Long gone are the days we could do those crazy no-income verification loans.  In order to figure  out what you qualify for, there needs to be income.  We can’t just write a guesstimate down on the application or use a number that “looks good” from the tax return.  And just so I am clear here, doing this was NEVER okay, but many people in my industry took some pretty dangerous liberties.  Need I say more??

Income comes in MANY forms — the most common is employment.  This is the most logical place I will look.  But some income is sneaky and not-so-identifiable.  Such as investment income.  Many people have assets that earn interest or dividends on a yearly basis.  If the same assets have earned income for the last two years, we can use these as income.

Could we count rent from your sister for income?  The easy answer is no since a lot of things have to fall in place to use this. Most importantly, will she be living with you in the new home and will she continue to rent??  If yes, then the question — can this income be documented with canceled checks from her to you for the rent and did you claim it on your taxes as income with a preferable two-year history???  If so, then there is a good chance we can.

How about the second job you got so you can save more money for down payment?  Easy answer … maybe.  Again, more questions.  Have you been working two jobs for the last two years?  (we sure like the two-year history thing in lending, don’t we??)  This is really the most important question.  If the answer is yes, then more than likely we can.  We’ll look at the hours you put in at both and may have to do some averaging to determine the actual numbers we can use for qualifying.  If, however, you started the job a year ago or 6 months ago to save for down payment, then no, we can’t use it for qualifying.  It is still a good thing and will still help you during this process!!!

How about self-employment or commission income??  You’ll love this … need a two-year history to use these types of income.  And so you know, lenders use the income you reported to the IRS, meaning we use the NET income (or loss for some) after you write-off expenses.  A few things can be added back, but without a lesson on tax returns and lending, this is the easiest thing to remember …. NET.

The two-year history holds true if you want to use tips, bonuses, overtime or even seasonal employment. Tips, by the way, actually have to be claimed to use — so either they show up on your paychecks or your taxes and if they don’t we can’t use them.   Oh, and speaking of seasonal employment, we can even use UN-employment income for qualifying if you work seasonally and have the two-year history of receiving both.

Something I want to point out here relative to first time buyer programs — these special programs have MAX income limits for qualifying.  Even if we can’t use all of your income for qualifying because it’s less than two years or for some other reason, we MUST still use it in calculating income for the program.  Federal guidelines require us to use ALL household income, regardless of it’s source or history.

Let’s say your spouse isn’t on the loan due to credit issues.  Though we aren’t using ANYTHING about their situation on the loan, we still MUST calculate their income for the first time programs.  And if you receive child or spousal support, we must use it under the program guidelines.  If you choose, you could also use this in qualifying for a loan; but there needs to be a history of receiving this income (which that history varies on the program you’re doing); it needs to be on-time and we must document it will continue for at least three years.

Are you a fan of the races or playing a mean hand of poker?  Gambling winnings could be counted as income if consistently received for the past two years!  Rental income from investment properties you own can be used as income.  Payments of pension, social security or disability could be used as income — have to meet not only the two-year rule, but we also need to show the income will continue for at least three more years, just like child or spousal support.

I am sure there are many income situations I haven’t listed and maybe some that are so obvious, they aren’t coming to the top of my head.  The main gist to remember is the “power of two” — having that two-year history.  Not all sources of income require this, but most do, so it’s a good rule of thumb.

As always, I am happy to go over your income situation to determine if we can use it when helping you qualify for a loan.  Next piece to our puzzle — assets — gotta have ‘em!

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

But, buying a home “just because” the rates are low isn’t a good reason to purchase and some people, frankly, aren’t cut out to be home-owners.  You need to know the time is right for YOU!

The chart below demonstrates where rates have been.  Current 30 year fixed rates are at least 1% LOWER than the low years or 2009 and 2010.  Take that to the bank!

What about the first time buyer programs?  Yup, their rates are soooo low, it’s crazy.   Here is a summary of the most common programs and the rates for the 30-year fixed:
-Dakota County - for homes in Dakota County – 3.75% with up to $10,000 in assistance*
-City Living - for homes in the CITIES of Minneapolis and St. Paul – 3.99% with up to $10,000** or 2.5% of the loan amount toward assistance
-MN Housing – ALL of Minnesota – 3.625% with no assistance or 4% with $4500 in assistance*

Yippee — great rates — what does that mean to you, other than bragging rights over your parents’ rate when they bought their first home?? It means more buying power. For example — let’s say you qualify for a $1500 PITI payment (principal, interest, taxes and insurance), of which $1200 is just the principal and interest. With a rate of 4%, you’d be looking at financing about $250,000 — if the rate were 1% higher, your buying power drops by $25,000.

A better way to look at this … buy a home that’s $25,000 less and have a lower payment by about $130. THAT sounds like a better idea, especially since home prices are in YOUR favor.

NUTSHELL — if now IS the time for YOU to buy, then by all means take the plunge. Make sure you’re working with a lender with experience (like my 17 years) and one that knows and practices the first time buyer programs (in my sleep!). I am here and happy to help!

*Assistance and qualification for program is based on total household income and possibly other parameters set by the program
**Special program with St. Paul based on total household income, as well foreclosure status

MN Housing, a program that is well known throughout the Minnesota area, has got a few programs. One of their programs offers no assistance, BUT, a low rate of 4.125%* That is incredible!  And, if you want, or qualify for, down payment assistance, you could be looking at 4.5%. All of these rates are subject to change, are 30-year fixed terms and have NO pre-payment penalty!  Keep in mind, they do have a recapture tax, which all subsidized bond programs have.  Don’t let this scare you though … most people don’t have to worry about this when they sell.

