First Stop 4 Home Loans

Are you a first time buyer just waiting to get a home?  Are you trying to save, but finding it tough to do with all your other obligations?  MN Housing has come to the rescue!  Starting around August 16th, with a signed purchase agreement, you’ll be able to obtain 100% financing on a conventional loan.  This just may make it easier to get a loan on some of those homes not allowing FHA financing.

Thankfully, MN Housing realized there was a huge need to bring this back to the first time buyer.  Currently, the most minimum down payment you can do is an FHA loan — 3.5% down.  Conventional financing does allow for 3% down, but the private mortgage insurance is higher.  Due to this, and the fact that MN Housing offers a lower rate on FHA, the payment is lower than a conventional MN Housing loan. 

Now, we finally have a conventional alternative where the payment IS less than FHA!!!  Here are the parameters to the program:

• NO down payment
• NO monthly mortgage insurance
• Must be first time homebuyer
• Maximum household income 1-4 person $83,900
• One unit home, townhome or condo
• Minimum credit score 680
• Seller can pay up to 3% of the sale price toward your closing costs or pre-paids
• Minimum investment of YOUR money — $1000
• Must attend the Homestretch class

Let’s look at an example comparing FHA to this new program.

In the scenario above, you could actually increase your purchasing power by about $4000, which may not seem like a lot, but could get you up to a different price point.  This program has so many positives.  Let’s hope it can help you afford the home you’ve been wanting to buy!

Believe me; I ask myself this daily.  You hear that you need 20% down to get financing or sterling credit.  And though these are GREAT attributes, they aren’t a guarantee that you will get a mortgage OR that you won’t have to go through a few hurdles.  It used to be so easy to get financing.  It wasn’t that we just handed money out to anyone, though there were people who did and look where that got us.  It’s not just them; it’s the lenders that accepted high risk buyers and did deals that should have never been done.  This is neither here nor there.  Right now, we need to focus on what the rules or guidelines are NOW, not what they used to be.  Those days are gone my friends.

Let’s start with the simplest issue I see today and the piece that has had the most changes — CREDIT.  Let’s talk about credit scores first.  Way back when, credit scores mattered; but they weren’t as much of a guage as they are now.  What I mean by that is we were able to create credit for people if they had lower scores or if they had NO scores.  It may have been acceptable to help someone who had lower scores, let’s say 560, if we could show clean credit on alternative sources such as insurance, utilities, rent, cell bills, etc — this is how we “created” credit.  And, if there was a clean credit history in the last 12 months, this deal could have probably worked.  Now, the line is drawn.  For the most part, you will need scores AND the middle of the 3 scores (most of us have a score from each bureau – Experian, Equifax and TransUnion) must be at least 620 or higher.  This is NOW.  I am guessing in the next few months, or sooner, most investors will be at 640, as some have already taken that leap.

Still referring to credit, you now need at least THREE tradelines (an item of credit on your credit report) AND they each must have 12 months’ history.  Plus, these lines need to be current.  Let’s say you haven’t done anything with your credit for a few years because you worked abroad.  You may have great credit scores because, before you left, you did a good job managing your credit.  Unfortunately, most, if not all, of your tradelines will be older in terms of the last active date.  This is one of the things that’s catching people and making it so they can’t get a loan.  It’s a shame really because you can tell they’re good at making payments and are responsible.  Thing is, the score isn’t a true representation of their credit since it doesn’t have current information reporting.  There is one exception to this rule, as of now.  The 3 main first time buyer programs, CityLiving, Dakota County Bond and MN Housing, in conjunction with an FHA loan, will allow less than 3 tradelines and less than the 12 month history.  If there is a score, it must still be over 620, however.  With the first time programs, we would work on creating credit and we WOULD need to find 3 items of credit to have added to our credit report — again, car insurance, utilities, layaway plans, healthclub memberships, utilities, etc., are all items we can use to create your history.  And by the way, this will NOT help your score as we do this on our credit report we pulled.  This does not get reported to the credit bureaus.

