Tag Archives: credit

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!

 

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. 

The Little House that Couldn’t … Pass FHA

Here is an all-too-common situation that could happen to you.  Your lender has you pre-approved to buy a home using FHA financing  and you found the perfect home.  Better yet, your offer got accepted and your loan is proceeding nicely through processing.  A little snag hits — the FHA appraisal came back, and while the value supports the price you paid, there are work orders.

Work orders are items the FHA appraiser calls to be corrected prior to closing on the home.  If these aren’t repaired, the home isn’t eligible for FHA financing.  Typically, work orders are called to correct safety or health issues.  The most common is in homes built before 1978 that have any peeling paint, as it could be lead-based.

Courtesy of Stuart Miles|freedigitalphotos.net
Courtesy of Stuart Miles|freedigitalphotos.net

Let’s say this home is owned by a bank who sold it “as is” or sold by a seller unwilling, or financially unable, to make the repairs.  More than likely, this will cause your perfect home purchase to fall apart, unless your lender handles 203K loans.  In a nutshell, a 203K allows you to finance the costs of repairs into one loan.  It’s a great way to cover the work orders called by the appraiser — and the best part, these items don’t have to be completed before closing!

There are two types of the 203K rehab loans.  The first is called the Streamline K – the most common.  It offers up to $35,000 to cover repairs including the 203K contingency reserve and affiliated fees.  That means you have up to $31,000 to work with for the rehab costs.  Just about anything can be done — repairs that FHA calls, a rehabbed kitchen, new flooring, new roof, furnace, new bathroom– even appliances if you choose.  What you CAN’T do is any luxury items (whirlpool, pool) or anything structural or foundational.

For you MN first time home buyers, the 203K streamline can be paired with MN Housing or the Dakota County Bond program!  A great way to get the money you need to do the work by financing it into your loan, plus getting down payment and closing cost assistance that you need upfront to close.   You really can make it your “perfect” home!

The second type of 203K loan is the full-blown 203K.  There is no maximum loan amount for the rehab piece and this loan allows for structural or foundation work.  You could add a room, move a load-bearing wall and/or do any of the above items.  This version has higher costs associated, but are still rolled into the full loan.

Some quick 203K details — your 3.5% down payment is figured off the “acquisition cost” which is the purchase price of the home PLUS the rehab cost and fees.  As with all FHA loans, you need to qualify for the new payment and this home must be your primary residence.  Though self-help is allowed according to FHA, most lenders require the use of a contractor and be aware, these loans take a little longer to get from start to finish, but each situation is different.

Ideally, working with a lender that offers the 203K loan and educates you on these during the pre-approval process will help you to be more prepared when looking at homes.  It’s my practice to advise all buyers of this option, whether they’re using FHA or Conventional financing.  Also, with the help of your Realtor, you can determine ahead of time if the house will need a 203K loan, hence helping your perfect home become the Little Home that COULD pass FHA!!  Let me help you get there!

 

And the Kitchen Sink Too!

Are you currently in the financing process?  Does it seem like they’ve asked for everything short of the kitchen sink?  We joke in the industry that somedays it seems we need a DNA sample to approve a loan.  While this isn’t really the case (thankfully!!), the amount of supporting documentation from start to finish may seem like you’ve provided a trilogy of your life!

There are quite a few steps and there are even different levels, if you will, of the process.  The initial level is being pre-qualified.  A pre-qualification is the most basic form of determining what you can afford. We ask questions about your income, assets, debts and employment.  More than likely, a credit report isn’t pulled at this time and if it is, the lender may opt to pull information from one bureau only (there are 3 to pull from).  Not only is it the most basic, it also doesn’t hold any water when making an offer.

kitchen sinkTo really know what you can afford, AND that you can actually get a loan, is to go to the next step, which is pre-approval.  A pre-approval means you’ve completed an application,  had a 3-bureau credit report pulled by the lender, provided supporting documentation and quite possibly, have had your file reviewed by an underwriter.  This is the “key” to making an offer on a home.

