Tag Archives: pre-approval

I Can Afford That, Right?

When looking at buying a house, there are a lot of things to consider. Do you NEED a two-car garage or do you just WANT a two-car garage?  Do you have a school district preference or prefer a certain city so you can be closer to work?  Do you want a rambler or a two-story and do you need a fenced-in yard for your furry family member?  Do you prefer to avoid outside maintenance, making a townhome a better option?  Is it important the house is updated or are you pretty handy at DIY?

Some of these decisions are a basic “wants” vs. “needs” analysis. Obviously, if you had a household of four people, a one-bedroom home won’t cut it – that would be a “need,” whereas having a pool in the back is more of a “want.”  Lot’s of things to take into account.  The most important though, should be what price home, or payment, that you can really afford.  Buying a house isn’t just a house payment for the next 30 years – it’s a commitment along with other financial responsibilities.

Many of you may be renting right now and, quite possibly, could be paying more in rent than what you can afford for a house payment. One of the mortgage lender’s goal is to help you get financing, but the main goal should be to make sure that whatever financing you obtain, you are comfortable with the payment.  Let’s face it, you’ll have this payment for the next 30 years and eating ramen noodles every night doesn’t sound like fun.

So how do we determine what payment/price you can afford? Lenders use something called ratios to determine your qualifications.  Ratios take a certain percentage of your GROSS monthly income, taking into account other monthly debts you have, to come up with a maximum house payment.  Sometimes, that top-end payment is NOT what you want to pay because it puts you out of your comfort-zone.  And if that’s the case, please let your lender know that!  There is no reason you should ever pay more per month than what you financially can afford.  You know your spending habits much better than your lender.  That said, if you think you can spend more than what the lender determines you can afford, we can’t increase it just to make you happy.  To make that work, your income has to be higher, debts lower or you may need a co-signor or co-borrower to bring that payment to what you feel you can afford.

Different loan programs have different guidelines for ratios. One constant is that your monthly income is looked at in gross terms versus net (after taxes/deductions).  The exception to this is if you’re self-employed.  In this situation, we look at the NET profit or loss on your federal taxes (assuming a schedule C filing) since this is what you got taxed on.  Also, different types of income might be looked at as an average over two years.  You’d want to check with your lender about how they will look at your specific situation.  For now, let’s keep this simple and use an FHA example assuming the person is salaried at $5000/month and has $650/month in debts.

In the example below, notice that there are TWO percentages being used. The first, we call the housing ratio.  This determines the maximum house payment you can make based on your monthly income.  The second is called the debt ratio.  This is based off your monthly income too, but now factors in any monthly debts you have (credit cards payments, car loans, other house payments, installment loans, lines of credit, ongoing payments to the government for taxes, alimony, child support, overdraft protection balances, etc.)  We will take the lesser of the two calculations to determine the maximum payment you can afford.  FHA guidelines allow 31% for the housing ratio and 43% for the debt ratio.  Some lenders may be willing to exceed these ratios, please check with your lender.



In this example, the buyer can afford a $1500/month house payment. The payment includes principal and interest on the loan, a monthly amount for property taxes and monthly amount for hazard/homeowner’s insurance and monthly mortgage insurance, if applicable.  If you were looking at a townhome, or something with monthly association dues, the lender would also factor this into the maximum payment you can afford.

Let’s say $1500/month puts you at a purchase price on a single family home (no association dues) at $220,000. You’ve gotten yourself pre-approved and are out looking at homes.  Did you know that you could look at multiple homes, ALL listed at $220,000, and possibly not qualify for ANY of them?  I know, I know … but your lender said you could look homes at that price.  So what gives?  Ultimately, you are getting pre-approved for a house payment, NOT a price.  The price of the property is a guide, so to speak.  In this example, if the lender used $229/month for the property taxes and ALL the homes you looked at had taxes higher than $229, then your payment would end up being higher than $1500, hence you wouldn’t qualify.  Not only will taxes affect the price you can afford, but so can the interest rates, association dues and hazard/homeowner’s insurance.  These are all moving parts to the home purchase puzzle!

As lenders, we do our best to give you an approximate price point, but knowing the above will hopefully help you understand that some houses you look at, though you were told the price would work, just won’t. Alternately, the house you look at could be $190,000 and the taxes could be crazy high,  making the payment higher than $1500, meaning you can’t afford even THAT lesser priced home.  It’s nuts, I know.