Another fun credit change that is COMING, and fast — Fannie Mae is requiring that lenders verify the borrower’s credit prior to closing.  It’s under the new Loan Quality Initiative.   Some Minnesota lenders have already put this in motion.  The interpretation of pulling credit prior to closing is within 48 hours of closing.  So, in my article, “Things Not to Do”, you learned that while in the loan process, don’t open new accounts or close accounts.  Well, this just became CRUCIAL to follow.  If you open a new account, just have a creditor check your credit for a possible new account, increase balances on what you owe, or anything … your approved, ready-to-go-to-closing loan could be un-approved.  For instance, the credit pull or increase in balances, could have dropped your score under what your approval requires.  Or, the new debt now makes it so your ratios are too high for qualifying.  If you want to deal with stress or the possibility of not closing on a home, then feel free to mess with your credit.  My advice is far different and will be quite bold.  If you want your loan to stay approved, DO NOT, under any circumstances, open new credit, consider opening new credit so your credit has to be pulled by another lender or increase your balances on your current debts.  This could make or break whether you close on your home or not.  There is no first time buyer exception to this either, so my advice stands in all circumstances — Just Don’t!

What else is making it hard to get financing?  How about qualifying ratios?  This is how a lender determines what you qualify for.  We use your gross monthly income and run some calculations.  In most cases, the “debt ratio” is the most common one for us to look at.  We want to make sure your new house payment PLUS all other obligations, does not exceed the program guidelines.  Essentially, for most loans, that means not spending more than 45% of your income toward the new housepayment and your other debts.  PMI companies (private mortgage insurance) have put their guidelines on this too.  Many PMI companies require a ratio of 41% or less.  Even though you may have an approval through an automated underwriting system, the PMI company could trump it and disapprove your loan due to excessive ratios.  I can remember the “days” when we saw ratios at 65%.  Now, was that a good underwriting decision?  Maybe, maybe not.  For an underwriter to make this call, the borrower must have excessive compensating factors, such as plenty of money left over after closing, good credit scores as well as good job stability.

This is a small sampling of the changes in the loan industry.  They are a few of the guideline changes that have impacted much of the business I do.  So, in answer to the blog’s title question … yes, many people can get loans.  No, you don’t need 20% down and sterling credit.  Fortunately, FHA is a great loan requiring only 3.5% down and more leniency with credit.  FHA also allows us to go a little higher in ratios and doesn’t limit us to the 45%.  I am not saying we can go over that just willy nilly.  That’s not the case.  We can go a little higher if, and only if, there are good compensating factors.  And I bet you didn’t know this (well, unless you read the blog), City Living and Dakota Bond programs ONLY allow FHA loans or VA, no conventional.  And don’t forget FHA and their guidelines in regards to disputed accounts.  This just adds another item on the checklist of things we have to watch for in order to make sure you can get approved for a loan.

Enough already, huh?  That’s all I have to say.  There are just too many variables that if it’s something YOU can control, you should.  You may want to check out our office blog titled Pain in the Assets – this goes over another important piece to your loan puzzle.  With all that can go wrong in the loan process now due to guideline changes, title issues or bank issues, we need all the humor we can get, so hopefully you like our article.  I’d love to do your loan right the first time by educating you BEFORE things become an issue.

Huh? What dispute? The one I am having with my roommate or with my parents about buying a home? You may have many disputes going on in your life. The one I am referring to is a dispute you started yesterday or 10 years ago with a creditor.

If you’ve been one to check your credit or maybe have had some issues in the past, you may have seen erroneous “tradelines” on your credit report.  A tradeline is an item of credit — car loan, credit card, mortgage, student loan,etc.  Now, if I were you I would be all over that like a bee to honey.  I’d contact the creditor and “dispute” the inaccurate information.  Wouldn’t you?  The whole goal is to get the right things reporting on your report, not items that don’t reflect your score and ability to pay on time.  True.  BUT one little catch.  Though you’re trying to BETTER your credit situation, you are actually making it harder to get financing.

Seriously?  Helping your credit/disputing an account = tough time getting a loan.  Tough to follow that logic,huh?  FHA is the most popular loan right now and the most lenient when it comes to credit scoring, as well as only requiring 3.5% down.  However, they have this little guideline that has been creating BIG issues for folks getting home loans.  The deal is, if you have disputed an account on your report, regardless of what the dispute consists of, your loan guidelines just got stricter.  Yes, your loan qualifications got tighter because you were trying to help your score improve.  Does that make sense?  Nope, not to me, but lately, many of the “rules” and changes have caused me to scratch my head quite often.