The biggest complaint about this process is the amount of paperwork that is requested upfront.  If this information is NOT requested prior to issuing your pre-approval, I would question the validity of your pre-approval from that lender.  Without verifying the information from your application, it’s like you’re back to square one, pre-qualification.  You certainly don’t want to make an offer on a home thinking you’re pre-approved and come to find out something was missed.

So here’s the list of all the “stuff” that starts the trilogy for your loan.  As the lender dives into the information, more “stuff” may be requested to provide further clarification.  For instance, if you had a foreclosure in your past, we would ask for the sheriff’s sale papers to prove we are out at least 3 years and may ask for a letter of explanation from you as to why it occurred.

The list:

  1. most recent 2 paystubs
  2. last 3 years federal taxes, all schedules (2 years if you’re NOT doing a first time program)
  3. last 3 years ALL W2s and 1099 forms (again, only 2 years for a non-first time program)
  4. last 2 months bank statements, all pages, all accounts
  5. most recent quarterly statement for retirement or 401K accounts, all pages
  6. any court papers such as bankruptcy schedules | discharge or divorce papers
  7. scan of your valid ID

Again, depending on your situation, more items may be requested for the pre-approval process.  Though it’s cumbersome and other lenders don’t ask for it, this is really in your best interest.  As an example, let’s say your application says you receive overtime or bonus, so the lender uses it for qualifying.  Had the lender dug deeper ahead of time, they would have seen that particular income had been declining year over year.  Now this income isn’t usable, making your qualifications less.  Again, bummer to find this out AFTER you’ve got an offer on a home.

While we really try hard NOT to ask for everything under the sun, we have to.  The CFPB (Consumer Financial Protection Bureau) requires us to prove your “ability to repay” the loan.  Our company had always operated this way, even before it became law.  It’s just good business.

It would be a pleasure to hear your trilogy and help you through this process of pre-approval.  We will really try to avoid asking for the kitchen sink!!

Don’t Crash and Burn; Instead, Read and Learn

There are plenty of things that can cause a loan to go sideways — from losing your job or a bad appraisal to an old judgment that shows up on title.  These are totally out of your control, but nonetheless, can sabotage the chances of your loan closing on time or at all.

There are some things, however, that you absolutely can control to get to your happy ending — homeownership.  And what’s great, is you don’t need to DO anything.  Instead, you need to NOT do certain things.  By just stopping and thinking before doing, you could save yourself a lot of heartache.

courtesy of cooldesign|freedigitalphotos.net
courtesy of cooldesign|freedigitalphotos.net

One of the most important pieces to your initial pre-approval, and most importantly, your final loan approval, is your credit.  Starting with the day you complete your online application, and all the way to closing, your credit is the one thing you need to protect.

While in this process, it should go without saying, pay your bills on time.  And incredibly important, make sure you keep paying your rent on time, same time each month, so it’s easily trackable to show you’re consistent.

Depending on how long it takes you to find a home and close, additional credit reports may need to be pulled, as they are only good for 90-120 days.  And for sure, a report will be pulled 5 days prior to closing — just to confirm no new debts have been incurred.

Additionally,

  1. DO NOT open any new credit, that means credit cards, student loans … anything.
  2. DO NOT close any accounts.
  3. DO NOT increase balances higher than what they were when you applied — ANY changes to minimum monthly payments could cause you to no longer qualify for the payment you were pre-approved for.
  4. DO NOT buy a buy or lease a car.
  5. DO NOT pay any collections off unless we advise this.
  6. DO NOT incur any new collections — okay, so this isn’t something you’ll have a head’s up on — they’ll just show up, but do whatever you can in your power to pay bills, or past due notices, when you receive them, so they don’t turn into a collection while in this process.

Oddly enough, changes to your bank accounts could also cause issues with your approval.

