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.

Lenders 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 80o 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 and no score, 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 get you a 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

Private 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 respresents a portion of your PITI payment (Principal, Interest, Taxes and Insurance (both homeowner’s and PMI).  There are other options though, such as LPMI, which is Lender-Paid Mortgage Insurance.  The rate is usually  higher to cover the premium so you don’t have PMI in your payment.  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.

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 agreenment 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.

First, it’s good to know that FHA is self-insured.  So, if you default on your loan, they provide insurance for the investor.  Whereas on a conventional loan, you pay Private Mortgage Insurance (PMI) to insure the lender in case of default.  The PMI is provided from an outside company and is required on all loans with less than 20% down.  (Of course, if you qualify, you may be able to get  the new MN Housing program that DOESN’T require PMI or a down payment!)

FHA requires the UFMIP on all loans and a monthly amount on all loans regardless of your down payment situation — minimum down of 3.5% or 50% down — you’ll still have it.  One thing many people don’t know is what ELSE the FHA insurance covers.  Let’s say you lose your job and are having a tough time making your house payment.  Like most, you don’t want to lose your home.  FHA’s insurance covers job-loss protection.  FHA may pay up to 12 months of your house payment to save your home and keep your payments on time with your lender.  Those payments will be added on to your loan on the back end.

Right now, the UFMIP is 2.25% of the loan amount.  In all of the deals I do, this is rolled into the loan, not paid out of pocket.  This will raise your payment because your loan amount increases.  The monthly amount is .55% of the loan amount, divided by 12 to get the monthly figure.

Here is what you need to know:  any new case numbers* assigned ON or AFTER 10/4/10 will have different UFMIP and monthly MIP.  Good news is the UFMIP will DECREASE to 1% of the loan amount vs. the current 2.25%.  This is a good change.  The annual premium, or monthly amount, will be INCREASING to .90% of the loan amount — almost double what it was at before.  So what, right?  Well, let’s look at the numbers.

Scenario:

• Purchase price $200,000
• Rate at 4.5% over 30 years
• 3.5% down or 96.5% LTV

Old MIP Scenario

• Loan with UFMIP is $197342
• UFMIP that is included in above loan amount is $4342
• Monthly MIP is $88
• Principal and interest is $991

NEW MIP Scenario

• Loan with UFMIP is $194930
• UFMIP included above is $1930
• Monthly MIP is $145
• Principal and interest is $988

Difference?  Payment is $54/month HIGHER with the new plan.  That means, in real terms, you can afford about $7500 LESS in purchasing power.  Sure, that’s the downside.  But, if you stick with your home for 7 years, you will actually “wash” the difference.  Though FHA will get more of your money upfront (vs being rolled into the loan), you will have MORE equity at that time than with the original plan).  And, stay in your home 10 years, the MONTHLY amount should drop off assuming you’ve reached 22% equity in your home based off your original purchase price.

The moral of the story — buy as soon as you can if you’re using FHA.  $7500 in buying power is HUGE!  Most of you will just stay in your home for 5-7 years if it’s your first home so the “wash” really doesn’t matter.  And who really wants a payment that is over $50/mo more?  Not me.

So, when’s the time?  Now!  Why is it now?  To save on your monthly payment and BUY more home!

*case number:   the number assigned by FHA for your property purchase.  It follows the address and is how an appraisal is ordered.

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.

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!

It’s called the FHA 203K loan.  A little background first on where the mortgage market is now.   Most buyers are using FHA financing, which stands for the Federal Housing Administration.  The main reason is the minimum down payment requirement of 3.5%.  Another reason for its popularity is being the closest thing to a “sub-prime” loan.  Now, I am not saying it’s like a sub-prime loan in the true meaning of it.  It is, however, the most lenient loan on credit score requirements.  You need a minimum mid-score of 620.  Conventional loans recently came back to the marketplace with a 3% down loan in part due to the PMI (private mortgage insurance) companies are willing to insure them.  To do 3%, you must be a first time buyer and in most instances, need scores over 700.  My experience these days supports that score being tough to come by.

