your monthly debts, items on the report and items not on the report, such as child support, alimony or tax payments, all need to be factored into that you can qualify for. The lender will run ratios, or percentages, to determine your qualifications using your usable/verifiable monthly income in relation to your monthly debts.

As an example, using monthly qualifying income at $5000/month and monthly debts at $650/month, below is how the figures shake out. These ratios are standard guidelines for FHA financing and will differ with other loan types.  The debt piece under credit goes hand in hand with the capacity part – income.

Sometimes, the underwriter also wants to know the “why” behind any derogatory items. What was the reason you had a bankruptcy or late payments on the credit card.  Again, they look at the whole file, as well as guidelines of your loan program, to determine the necessity of explanations.

To sound like a broken record, credit is the utmost importance when it comes to your loan. The advice here is simple: pay your bills on time; keep your balances status quo while in the process and do not close any accounts or open any new accounts.  If you have had derogatory items in your past, a lower score or no credit, start early and get in touch with a lender to discuss what you need to do to be ready for your exciting home-buying journey!   Next up of the 4 C’s – Cash.

No Loan = No Credit … Or Not?

You hear it all over the news and on advertisements how important your credit score is. I agree … your score is absolutely important and has become the first go-to thing lenders look for.  Lenders want to know what your score is, how long you’ve had credit and how well you pay your bills on time.

But what if you’re one of those people who doesn’t have a credit score? It happens, even to some people who have some credit established.  Maybe the history isn’t enough for a FICO (Fair Isaac) score to be generated or there are just too few items on the report.

As an experienced loan originator, I’m here to give you some hope. Not all loan programs require a credit score.  The main criteria – you must meet the eligibility requirements of a MN first time homebuyer program.  In conjunction with this, we will use FHA financing which allows us to create credit.

Really, what it all comes down to is WHAT you have for debt obligations outside of a traditional credit report. It’s imperative that we create credit for the lending process.  This means we’re looking for accounts that you pay on a monthly basis, ON TIME and over the last 12 months.  Our goal is to verify three established accounts.  You need at least one account from either rent, telephone service, internet, TV service or utility company (a utility not included in your rent).

So, what do we look at? Are you renting?  Are you on time?  If it’s a management company or apartment complex you pay, we can verify directly with them your timeliness.  If you pay a private party, we want to see the last 12 months cleared checks from you to demonstrate you’ve paid on time.  As a tip, if you’re living at home, it makes sense to pay something to your parents, same amount EVERY month, for 12 months, always due the same time (say the 1st of the month) and via a check or direct transfer to their account.  This way, regardless of the amount, we can look at your history as a source of good credit.

What about other sources? Here are some quick reference items that you may pay monthly that can be used to create your credit history.  These items must be in your name.  This list isn’t inclusive, but a way to get you thinking about what you have out there and how it can help you get your first home!

Utilities, cell phone, car insurance, weight loss plans, lot rent on a mobile home, renters insurance, health club payments, child support/alimony you pay outside of your work paycheck, Netflix, gaming sites, internet or iPad-type services, lay-away, outside health insurance or monthly payments to a doctor.

It’s important to note that not only are we looking at your off-report debts, but we also look at any debts you have on the report. There are certain guidelines we follow to determine credit worthiness, such as seeing no more than TWO 30-day lates on any installment payments in the last 24 months and there is no major derogatory credit on credit cards in the last 12 months – that means, no more than 90 days late.  Truthfully, having NO lates on anything is the best way to work toward a loan approval.

There are certainly other guidelines that your situation must meet in order to get an approval on a loan. These are things above and beyond credit.  Your lender will go through these items with you and hopefully prepare you for what you need in order to be ready to buy.

Not all lenders allow the creation of credit, so you’ll want to check. The main idea I want to get across is that having no credit doesn’t necessarily mean no loan.  It’s best to find a lender you’re comfortable with, and one that has the ability to walk alongside you to make your dreams become reality!  I am here to help if you so desire!

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!