Remember I mentioned this was a single family home? Pretend you change your mind and start down the townhome or condo path.  If that should happen, then your $1500/month payment MUST also take into account association dues, which can vary dramatically.  This will lower your purchase price power approximately $20,000, maybe more depending on the dues.  Best advice here – talk to your loan officer if you decide to change property types so you can get a more accurate price range to be looking in.

So the question – “I can afford that, right?” has the wishy-washy answer of “maybe.” First, remember your income and your monthly debts will determine WHAT payment you can afford monthly.  And second, the payment you can afford will get varying results on whether you can afford a specific house depending on interest rate, property taxes and homeowner’s insurance amounts.  Your lender will get you pretty close to the price range you can look in so you have a starting point, but at least now you have a better understanding as to why you might not be able to buy the house you thought you could afford.

My goal is to provide education and a clear understanding of the process and your goals. It would be my pleasure to help you with your homeownership journey.

What to Expect when You’re Expecting to be a Homeowner

A little play on a book title, but if you’re like me, you feel better about taking on something new when you’re prepared –whether it’s going to college, starting a new job, becoming a parent or buying your first home. When you understand the process, the task itself isn’t so daunting.

The first thing to realize, as you leap into home-ownership, is the need to get pre-approved for financing. The lending industry is under scrutiny in an effort to protect you, the buyer.  Due to this, lenders are required to prove you have the ability to repay the loan.  This means you will be required to provide supporting documents.  This can become quite cumbersome, and frankly, frustrating.  We understand – believe me!  Our goal is the same as yours … help you get a loan.

The first step is the loan application. To make this convenient, we can gather this

courtesy of Stuart Miles|freedigitalphotos.net

information over the phone, on our internet site or in-person, whatever is best for you.  We need information such as your name, contact information, addresses and employers for the last two years, income, assets and your debts.  The application enables us to obtain credit to determine if you meet today’s credit guidelines, which vary by program and financing type.

From there, if all looks good, we gather supporting documents, such as paystubs, bank statements, etc. This information will initially be reviewed by the loan officer for validity and to determine if income matches what’s on the application, among other things.  It’s important to meet with your loan officer to discuss your options, the costs of buying a home, and most importantly, your comfort level in terms of a payment.

Once pre-approved, you’ll look at houses, and hopefully, will find one you want. At this point, you and your Realtor will draft a purchase agreement stating the terms of your offer – price, closing date, what you may want the seller to pay toward closing costs, earnest money amount and any contingencies you desire, such as having a home inspection.  Assuming you get the “your-offer-was-accepted” call, we move on to the next steps.

You may have chosen to do a home inspection. You will pay the inspector directly; this is not part of the closing costs the lender would have gone over with you.  The inspection will help you determine if you want to move forward on the purchase or not.  Hopefully, you are full speed ahead!

Now that you have a property address and aren’t just a TBD (to be determined) anymore, there will be disclosures that are generated for you to sign. Your lender may mail these, email you a link or sit down with you to sign depending on their process.  At this point, you will receive a loan estimate, which will outline all your costs, including down payment and seller paid costs or down payment assistance, if applicable to your situation.  Your lender most likely went over a similar type estimate at your pre-approval meeting so you had an idea what your costs would be.  The loan estimate is still an estimate but is much closer to actual figures now that we know the price, taxes, rate (if you locked) and closing date.


At this point, you can lock in an interest rate. Your loan officer will check to see what rates are for the program you’ve decided to use.  Keep in mind, if using a first time buyer program, they publish their interest rates right out on their sites – so the rate is the same with any lender.  Rate locks have expiration dates – that means we must lock the rate long enough to cover you through your closing date.  And something very important – once locked, you’re locked.  If rates go down after locking, you cannot get a better rate and if they go up after locking, the lender must honor that rate.

Depending on how long the time-frame was between your initial pre-approval and the accepted purchase agreement, the lender may ask for updated paperwork – items that get old, like paystubs and bank statements. Eventually, when your earnest money clears, we will prove that left your account.  And, if your credit report has, or will, expire before your closing date, new credit will need to be pulled.  The life on the report is 120 days.

The lender will process your file, order verifications of income, flood certification, appraisal on the home and title work, among other things. Depending on the lender, the file may go directly to the underwriter, or may hang back while the ordered items come in.  The best advice here – if the lender needs any additional information from you, please provide it in a timely manner to keep your process going as smoothly as possible.