Since most buyers are using FHA financing, many are unable to get offers accepted on foreclosed properties with any work that needs to be done.  Why?  A few reasons.  First, FHA is a little more strict on safety and structural issues with the homes.  When we send an appraiser to the property, they’re supposed to look for those things that could pose a hazard, such as missing cover plates on outlets, or the biggest one, peeling paint ANYWHERE in/on the home if the house was built before 1978.  Those homes have a higher chance of the paint being lead-based.  If you eat the paint chips, you could get sick — too many, like a little kid might, and you could die.  That’s scary and that’s why FHA is very clear on their position.  So, if any issues are found, they must be fixed prior to closing on the home   Second, many banks won’t accept FHA financing.  Due to the amount of work potentially required by an FHA appraiser, they don’t want to have a deal fall through if an FHA appraisal comes in with work orders.  In 99% of the cases, the bank won’t fix the issues.  Banks are known for selling the home “as is” and really, this makes sense.  They never lived there, so they really can’t comment on water damage or storm damage or stolen fixtures.  Yes, some people DO take the toilet and sink.  Seriously, what are they going to do with that stuff?  Nothing, I would assume – it’s just a way to say “I’ll show you bank for taking my house away”. 

So, if the bank won’t accept FHA financing and most people are buying this way, how can these foreclosures be sold?  The financing that can handle this is called the FHA 203K loan.  Under this program, there are two sub-programs, the streamline 203K and the full-blown 203K or “K” as I call it.  This is a rehab loan that would allow you to get into a home BEFORE those repairs are completed.  The repairs would be addressed in a bid which is added to your loan size.  There are only a handful of companies that do these loans, mostly because they are labor-intensive and carry a lot of risk.  Cornerstone Mortgage has been doing this for years and understands the niche that is filled by doing the rehab loans.

As I mentioned, there are two sub-programs.  The streamline “K” is a more condensed rehab loan.  The maximum addition to your loan size is $35000 including the “K” costs.  The main difference with the streamline vs. the full-blown “K” is that you cannot do any structural or foundation work on the streamline.  You can paint, carpet, replace the furnace, add A/C, change lighting, add a bathroom, do the roof and even something that isn’t re-habby at all like buying appliances.  Most importantl, you can fix those items that are required by the appraiser to bring the home to FHA standards.  Another REALLY cool thing about this streamline “K” is that Cornerstone CAN do a smaller version of this in conjunction with the MN Housing Finance Agency loan (max $15000 including “K” costs) and you could still get $5000 in assistance.  We can do the the regular version with both the City Living and Dakota County programs, which are programs that just received a big chunk of money at a low rate.  And speaking of rates, if you don’t use a first time program, then the rate on the 203K loans will be about 1/4 – 1/2% higher than a normal FHA loan.  Trust me when I say, this is a screaming deal even at a little higher rate.

The second sub-program is the full-blown “K”.  The loan amount that can be added to your primary loan is UNLIMITED, assuming two things — 1) you can qualify for the loan and 2) you stay under the FHA loan limits, which in the 11-county metro area are $365,000.  In this rehab program, you can do anything — like items mentioned above, doing an addition to the home and get this, even tearing down a home just as long as you re-build on the existing foundation.  Yes, seriously.  Of course, you’d have to get that home pretty darn cheap to keep a new home build under $365,000.

You may be thinking, ‘this is cool, but how do I qualify for this?’  Are there any special requirements?  Nope, not really.  You need the 620 score or higher, need to be able to qualify for the higher loan amount and need to do a little extra in terms of paperwork and hiring a contractor.  We have a team of awesome contractors that are ready to give a free bid based off what your needs are and what the inspection may bring to your attention.  We don’t require you to use our preferred contractor partners, BUT, we highly recommend it.  I can tell you stories as to why another time!

