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You Through the Underwriter’s Eyes — Credit

Credit is super important in financing a home, and these days, even more so.  In my previous blog,  I introduced how underwriters make a loan decision based on four criteria – capacity, credit, cash and collateral.  That blog went over capacity – otherwise known as your income and employment.  Today, we will get to know what role credit plays in your loan decision.

Credit score trumps many things in today’s lending. For instance, you could have sufficient income, plenty of assets (money in the bank), but you don’t have the necessary score set forth by the investor.  Because of this, you might not be eligible for financing until your score meets investor requirements.  These “certain” scores will vary depending on program and lender.  Your individual credit scores are generated through three credit bureaus – Experian, Equifax and TransUnion.  Not everyone has scores and some people may have less than three scores due to a lack of or length of credit history.

As a consumer, you have the right to look at your credit report annually for free. You can visit www.annualcreditreport.com.   Getting your scores will cost you though, so be prepared to pay something to see your scores (costs vary).  A best first step is to visit www.myfico.com to learn from the best!  Your score may be available via other methods, such as your credit card company or outside companies you may pay to monitor your score.

The important thing to know here is that most mortgage lenders use the FICO scoring system, created by Fair Isaac Corporation in the 1950’s (source).  There is another major scoring system called Vantage, established by the three credit bureaus (source).  While Vantage scores are accurate under Vantage, they are not what the majority of lenders use for your score, so they may not be an accurate indicator when it comes to mortgage financing.

To unintentionally confuse matters, BOTH scoring systems pull from the three bureaus, one of which is Experian and their score is actually called a FICO score. Under the Vantage system, your Experian FICO score may be different than the FICO score under the FICO scoring system. Always best to know what system is being used to generate your score, especially since your lender is probably using the FICO system.

We now know score is the starting point, but it’s not the only point. In a previous blog, “No Credit = No Loan” alludes to, you don’t necessarily need a score.  But, we still need to look at your history.  Your score is an indication of how well you pay your bills, how much you use your credit (allowable limits in relation to actual balances), types of credit you have (revolving vs. installment), length of time credit has been established and recent inquiries (credit checks) into your credit.  And by the way, your score is literally a snapshot on the day it was pulled so it could vary daily.

Lenders are trying to determine your willingness and ability to repay the loan. Sometimes the score doesn’t tell the whole story, so they do look at other things.  Have you had any late payments in the last 12 months (may go back 24 months depending on program)?  Are there any outstanding collections or any other major derogatory things like judgments, bankruptcy, foreclosure or short sale?  If you have had one or more of the major derogatory items, the waiting period for new loan will differ depending on the loan program you use.  And guidelines for collection accounts will vary by program too – whether they must be paid or not.

Your monthly debts, items on the report and items not on the report, such as child support, alimony or tax payments, all need to be factored into that you can qualify for. The lender will run ratios, or percentages, to determine your qualifications using your usable/verifiable monthly income in relation to your monthly debts.

As an example, using monthly qualifying income at $5000/month and monthly debts at $650/month, below is how the figures shake out. These ratios are standard guidelines for FHA financing and will differ with other loan types.  The debt piece under credit goes hand in hand with the capacity part – income.

Sometimes, the underwriter also wants to know the “why” behind any derogatory items. What was the reason you had a bankruptcy or late payments on the credit card.  Again, they look at the whole file, as well as guidelines of your loan program, to determine the necessity of explanations.

To sound like a broken record, credit is the utmost importance when it comes to your loan. The advice here is simple: pay your bills on time; keep your balances status quo while in the process and do not close any accounts or open any new accounts.  If you have had derogatory items in your past, a lower score or no credit, start early and get in touch with a lender to discuss what you need to do to be ready for your exciting home-buying journey!   Next up of the 4 C’s – Cash.

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.

 

Can ANYONE Get a Loan Anymore??

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.

stopLet’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!

percentageWhat 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.