Another great change occured with the City Living Program. This is the program availalbe to homes in the cities of Minneapolis and St. Paul. They reduced their rate to 4.25% AND increased their down payment assistance from 2% of the loan amount up to 2.5%! Plus, you may be eligible for funds in certain neighborhoods making the pot even sweeeter!

The Dakota County program also dropped their rate — so 4.35%. They offer 3 different tiers of assistance depending on your household income. And speaking of household income — all the programs have adjusted these limits down just a tad, so please inquire if you’re interested in pursuing one of the programs.

Remember, you’re only a first time buyer once and if you can take advantage of a special program to reduce your rate and possibly help with costs, do it!!!
*Assumes an FHA or VA loan

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.

Was it too soon to bring back such a risky loan in our current mortgage atmosphere?  I think many people thought that zero-down loans were the cause of the fall and the start of the so-called “mortgage meltdown.”  I have opinions on this, but my assumption is these loans are not to blame.  The loans that didn’t perform were those that were made to risky and not-so-credit worthy buyers.  It’s true, many of these loans were zero-down payment loans, but they had the added risk of being an adjustable rate loan (ARM). 

How most people financed these loans was to do a first loan at 80% of the value of the home, avoiding private mortgage insurance (PMI), and adding a second loan for the 20% down, thus not having any “skin” into the deal.  Pretty sure their  loan officer said something like — work on your credit for the next two years, then you can refinance and get a fixed market rate.   Unfortunately, there was a double-whack that occurred when home prices dropped.  First, these people didn’t have equity in their homes to refinance and second, they were stuck in adjustable rate loans that adjusted to very unfavorable rates.  That was the risk and a primary part of our current mortgage state of the union.

Don’t feel left out in the cold.  It’s not all doom and gloom if you didn’t get to use the zero-down program.  There are plenty of programs available.  For most, we’ll  just go back to the way things were a few months ag0 — doing FHA financing with 3.5% down.  The seller can still pay up to  6% of the sale price toward closing costs, so maybe you only need the down payment.  Or, maybe you’re able to get first-time buyer assistance, which is still available and then you might only need $1000 of your own money. 

So put on your happy face and bundle up, ’cause there’s plenty of home buying opportunities and even more programs to take the chill out of needing down payment!

Rates are Grrrreat!

For the first-time buyer, the special programs have had LOWER-THAN-MARKET interest rates.  Not only do they offer these competitive rates, most have an option to get down-payment assistance.  The down-payment assistance, in most instances, is actually a second loan that is placed against the home.  The assistance is a zero-interest loan with no payments.  Because it’s a lien on the home, it must be paid when you either sell the home or refinance.  It will be due to a sale since there will be NO reason for you to refinance your loan, ever.  Rates are just too low.

So what about the first-time program rates?  Below is a listing of a few of the most popular programs and what their current interest rates are.  Please keep in mind, these rates are as of this post date and are subject to change at any time.  This is more to show you just how crazy-low rates are.  And yes, these are all 30-year fixed rates, no additional points being charged and no pre-payment penalties.

• Dakota County Bond:  for homes in the Dakota County area — 4.25% — FHA or VA loan
• City Living:  for homes in the city limits of St. Paul and Minneapolis — 4.25% with assistance or 3.99% with no assistance — FHA or VA
• MN Housing:  available in the 11-county metro area — 3.75% (FHA/VA) with no assistance up to 4.5% (conventional) with NO down payment and NO PMI (private mortgage insurance)

A few of these programs can also be used in combination with the FHA 203K rehab loans.  A great way to get into a home that may need some work or that may NOT meet FHA guidelines.  All of these programs have special requirements for owner-occupancy, household income limits and sales price limits.  Feel free to contact me with further questions or to see if you qualify for one of these great programs!

Let’s look at some figures using a loan amount of $150,000 (these estimates do NOT include taxes, insurance, mortgage insurance or dues):

• Rate:  3.75%**
• Principal and interest:  $695
• Total interest over 30 years:  $100,042

Compare this to the rate prior to 4 PM today …

• Rate:  4.25%**
• Principal and interest:  $738
• Total interest over 30 years:  $115647

So, the monthy savings is just $43/month, which means $516 a year.  Okay, so not really a HUGE difference; BUT, check out the 30 year savings in interest — over $15,000.  That’s just crazy!  You could take that $43/mo and add another $6000 or so to your purchase price.  That may be worth it just to get into another price bracket.

So what about the zero down payment program?  That rate came down too — also by 1/2%  — from 5% to 4.5%**  Remember, this program’s primary benefit, other than NO down payment, is that there is no private mortgage insurance (PMI).  A regular 30 year right now is about 4.5% or less without using a first time program.  Well, if you had less than 20% down, you would be required to have PMI.  On the above $150,000 loan the PMI would be about $65 in  your payment, eating away at what you could afford.

We are in some crazy times right now, but I cannot say it enough — NOW IS THE TIME to buy a home.  There hasn’t been, and will probably never be, another time in our lifetime to have so many benefits — low rates, low home prices and many special first time buyer programs just waiting to help you get into your first home.  Let me be the one to do that too!

*Rates are subject to change without notice.  This is not an offer to enter into an agreement.  **Assuming 5 days of interest on a $150,000 loan amount, the APR for these rates are 3.899%, 4.403% and 4.656% respectively

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.

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

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

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

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

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