Okay, what’s the process?  More than likely, you won’t be looking for homes that need the work.  But, the appraiser may just require that work has to be done and now the 203K program becomes a necessity.  Essentially, you locate the home, make an offer using the 203K (since many bank-owned properties won’t accept regular FHA financing), we have an inspection and potentially have the contractor out there with you to assess the scope of work and provide a written bid.  This information goes to processing with your file and an appraisal is ordered using the purchase price PLUS the bid.  The home will be valued “as-is” and also given an after-repairs value.  Here’s an example of built-in equity.  I helped finance a townhome that  just required new flooring throughout and then the client decided to get appliances (were none in the home)  – home price was $115,000, bid items added up to $13000 — it appraised at $150,000.  WOW, that’s awesome.  The work, not that extensive at all nor value-enhancing per se, just brought the home to a level playing field with the other townhomes that are in good shape.

There is more to the process, but I see that this post has become quite long.  You can wake up now!!  To summarize, you DO have a way to do an FHA loan and still purchase a home that needs work or is bank owned.  We have the opportunity waiting to help you and I do profess that this is one of those programs I have done quite a bit and with great success.  I hope I can help you make the house you’re buying a “dream home”.

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.

Take Credit is a Mortgage Credit Certificate program, not a loan – it gives you a credit EACH year in the amount equal to 20% of the mortgage interest you claim yearly to use toward your tax LIABILITY.  Okay, so that’s weird … who wants a tax liability?  Wouldn’t it be better to get money back?  Great questions!  You actually WANT to owe money at the end of the year.  To make this so, you would increase your W4 exemptions for federal withholdings.  This way, you’ll get more money back in your paychecks, pay less in for taxes to the government and then, will have a liability that you can use this credit against.

First time buyers can take advantage of this program in the city boundaries of Minneapolis and St. Paul.  You must be a first time buyer, which means you could not have owned a primary residence in the last three years.  We prove this fact by getting the last three years of your tax returns.  Here are some numbers to know for limits:

$83,900 – maximum household income for 1-2 people

$92,290 – maximum household income for 3+

$276,870 maximum sale price limit

There is no “special” rate for this program because again, it’s not a loan.  You will use this with an investor that allows for the MCC.  So I suppose you want a visual?    I can do that, but first, one thing to know if you don’t … 100% of  your interest on your mortgage as a homeowner is tax deductible.  With this program, that is reduced by the 20% credit, so now you can only write off 80% of that interest.  For example (finally, huh?):

$175,000 Loan Amount

5.5% Example Rate on a 30-Year Fixed

$994  Monthly Principal and Interest Payment

$9566 Total Interest Paid in Year One

$1913 — 20% of the Total Interest Paid, Mortgage Credit

That’s a pretty big number to be able to have as a liability.  Think about it.  If you were normally getting $2000 BACK, then you have $3900 to work on getting throughout the year by changing your W4s.  How do you even start determining what that W4 change should be?  You can certainly see your HR person or accountant.  Or, you can visit a great IRS website to run some scenarios.  Doesn’t it seem like you’re taking money from the government??  Let’s not go that far, but hey, I am sure they owe you something!!

A few things to note.  The MCC program cannot be used with a Mortgage Revenue Bond program, i.e. first time buyer program that uses interest-free bonds to give you a lower-than-market rate.  This program DOES have a recapture tax, which I will address in Tips & Tidbits post soon.  You can do a FHA, VA or Conventional financing and the loan must be a fixed rate.  With rates as low as they are on 30-year mortgages, it would be silly to do an Adjustable Rate Mortgage anyway.  Something you may be wondering … is it a “use it or lose it” kind of program?  Sort of.  You can carry over any unused portion for up to three years.  So let’s say in the example above you owe $1000 to the government.  Due to your credit, you owe NOTHING, but you still have $913 to use for next year’s taxes, which means you need to get on adjusting your withholdings up ASAP.  Let’s say your liability is actually $2000.  Then, you still owe the IRS money, but in that example, it’s only a mere $87.  Pretty sweet deal, huh?

One of the best parts??  If getting money toward your liability wasn’t enough, right?  If you do FHA financing, which so many people are doing these days, we can use that 20% as assistance to help you QUALIFY for more!  Yes, you heard me right.  So, using that same example of your $1913 credit.  If you divide that by 12 months, your credit PER MONTH for qualifying purposes is $159.  In real dollars, that means if you kept the same house payment, you could INCREASE your purchase power by about $20,000, depending on property taxes and homeowner’s insurance.