  1. DO NOT make any cash deposits — we have no way to prove where the money came from, or more importantly, that it was yours.
  2. DO NOT bounce any checks or let your balances go negative on any statements we need to see — this demonstrates money mis-management and doesn’t help.
  3. DO NOT forget to make copies of any checks you receive PRIOR to depositing them — such as expense reimbursement checks, work checks or checks from your roommate to reimburse you for the concert ticket.  You get the drift.
  4. DO NOT deposit any funds for a gift without first talking to your loan officer.
  5. DO NOT deposit any unsecured funds — such as loans against a credit card or from a student loan.  These loans are not acceptable sources of funds needed for down payment or closing costs.

And what about your job?  The simplest advice here — DO NOT change pay structures without talking to your lender.  For instance, going from salary to commission could delay your home-buying process TWO years.  That’s a long time to wait.  It’s a better idea to wait a few months, or until after closing, to actually give notice and change your job or pay structure.

This post may seem negative, but believe me when I say, NOT doing these things now, and through the process, will make it so you don’t crash and burn later when you’re hoping to close on a house.

 

The Pre-Approval Puzzle: Piece #1 — Credit

Buying a home can be a daunting process.  Throw in the pre-approval process, which determines your ability to get a mortgage.  It’s a lot of work and can take some time, but by knowing the “pieces” to the pre-approval puzzle, you will feel a lot better about the process and hopefully, a lot more prepared.

Ranking #1 is Credit.  You’ve probably seen the ads for credit scores or credit monitoring companies on TV.  It’s good to have a pulse on your score, but there is so much more that goes into determining “credit worthiness” in the eyes of a lender.

credit  cardLenders are looking for a few things now in terms of credit, such as history, how many accounts you have, what your payments look like and how recent your history is.  It used to be, which seems like FOREVER ago, that the score “spoke for itself.”  If you had over 680*, you were golden.  Typically, no more questions were asked and no other checks were done.  Not so much anymore 🙁

As a starting point, there is a minimum credit score that is required by investors and the first time buyer programs — 620.  Typically, people have three scores, one from each credit bureau.  We need the middle of the three to be at least 620 or higher and we will always use the LOWER of the middle scores if there is more than one borrower on the application.

Along with the score requirement, investors are looking for history of current credit.  We want to see at least three items of current credit on your report.  Current credit is something reporting to the credit bureau in the last 12-24 months AND where there is at least a 12-month history, preferrably, history with on-time payments.

Here’s the deal — you could have an 800 score, which is awesome, but if you only have one current item, let’s say a credit card you use for gas and all your other credit hasn’t reported since 2008, then your loan financing options may be limited.  Strange, but true.  Technically, if current items aren’t reporting, then that 800 score you have really isn’t accurate.  It’s a dated score because nothing is causing it to be that good any longer.

A few other things can skew your score, such as authorized user accounts and disputed accounts.  Remember that card that Mom and Dad put you on when you were in college?  It’s not yours and shouldn’t be on your report.  It’s not being calculated in the score since it’s not your responsibility to pay, BUT, it could be throwing off our automated loan decision.  Thus, these need to be removed from your report if found during the pre-approval process.

Disputed accounts — most people don’t even remember “disputing” an account.  It could be as simple as calling up your creditor and stating you weren’t late back in May or you shouldn’t have been charged a late fee because you paid the balance in full.  At that point, you disputed the account.  Same thing applies here — it’s not affecting your score AND if this account happens to be in good standing, it’s also not giving you bonus points in your score.  So, in these cases, the accounts aren’t removed,  BUT, the dispute verbiage needs to go away.

And, though I haven’t said this because it seems obvious, we are also looking for clean credit.  Everyone has a boo-boo here and there — it happens.  We want to make sure your report isn’t litered with bandages and if there are issues, why?  Sometimes, it’s getting beyond a certain time-frame (i.e. 2 years after the discharge date of a bankruptcy) or having a full 12-months of on-time payments since having some credit issues.  Believe it or not, MOST credit issues can get better with TIME.  But time takes time and we don’t always have the patience to wait.