Worth Repeating for Smooth Loan Sailing

Getting financing for a new home can sometimes seem a little daunting. It seems like you’re on this never-ending wheel of providing your life history on paper – and then when you think you’ve provided the last of it … the lender wants more.  It’s all to help you get your loan approved so you can realize your homeownership dreams.  Believe me, we don’t want to keep asking you for documents any more than you want to provide them!

Another way to realize those dreams sooner is to keep your nose to the grindstone on a few items that could affect your chances of approval throughout the process. The process of buying a home starts the day you apply for the loan all the way until closing.

This blog is a re-do of a blog I did about three years ago – and it’s worth repeating because even though I go through these items with my buyers, they still “fall off the wagon” and miss some simple steps. My goal is to make it so that you know exactly what NOT to do while you’re in the loan process.

First, and foremost, credit is very important – not only on the day you applied, but even at the time of closing. Lenders will pull credit a few days within closing (called a credit refresh – no scores are pulled) to make sure you haven’t increased any balances, opened any new credit (big or small) or incur any new derogatory items.

So, it should go without saying, continue to pay your bills on time; don’t open any new credit and certainly, don’t increase balances on current credit. Oddly enough, don’t close any accounts either as this could have a negative effect on your scores.

Credit reports are good for 120 days, so if your process takes longer than that, you may need to have a full credit report (with scores) pulled again. If credit does need to be re-pulled, lower scores could mean not qualifying for the program you want, increased interest rate or increased monthly PMI.  It’s important to keep your credit as shiny as possible just in case.

Here is the list of items to avoid while you’re in the process relating to your credit. Some items may be unavoidable, so it’s always best to chat with your lender about these or any future changes.  Your lender is your ally – we are all trying to get you to the finish line!

  1. As mentioned, don’t open any new credit – credit cards, interest-free accounts for new furniture, etc, cars, co-signing for someone – anything. Just say “no!”
  2. Don’t close any accounts – this is something you can do after you close on your home if you really want the account to no longer be available to you. But again, it could bring your scores down temporarily.
  3. Don’t increase balances – you basically want all credit card balances to stay status quo during the process – a little up or down is okay. Believe it or not, just an additional $25 added to your debts could make it so you cannot qualify for your loan any longer – and that is NOT what you want to find out a few days before closing!
  4. Please don’t buy or lease a car – refer to #1
  5. Don’t pay off any collections unless your lender has advised you to do so.
  6. Try not to incur any collections. I realize this isn’t something you have control over, BUT, if you happen to get a past due notice during this process, please pay your bill so it doesn’t go to collection.

And what about your assets or your bank accounts? Believe it or not, changes to those could possibly affect your loan approval.  For instance, with many first time programs, the buyer is required to have $1000 of their own money into the transaction.  If there are a lot of cash deposits into the account, the lender will have a hard time proving the money is theirs, since cash is not acceptable for the transaction.

Here are the things to avoid with regards to your bank accounts.

  1. Don’t make any cash deposits. Though the money may be yours, we have no way to prove this. If you need the money for closing, the best advice is to use your cash for bills and spending money so your employment income can just keep building in your account. That is easily verifiable.
  2. Try hard not to bounce any checks. This can be a sign of money mismanagement.
  3. Please copy any checks you deposit that might not be from your work. Better yet, contact your lender first to make sure putting that money in is okay – they will advise what to do in order to document this is your money.
  4. Talk to your lender FIRST before receiving any money as a gift. There are steps to follow and it’s much easier to document forward vs. having to chase down paperwork.
  5. Don’t deposit any unsecured funds. Loans you take out not tied to your 401K or cash advances on a credit card are unacceptable sources of money for closing costs or down payment, so please don’t do that. 401K loans are acceptable and please discuss with your lender if you intend to go this route.