So, what changes with your underwriting guidelines?  For one, your loan must be manually underwritten.  90% of my loans are run through and approved through AUS (automated underwriting system).  Information about you in … decision on a loan for you out.  Slick and easy.  Your file is still processed, verified and still gets in front of an underwriter for the final stamp of approval.  In a manual underwrite, it doesn’t matter what the loan decision is through the AUS.  It’s no longer eligible for this to move to the underwriter faster and with more assurances of getting  your final approval.  It now has to be reviewed in depth and documented in depth in order for an underwriter to make a decision.

The rules to follow:

• Your ratios cannot exceed 31/43%.  This means you cannot spend over 31% of your GROSS monthly income toward your house payment, OR over 43% of your gross monthly income toward your house payment and other monthly debts.  This is concrete; no wiggle room here.  We will use the lesser payment for qualifying when choosing the payment you can be approved for.
• We must get traditional VOE’s and VOD’s (verification of employment and deposits)  So, even though you provided me with W2′s and paystubs, as well as bank statements, we must still get this information from a 3rd party.  No fun especially since some banks and some employers charge a fee to give us that information.  Unbelievable.
• We must do a VOR which is a verification of rent.  Important that we confirm you make rent payments on time.  Don’t worry if you’re not renting and with family; this won’t hurt your chances of getting a loan.
• The biggest one — you must have 2 months of reserves.  In layman’s terms, that means after closing, you need 2 months of your PITI payment leftover.  This can include retirement.  Here’s the thing.  Most first time buyers have a hard enough time coming up with their down payment or minimum investment depending on the first time program the buyer uses.  Now you’re saying we need money left over?  Yup and it hurts.

So how do you combat this?  Well, there may be a way to work on getting the dispute removed.  For instance, you could contact the creditor and tell them you don’t want to dispute the account any longer.  About 30 days after you call, we can re-pull credit to make sure the verbiage “account in dispute” has been removed.  It’s not an ideal situation, BUT, it would allow for a faster decision, more leniency on what you qualify for and NO requirement to have money leftover after you close, though there is nothing wrong with that!

The moral of this story — don’t wait to find a house to make an offer to find out you might have to wait due to this rule.  Make sure you’re getting pre-approved with a lender that knows these guidelines and looks for them when reviewing your report.  Also, there are people I can refer you to with regard to credit restoration if you’re in that boat.  Let me help you get ready for the biggest purchase of your life.  Knowledge is power and the more you know and can prepare for now will save a lot of headaches and stress when you do buy.  I think you’ll have enough of that just from doing something new!

Oh no, the tax credit is gone!  Why would I want to buy a home?  A fantastic question that we will answer in this educational evening about buying your first home.  Please join Steve Howe, Realtor MN Real Estate Team, and me, on Thursday May 20th to learn the steps involved in purchasing a home.  The seminar goes from 6:30-7:30 pm and is located at the Cornerstone Mortgage office at 436 Gateway Blvd in Burnsville.  

Our agenda is simple — to educate.  Would we love to be your Realtor and loan officer … of course.  Do we make you feel like you HAVE to use us — no.  This isn’t a high-pressure seminar.  It’s a relaxed atmosphere where we hope you will learn a lot, get your questions answered and be able to make good choices moving forward in this process.

We will talk about the process in the order you’ll go through it, starting with pre-approval and ending with getting the keys to your home.  We will also discuss the available first time buyer programs and the many reasons why it is still the BEST time to buy, even without a tax incentive.

If you’re interested, please RSVP to clavey@houseloan.com as soon as possible.  We’d love to have you and look forward to sharing our knowledge.  Most importantly, come with questions!

You may have heard that it’s getting harder and harder to qualify for a loan.  It’s true.  Though things have lightened up a bit, some old rules have come back into play, as well as new rules are being enforced more than ever.  For the most part, I am referring to FHA financing below as they are the most lenient when it comes to qualifying for a home.  More than 95% of my clients use this loan type due to this, the lower down payment requirement and the ability to receive a gift.