Now, you may be thinking, “I have NO credit,  so now what?”  Thankfully, we may have a solution if y0u meet the guidelines of the first time buyer programs.  We can use alternative credit, so credit that isn’t normally on a credit report — i.e. rent, utilities, phone, cell, Netflix, health club, tanning salon, War of the Worlds gaming (yes, this works!) etc.  Again, we need to see a 12-month history with on-time payments for at least three items.  These won’t go on your report and won’t affect your score, but at least you may still be able to buy a home!

So credit — really, it’s the biggest piece to the puzzle these days since the “crash” of the mortgage world.  But, it’s just ONE piece and there are a few more to come — next up, Employment.

*scores range from 350-850 – the higher the better

Is PMI Really That Bad?

Did you hear about AIG being bailed out by the government?  Okay, this is really old news; but it reminds us of the “horrible” acronym tied to some conventional loans … PMI.  I’m hear to tell you that this three-letter word isn’t such a bad thing.

riskPrivate Mortgage Insurance, known as PMI, is just that, insurance.  It’s not insurance you “choose” to purchase or shop around for and it isn’t coverage for you or for making payments on your mortgage in case you die.  It’s insurance for the lender/investor to protect their investment — your loan — in case you default.  On conventional loans, PMI is required, in most cases, if you have a down payment of less than 20%.  I say “most cases” because some lenders will do financing without PMI, but there is typically an interest rate premium paid for avoiding this.

For most, PMI represents a portion of your PITI payment (Principal, Interest, Taxes and Insurance (both homeowner’s and PMI).  There is also  BPMI  — Borrower-Paid Mortgage Insurance.  In this scenario, the borrower pays for the upfront amount at closing.  This is also done to avoid having PMI as part of the house payment.  Either way, PMI is being purchased to cover this loss.

And so you know, PMI doesn’t cover the whole loss.  Coverage requirements are dictated by your down payment amount.  According to Fannie Mae or Freddie Mac guidelines, if you had 15% down, the coverage would be around 12% of the loan.  Alternatively, if the down payment is less, like 5% down, the coverage requirement will increase to 25-30%.  For example, if the loan is $100,000 with 5% down, you would be required to have 25% coverage or $25,000.  In case of default, the PMI company pays the lender $25,000.  That’s a lot of money.  No wonder AIG took a fall, or a few.  They were one of the PMI companies that chose to insure higher risk loans — and I’m not talking about less down loans, but those that had other risks as well, such as lower credit scores or recent major derogatory items like bankruptcy.

But you’re a good risk, make your payments on time — why are you being penalized for the bad eggs?  Valid question, but it all plays into historical data.  And history shows that people with less down payment are more likely to default.  When you have “less skin in the game” and things go South, you’re more apt to walk away than try to salvage the equity you have.  I equate this to car insurance.  If you’re male and 21, you’re car insurance is higher than a 21-year old female.  Why?  They have more accidents, thus, a higher risk.  So, the premiums are higher.  And insurance is all about risk.

So why would PMI be a good thing?  I have a few reasons, kindly provided by MGIC, one of the PMI companies we use.  All of the companies that provide this type of insurance offer similar rates, but they may have different guidelines or requirements that make one better than the other.

  • It’s affordable.  Okay, so why is this a good reason?  Recently, FHA  increased their monthly mortgage insurance premiums, making them 1 1/2-2x higher than conventional.  And, they charge an upfront premium that’s rolled into your loan.  This is not to say FHA isn’t a good loan.  More, it may make more sense to use conventinonal financing if you have the credit to do so.  Most people use FHA due to lower scores (doesn’t equate to “bad”) , like under 660.
  • It’s not forever.  Not the best argument because FHA mortgage insurance isn’t either.  BUT, as long as you pay the PMI for two years, have on-time mortgage payments AND can show you have 20% equity via a new appraisal, you can discontinue it.  FHA, on the other hand, requires you to have the mortgage insurance for at least five years and you must have 22% equity of the ORIGINAL PURCHASE PRICE, which doesn’t take into account appreciation.

Oh, and another way to avoid PMI altogether is to do a “piggy-back” loan or second loan.  You would put 10% down, get a second loan for your other 10%, which would make up your 20% down, thus avoiding the PMI.  Your payment would be a little less than having PMI, but there are other challenges getting the second loan.  Doable, but not for everyone.