Last, your job could change things too. A few days before closing we will contact your employer to confirm you’re still employed.  SO, the simplest advice is to KEEP YOUR JOB.  If you have the opportunity to change employers or change positions within your company, please let your lender know first.  A change in pay structure, like going from salary to salary plus commission, could affect your chances of getting your loan.  Or, if you’re doing a first time buyer program, a raise in income (though a GREAT thing) could put you over income for a first time buyer program, taking away your down payment assistance.  It’s best to chat with your lender so you know what your options are before making a job move.

Ultimately, as a lender, we want your loan process to sail as smoothly as possibly. With the right current and rudder to guide you (information above), you should have no problems making it to your homeownership destination!

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

 

No Credit = No Loan … or Not?

You hear all over the news and in advertisements how important your credit score is. I agree … your score is absolutely important and has become the first go-to thing lenders look at. We want to know what the score is, how long you’ve had credit and how well you pay your bills on time.

But what if you’re one of those people who don’t have a credit score? It happens, even to some people who have some credit established. Maybe the history isn’t enough for a FICO (Fair Isaac Corporation) score to be generated or there are just too few items on the report.

credit  cardI’m here to give you some hope. Not all loan programs require a credit score. The main criteria – you must meet the eligibility requirements of a Minnesota first time homebuyer program. In conjunction with this, we will use FHA financing which allows us to evaluate credit not necessarily reported to the credit agencies.

Really, what it all comes down to is what you have for debt obligations outside of a traditional credit report. It’s imperative that we review credit for the lending process. This means we’re looking for accounts that you pay on a monthly basis, ON TIME and over the last 12 months. Our goal is to analyze three accounts, but that’s not set in stone.

So, what do we look at? Are you renting? Are your payments on time? If it’s a management company or apartment complex you pay, we can verify directly with them your timeliness. If you pay a private party, such as a private landlord, or your parents, we want to see the last 12 months cleared checks, or auto withdrawal, from you to demonstrate you’ve paid on time. As a tip, if you’re living at home, it makes sense to pay something to your parents, EVERY month, for 12 months, always due the same time (say, the 1st of the month) and by check. This way, regardless of the amount, we can look at your history as a source of credit.

What about other sources? Here is a quick reference list of items that you may pay monthly that can be used to develope your credit history. This list isn’t all-inclusive, but a way to get you thinking about what you have out there and how it can help you get your first home! Remember, these items must be in your name.

Utilities, cell phone, car insurance, weight loss plans, lot rent for a mobile home, renters insurance, health club payments, child support/alimony paid separately from your work paycheck, Netflix, gaming sites, internet services, lay-away or monthly payments to a doctor

Not all lenders allow the evaluation of credit from these sources, so you’ll want to ask ahead of time. The main idea I want to get across is that having no credit doesn’t necessarily mean no loan. It’s best to find a lender you’re comfortable with and one that has the ability to walk alongside with you to make your dreams become reality! I am here to help if you so desire!

 

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

 

Pre-Approved for What?

If you’re a MN first time home buyer or are in the home buying market, it’s crucial to obtain pre-approval.  This terminology can mean different things to different lenders.  How much information are they gathering to determine your eligibility for financing?  Are they just asking some general questions via a website and going off what you entered?  What information are they looking at to confidently send you out looking for a home?   Again, this process varies from lender to lender.  Regardless of who you choose to work with, you want to make sure a few things happen.

Compliments Stuart Miles/freedigitalphotos.net
Compliments Stuart Miles/freedigitalphotos.net

First, you’ve provided an application.  The application provides the lender with the stepping blocks to dig deeper into your situation.  It gives them the keys to check credit — which helps them to know if you meet today’s guidelines for a loan.  For instance, are your credit scores where they need to be?  Do you have any derogatory credit that could prohibit you from obtaining financing?  Or even simpler, do you have enough credit established?

Second, they request supporting documents from you.  I’ve heard many people say that they were pre-approved just off of their credit and information they provided on the application.  My concern is nothing was verified.   Different types of income have different requirements on whether we can use it in qualifying or not.  Without seeing paystubs, W2s, bank statements, taxes, and possibly verifications of employment, we can’t really say if someone’s pre-approved.