These days, what do you need to know with regards to credit requirements?

• Your credit score must be 620 or higher.  The line is drawn in the sand on this one — higher requirements for conventional financing.
• You must have THREE tradelines* with at least 12 months history.**
• If you have ANY disputed accounts, we MUST manually underwriter your file, per FHA.***
• Judgments and liens must be paid in full prior to or at closing.
• With FHA, collections do NOT have to be paid off.
• With FHA, student loan payments DON’T have to be counted in the ratios for qualifying IF they are deferred and we can get proof they won’t start until at least 12 months after your first payment is due.

For the most part, these are the main things to know about credit these days.  So you know, first time buyer programs aren’t programs that allow anybody, such as people with bad credit, get a loan.  You first have to qualify for a mainstream loan, like FHA, VA or Conventional.  Once you’ve passed their muster, then we look to see what first time programs meet your situation in terms of income, household size and location.

And some tips for dealing with your credit?  If you want to buy a home, you need to watch a few things:

• Make your payments on time — period.
• Bring your credit card balances down to 50% or less of the available credit.
• Don’t apply for new credit or have your credit pulled.
• Don’t consolidate credit cards.
• Definitely don’t close accounts, whether you use them or not.
• Don’t pay off collection accounts unless your loan officer advises you to (if you pay off an old account, it could negatively affect your score)

Certainly, if you have any questions, don’t hesitate to contact me.  It’s best to talk about what you want to do with your credit PRIOR to doing it.  Easier to “fix” a potential problem before it happens.  Once it’s done, it’s done.

*Tradeline is an item of credit on your credit report.  It can be a credit card, house payment, car payment, student loan or another type of installment debt.  Collections and derogatory credit don’t qualify as a tradeline.

**Some first time buyer programs defer to FHA standard rules and don’t require the 3 tradeline minimum or 12 month history.  Check with a first time buyer expert (like myself ) to see what you can do if you don’t meet these parameters.

***Most loans are run through an automated system to get an answer and all still get seen by an underwriter for final approval.  However, if there is a disputed account, the automated system isn’t acceptable and an underwriter MUST look at the file and stick to standard FHA guidelines.

How do you get started buying your first home — short of actually looking at houses or driving around on a Sunday and visiting open houses?  There really is a “first” step in the home buying process.  It’s to get pre-approved.  Now, don’t mistake pre-qualify for pre-approval.  These are two totally different thing!  A pre-qualification is nothing more than gathering some info on your income, assets and debts to let you know the amount you can afford for a house payment and a sale price.  This process does not hold any water and certainly doesn’t tell a seller you can get home financing. 

Being pre-approved means a couple of things.  First, you’ve applied for a loan – which can be done via the phone, in person or mycompany  website which is the option many take.  Our online application is a secure site which will only take you about 5-10 minutes, depending on how long it takes you to type!!   A one-on-one meeting is not necessary at this time, BUT, I do suggest we meet PRIOR to you looking at homes.  There is a lot to learn about the process, the money you need to purchase a home and the different loan programs and first time buyer programs you could qualify for.  I would be doing you a huge disservice if we didn’t take the time to meet.  Generally, my meetings take 1-2 hours.  I try so hard to keep them manageable for you, but it’s my goal that you leave the appointment with a full understanding of what happens next.  And, you feel like ALL of your questions have been answered.

The second piece to a pre-approval is pulling your credit report.  The credit report is important for a few reasons.  First, regardless of whether you are buying your first home or fifth, you must have at least a 620 credit score.  Though it is true that loans insured by FHA (Federal Housing Administration) and VA (Veteran’s Administration) do not have minimum score requirements, it just doesn’t matter.  FHA and VA are not buying or servicing the loan — the end investor is.  THEY are the ones requiring the 620 score.  And, there are some investors that require a 640 score.  This part of the pre-approval puzzle has become crucial to qualifying for financing.  It didn’t used to be this cut and dry.