So why don’t people do this program or why haven’t you heard of it?  First, most lenders don’t do the MCC program and why, I don’t know.  There is a cost to you of $575.  You can see though, that one-time fee is WAY worth the financial benefits you will see yearly.  So, if you need help qualifying for more house in the cities of St. Paul and Minneapolis … I can help and would love to!

I am so glad you asked.  Let’s just start with some explanatory definitions, then I will get to the meat of this.  Homeowner’s Insurance is insurance that covers your home and the contents in case of a catastrophe or burglary.  As lenders, your house is our collateral.  If something should happen to it, we want to make sure you have enough coverage to replace your home.  This is a policy you purchase with your current insurance agent or one I could refer you to. 

If you were to buy a townhome or condo, you may not need this type of insurance.  In most instances the homeowner’s association covers that with the owner’s association dues.  There are some changes that have occurred with investors in regards to requiring a separate policy.  If the association’s insurance policy only covers “studs out”, then you would need to buy a special policy called a HO-6 — basically, this will cover the “studs in”, which means, all your personal belongings along with cupboards, fixtures and appliances.  If the association does have the extra coverage, it is still advisable for you to get the HO-6 policy (just won’t be as expensive) to cover your personal belongings.  In this instance, proof of this would NOT be required at closing.

How about the “dreaded” Private Mortgage Insurance (PMI) on conventional loans or Up-Front Mortgage Insurance (UFMIP) with FHA?  First of all, it’s not something to dread; it’s reality.  And in this day and time with all the private mortgage insurance companies that had to pay on claims due to foreclosure, it will never go away.  In a positive light, it allows you to do a minimum down program.  Anyway, the purpose for mortgage insurance is to insure the lender in case of default.  You remember AIG???  Who couldn’t forget the insurance  company that was bailed out … a few times, right?  They insured a lot of the high risk loans that were done in the past years.  No wonder it’s harder to get this type of insurance.  Only in the last few months have the PMI companies “let loose” a little to do 3% loans.  UFMIP is for FHA loans.  FHA is self-insured.  They have an up-front amount that is financed into your loan amount, as well as a monthly amount for insurance — which is lower than conventional insurance. 

Last, at least the last I intend to address, is Title Insurance.  This is the CHEAPEST insurance you will ever purchase.  There are two types of title insurance — lender’s and owner’s.  The lender’s policy is required to be purchased to insure the lender that they are in first lien position.  One of the title company’s jobs is to search public records at the county to check for any liens.  The title company can only find what is correctly recorded.  You have the  option to purchase a  policy for yourself, called an owner’s policy.  This protects YOU in the event any liens were to appear against the property that you didn’t incur.  For instance, let’s say that a few owners ago, a new roof was put on the home and the owners didn’t pay the contractor.  In order for the contractor to make sure he gets paid, he placed a lien against the home YOU’RE purchasing.  If recorded correctly, the title company will find this and require the seller to pay it off to give you free and clear title.  If, however, someone made a mistake at the county, then it may not show up.  Bummer deal is liens follow the address, NOT the person who incurred them.  Five years later you decide to sell and wah-la, a $5000 lien appears.  Hmmm — what to do?  You have a few options — pay it (cheerfully I’m sure :-D ), go to court to fight it or … drum roll please … at closing when you purchased your home, you purchased owner’s title insurance.  With this insurance, you pay ONCE, at closing, and it covers you for the ENTIRE time you own your home.  This insurance depends on the loan amount and sale price, but for first time buyers, it won’t be much more than $200 or so.  Paying just $200 to save $4000.  No brainer.  The two real estate attorneys I trust would NEVER let their clients close without it.  They spend way too much time fighting in court for other clients that don’t have the insurance.  Unpaid work is just an example of a type of lien, but there are more “opportunities” to have to use it — heirs to a property, divorce situation, many things that may put a  person in title to the home YOU own. 

The long and short — there are many types of insurance during this process.  The only one you have the CHOICE to purchase is the owner’s title insurance.  It’s a necessary, but cheap, evil and well worth the investment.  Just do it!