Third, they’ve taken the time to go over your options and your comfort level.  It’s all good to be told you can buy a house for $250,000, but do you know what a payment looks like for that size home?  Is it even a payment you’re comfortable with?  What are the costs involved with buying a home?  Are you eligible for any assistance if you’re a MN first time home buyer?  Do you know where you will be getting the money from for down payment and closing costs?

Even more important, for “what” are you pre-approved?  Many people say they’re pre-approved for a certain house price.  And while that is partially true, it’s not really what the lender is approving you for.  Based on your income and debts, you will be pre-approved for a PAYMENT.  This will include principal, interest, taxes and insurance (both homeowner’s and possibly mortgage insurance).

Depending on the home type you want, this payment may also include association dues and if you’re using a first time buyer program, it may include a payment for the assistance you’re getting.  This payment will determine the price of the single family home, townhome or condo you may purchase, BUT, the interest rate, taxes and association dues will truly determine the actual purchase price while keeping you within the payment limit.

There’s a lot to know about getting pre-approved.  The most important thing is education.  Understanding what pre-approval means, knowing your options and being comfortable with these are key.  We’d love to help make sure your pre-approval is a “YES!”

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. 

Dakota County Program Just Got Better!

MN first time homebuyers buying in Dakota County have a few new reasons to celebrate!  The Dakota County Bond program has made some great improvements to their popular MN first time buyer program with regards to their household income calculation, income limits and down payment assistance amounts!  This is fabulous news!!

As the name implies, this program is for homes purchased in Dakota County and is only available for first time buyers — meaning you haven’t owned a home in the previous three years.  The other MN first time buyer program via MN Housing, does have a down payment and closing cost assistance option for non-first time buyers, as well as MN first time home buyers.

courtesy of Stuart Miles|freedigitalphotos.net
courtesy of Stuart Miles|freedigitalphotos.net

Dakota Bond has three down payment assistance options, depending on your household income.  As shared in a previous blog, household income used to be defined as ALL income derived by ANY person, over the age of 18, who will be living in the new home.  They recently revised this to be in-line with MN Housing’s new definition — income is calculated from the person on the loan, any other person on the loan AND living in the home or the borrower’s spouse, whether on the loan or not.

Their assistance can be used with an FHA or VA loan (must be a Veteran to qualify for VA).  The amount of assistance was previously calculated off the loan amount, but is now calculated off the purchase price — offering MORE money to use for down payment and closing costs.

Here is the break down of their assistance programs — the one that changed was for those people in the higher income category — it went from 2.5% up to 3.5% and now has a higher max loan cap — currently $7500, as is the 5% option.  The max loan amount is $10,000 under the 10% option! (more household size info can be found on their site)

Household
Size
10% of Purchase Price
5% of Purchase Price
3.5% of Purchase Price
1
$28,850
$45,100
$83,900
2
$32,950
$51,550
$83,900
3
$37,050
$58,000
$96,485
4
$41,150
$64,400
$96,485

As with all MN first time home buyer programs, you must attend the Homestretch class.  This course is offered through the MN Homeownership Center.  There is an online version, but if you opt for this, you still need to do a one-on-one session with Dakota County.  Because I feel strongly about education and learning from your peers, I highly recommend the 8-hour,  in-person class.

The assistance from Dakota County is an interest-free, deferred loan.  When you refinance, sell your home or your home becomes non-owner occupied, you must pay the assistance back.  There is also a minimum investment of your own funds of $1000.

Also available with Dakota County is the MCC — Mortgage Credit Certificate.  This can create a $2000/year tax credit.  In a nutshell, 35% of the mortgage interest you pay each year can be used to offset a tax liability, up to $2000/year.  I am happy to explain this further, but an accountant is the best person to advise if this is a beneficial option for you.

We are very fortunate in Minnesota to have so many wonderful programs to help MN first time home buyers obtain their homeownership dreams.  It would be my sincere pleasure to discuss your options to see which programs best fit your situation!