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.