Nutshell — PMI isn’t all bad.  If it weren’t for PMI, we couldn’t do 3% down — or less than 20% for that matter.  Do you have that much saved?  I don’t and that’s another blog for another day.

Coming April 18th — FHA Payments Going Up for Pre-Approved Buyers

MONEY STEPFHA is trying to re-build its reserves again.  Back in October 2010, FHA lowered their UFMIP (Up Front Mortgage Insurance Premium) from 2.25% to 1% to somewhat offset the increase in the monthly MIP (Mortgage Insurance Premium) from .5% to .9%.  This certainly didn’t help FHA buyers with their monthly payments.  It made it so a buyer couldn’t qualify for as much home.  And it took the argument away that FHA has a cheaper payment than conventional financing because the mortgage insurance is less.

So, why did they do it in the first place if it negatively impacted the borrower?  It was necessary.  FHA is required to keep reserves as a government program.  They have paid out, like many conventional PMI (Private Mortgage Insurance) companies, insurance claims to lenders when FHA insured homes go into default.  Unfortunately, they are still under the 2% reserves they are required to have and again, have to increase the MIP.

With case numbers* dated on or after April 18th, be prepared to see your FHA payment rise if you’re in the buying market.  This monthly figure in your payment will go from .9% to 1.15%.  On a $150,000 loan, that makes a $30/month difference.  For some, this may halt a transaction in its tracks.  This isn’t what anyone wants.

Unfortunately, you can’t change when you get an offer accepted.  The advice I can give, especially if you’re tight for qualifying, is to find a home sooner than later and get your purchase agreement to your lender ASAP.  It doesn’t take much for them to order the case #, but it will be a huge bummer if it doesn’t happen.   And, believe it or not, conventional loans, if you qualify, may actually have a lower payment for mortgage insurance — making the argument now favor conventional financing.

Still, some buyers will HAVE to use FHA.  Why?

  • FHA is more lenient on credit scores and allows for “creating” alternative credit.  So, if you don’t have a credit score, you could get FHA financing combined with a first time buyer program.  As of now, the first time buyer programs only require 620 for the mid-score using FHA financing.  Conventional financing will require a higher figure — 680+, if not even 720 or higher.
  • FHA also allows non-occupant co-borrowers to help qualify for the loan.  Let’s say part of your income is salary and some is commission and that income started a year ago.  Though you know you can count on it, lenders won’t for qualifying.  Commission income requires a 2-year history to establish a pattern.  Other income of this nature would be tips, self-employment, bonus and overtime.  Without 2 years, you can’t use it to qualify.  However,  if you had a family member co-sign with you, your qualifying ability could increase.  Keep in mind, my assumption is your family WON”T be paying your house payment, so you still need to use your head and stay within a payment range in which you’re comfortable
  • Did you know FHA offers job-loss protection?  I bet many people, including financing professionals, don’t know this.  If you can’t make your payments due to a job loss, FHA could pay up to 12 months of your house payment to your lender so you don’t fall behind.  The amounts you get will be added to your loan on the end — FHA is nice, but not that nice!
  • Another reason people may choose/need FHA financing is for rehab.   A loan type, called the 203K loan, offers rehab assistance that is added to the purchase price.  You still pay a lower amount for the home, but we add the fees and repair bid to the purchase price.  Your 3.5% down is figured on that higher number.

Long and short — if you have to do FHA, I suggest getting a purchase agreement prior to April 18th.  Otherwise, prepare to pay the price when the 18th rolls around.  So stop waiting for something  better to happen with the market.  It’s not going to happen.  Get pre-approved and get out there and look!

*Case number — a number assigned to a loan and a property address.  Lenders enter the property information into the FHA system, which then generates this number.   It’s like a social security number for the house.  If the current borrower doesn’t buy the home, and another person does using FHA financing, the case number will still attach to the address.  This also means if an appraisal was done, the appraisal sticks too and is used by the new lender.