The third part is submitting your loan to an automated underwriting system or to an underwriter.  In order to confirm your pre-approval, it’s important that I collect documentation to support the information you provided on the loan application.  The following documents will be required from you to complete this process:

-most recent paystub

-last 2 years W2s AND last 2 years federal taxes (it’s the last THREE if you’re applying for a first time buyer program)

-most recent MONTH bank statement, all pages, all accounts

-copy of your driver’s license (this is part of the Patriot Act that came about due to 9/11)

-any court papers, such as bankruptcy, divorce or child support

Because everyone has a different situation, there may be more documents requested.  For instance, let’s say you had a $3000 deposit into your account from the sale of a car.  Your “extra” paperwork would include a copy of the title, cashier’s check you got for the sale and a copy of the blue book value to substantiate the value matches what you sold the car for.  Now you may be asking why this is any of our business, and truthfully, I would do the same thing too.  All lenders want to source the funds you receive.  If you have deposits other then income, then lenders want to know where the money came from — if it’s a loan, then we need verification of that and need to count payments in our debts.  If it’s a gift, then we need to document that according to the specific program you’re doing.  This can be a lot of back tracking which is why during our appointment, I will advise you what NOT to do while in the home-buying process.  It’s better to know what you need to get to verify deposits then having to re-create documentation that may not even exist.

One of the main reasons this is the FIRST STEP in the process is two-fold — first, it insures that you can get financing and two, you will know what price range you can look at, as well as what payment you’re comfortable with.  Sellers will require that you’re pre-approved.  And just so you know, all pre-approval letters are NOT created equal.  Just because a lender says you’re approved doesn’t mean this is true.  Some lenders don’t take the step of verifying the information provided.  Some don’t understand the rules of the first time buyer programs or don’t know the ins and outs of the loan type you’ve applied for.  The paper the letter is written on is sometimes worth more than the actual “pre-approval”.  More times than I can count, I was presented with a pre-approval letter from another company via the Realtors I work with.  Low and behold, they were coming to me to “save” the deal because indeed, the person was NOT pre-approved.  So, how can you tell?  I guess the only suggestion I have is to work with a reputable company, one that’s known for your special needs (i.e. first time buyer programs).  Listen to your agent’s advice.  Even then, they aren’t always connected to the right people.

Woohoo — you’re pre-approved.  Now what?  It’s time to get excited because the fun begins — you get to look at houses and find one that fits your needs, as well as your budget.  Speaking of budget.  This is a VERY important thing to keep in mind.  A lender can tell you your max payment is $1500, but in your heart and on paper, you know going over $1200 would put you in the poor house.  Staying withing your comfort zone is key to having a great home -buying experience.  I don’t plan to make your house payment so you would be wise to have a number in your head for that “max” payment you’re willing to exceed.  When you do put some numbers down as a budget, don’t forget things like insurance, meals out, entertainment, clothing, etc.  Many people forget these things — hey, even a coffee each day adds up!  Another note … being pre-approved with take a lot of disappointment away from the process.  If you start looking at houses you THINK you can afford and then come to find you don’t fall in that price range; you will be frustrated and bummed.  Believe me; I’ve seen it.  It’s better to know what your range is before you start looking — either on your own or with an agent.

So, take the first step to your home buying experience by getting pre-approved.  It’s the one piece of this home buying puzzle that will help all the other pieces fall into place.

When I titled this, I could hear Tina Turner singing in my head.  Maybe I could add her soundtrack playing in the background of her big hit … or not!  Let’s get to the topic at hand here — credit.

“Check your credit once a year” is what you’re told all the time.  Open credit cards so you can develop a score.  Close those unwanted accounts.  Certainly, some of this is good advice, but not all of it will help.  More and more in this current market, credit scores have become crucial in determining whether you can get credit or not.  In the last year, scores have become the FIRST thing companies look at when choosing to extend credit.  It didn’t used to be this way! 

But what makes up a credit score?  How do you “get one” if you don’t have it?  What types of things DON’T affect your credit score?  These are all questions and topics that will be discussed at the next Credit Seminar, Thursday, February 18th from 5:30-6:15 pm.  It’s located at the Cornerstone office — 436 Gateway Boulevard, Burnsville, MN.  To RSVP for this event, please contact Cheryl at 952-808-0042.  Bring your questions!

If you want more information about buying your first home, feel free to stay for our First Time Home Buyer Seminar from 6:30-8pm.  Long night, but may be worth your while to learn about the important things surrounding the home-buying process.