Credit Requirements — What You Need to Know

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

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

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

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

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

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

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

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

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

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

Tips & Tidbits — What NOT to do While in the Loan Process

Nothing like starting a post with a negative — things NOT to do.  It would be better to say what you should do, but as a loan officer that sees so many things that need fixing, I would rather warn vs. fix.  If you’re a first time home buyer, please take the time to look this list over.  Admittedly,  because of it, I sometimes get questions that aren’t really an issue for the pre-approval process.  I totally appreciate that my clients are reading the “instructions” and are checking with me ahead of time.  I would rather be safe than sorry.

Let’s start with the biggest offender — deposits into your bank accounts.  While in the process, please don’t make any deposits other than your regular payroll deposits.  And, please resist the urge to transfer money back and forth between accounts.  So go ahead, ask the question … why is it any of our business what you do in your accounts, right?  I respect that question, but of course, have a valid response.  The thing is, FHA, VA and Conventional guidelines all require that we “source” the funds for down payment.  If there are deposits, we need to verify you didn’t take a loan out (and if so, we need to know the terms of the loan to consider the payment as a debt) or make sure it wasn’t a gift.  The loan type you’re doing needs to allow for gifts and we would need to document the gift and donor.

What else are we going to restrict you from?  Another biggie — please don’t mess with your credit.  For example, don’t start closing unused accounts.  History makes up about 15% of your credit score and if they go away, you will reduce your history.  This is super important for first time buyers since they might not have a long history to begin with.  A few other things — obviously, don’t open any new accounts, pay off any collections (unless your lender told you to do this) or pay off debts.  New accounts mean you’ve had inquiries into your credit.  These can negatively affect your score.  I advise clients NOT to pay collections.  Main reason is tracking, and for the most part, only VA guidelines require collections to be paid.  I would rather you pay it off at closing.  This way we have a paper trail of payment vs. assuming you’ll get a receipt from the collection agency.  Good luck with that!  Oh, and the reason I keep mentioning scores is that they are crucial to whether you can get financing or not.  These days, you must have a 620 score or higher to get a loan.  I have a perfect example of a current client who had a score of 622.  We were golden; but her price range limited what was available to look at.  Finally, five months later, she’s ready to go and I had to pull new credit (reports are good for 120 days).  Due to her increasing her debt-load with balances over 50% of the available credit limit, her score dropped to 618.  UGH!  There is seriously nothing we can do but wait.  On her end, she can use some of the down payment money she was saving to pay down these cards to less than that 50% mark.  Since she had no lates or other derogatory things, this is the only reason her scores decreased.  The moral of the story … don’t mess with credit, which can even mean, don’t increase your balances on revolving lines such as credit cards.

As much as a new job is really cool, make sure you’ve consulted with your lender prior to this change.  We just ask that you don’t change your pay structure or how you’re compensated.  Let’s say you’re currently salaried and you have a great opportunity to earn more by changing how you’re paid (which is usually more a benefit to the employer in the beginning).  So now, you make a base salary, lower than what you were previously making,  but have a whole lot more potential top make more by receiving commissions.  This may be true, but you may have just unknowingly sabotaged your ability to get a loan.  Why?  Well, all loan types require you have a 2-year history of commissions; otherwise, we can’t use the income for qualifying.   This is true with bonus, self-employment, tips and overtime — all need a 2-year history.  So don’t go from being employed to starting your own business either.  This will hinder your financing plans big time.

The next one seems super obvious … well, I think so.  Don’t make any large purchases such as a new car, furniture or appliances.  This covers a few of the areas above.  For instance, if you’re offered a no-payment option for 2 years on appliances, you may say “sweet” and go for it.  Couple things happen here — your credit is checked, so an inquiry is made which may bring your score down.  Also, even though you don’t have payments, we still have to count a payment on this new debt.  This could make it so you can’t buy the home you have a purchase agreement on.   That would not be good, for all parties involved, you especially!

Last is my rule … don’t ever feel like you can’t ask a question.  There is never a right or perfect question, as well as a dumb question.  I have an “open question” policy.  My hope is I can assist you with your loan, and during the loan process, make sure I’m answering your questions before you even have them.

There you have it; a few things that you shouldn’t do while in the loan process.  Believe me, following these “rules” will make the process so much smoother.  It’s easier to paper trail prior to an event happening vs. having to chase papers since it’s already done.  Just say “no” to the above so we can say yes to your loan approval.