Once all documents are in, including an acceptable appraisal and title work, your loan will go back in for final approval. Either after this, or prior to this, the lender will provide you with a closing disclosure, which you must have in your hands three business days (includes Saturday) prior to closing.  Some lenders require you sign this to acknowledge receipt in that time frame.  This will give you the final figures for your closing.

Now the fun — going to closing and getting the keys to your home! You will sign a bunch of documents, get a check or send a wire for money needed at closing (dependent on your program, down payment, etc) and will possibly have a chance to chat with the sellers to find out more about your new home, and maybe the scoop on your new neighbors!

For most people, this process, starting with the application, will take you 60-120 days depending on your situation and motivation. And for some, it may take nine months or longer J  Either way, hopefully this has given you a little more information on what to expect when you expect to be a homeowner!

A Wolf in Sheep’s Clothing?

Lately, I have been helping a lot of people purchase their home and it hasn’t been a traditional single family home.   Many MN first time homebuyers opt to purchase a townhome or condominium because it works in their price range or their lifestyle.

When I say “condo,” what do you visualize?  Do you see a high-rise building that resembles an apartment complex?  These are typical versions of condos, and believe it or not, many apartments have been converted to condos, which may explain why they look like your first apartment!  These properties are perfect for many people, but some might prefer a traditional townhome.

Be aware that some condos are like a wolf in sheep’s clothing — on the outside they look like townhomes and feel like townhomes, but on the legal description of the property, they’re condos.  So what does this mean to you?

Simply put, the difference between them has to do with ownership of the land beneath the unit.  You own the land if it’s a townhome, you don’t if it’s a condo.  This differentiation is really a moot point since both properties are part of an association which governs what you can do to the property, or what you can’t do, such as bulldoze it down and build something new.

Most condos have a shared water line.  Water comes into one meter at the complex and then individual lines go to the units.  The water is part of the association dues you pay on a monthly basis.  Usually, in a townhome, you will have your own water meter and will be responsible for this utility on your own.

The most important differentiation may come with financing.  Getting a loan on a condo can be tougher than a townhome.  Many years ago, condos got a bad rap.  Investors would buy condos as rentals and if their rent was not paid, they would let the properties fall into disrepair. Now there is a stigma tied to condos that’s been hard to shake!

Some loan types, such as FHA, require the complex to be approved by FHA in order to be eligible for financing.  If it’s not approved, you may have a difficult, or drawn out process buying a condo in the complex using FHA financing.  For some, conventional financing may be the only option available in this situation.

Regardless of financing types, even IF it’s FHA approved, the lender will receive a questionnaire completed by the association to make sure the complex is financeable.  The lender will consider how many units are rented, how many are owned by one person, what their budget looks like, and most importantly, if the association is currently in litigation.

The biggest thing to take from this is many townhomes are really condos in their legal descriptions.  And to be clear — just because it’s a condo doesn’t make it a bad property type to purchase, or make it a bad investment, it just means there may be some extra hurdles with financing.   Make sure you work with a lender and realtor who can help you be sure what you purchase is a sheep, and not a wolf in disguise!  It will make the financing process go that much more smoothly!


Pre-Approved for What?

If you’re a MN first time home buyer or are in the home buying market, it’s crucial to obtain pre-approval.  This terminology can mean different things to different lenders.  How much information are they gathering to determine your eligibility for financing?  Are they just asking some general questions via a website and going off what you entered?  What information are they looking at to confidently send you out looking for a home?   Again, this process varies from lender to lender.  Regardless of who you choose to work with, you want to make sure a few things happen.

Compliments Stuart Miles/freedigitalphotos.net
Compliments Stuart Miles/freedigitalphotos.net

First, you’ve provided an application.  The application provides the lender with the stepping blocks to dig deeper into your situation.  It gives them the keys to check credit — which helps them to know if you meet today’s guidelines for a loan.  For instance, are your credit scores where they need to be?  Do you have any derogatory credit that could prohibit you from obtaining financing?  Or even simpler, do you have enough credit established?

Second, they request supporting documents from you.  I’ve heard many people say that they were pre-approved just off of their credit and information they provided on the application.  My concern is nothing was verified.   Different types of income have different requirements on whether we can use it in qualifying or not.  Without seeing paystubs, W2s, bank statements, taxes, and possibly verifications of employment, we can’t really say if someone’s pre-approved.

Third, they’ve taken the time to go over your options and your comfort level.  It’s all good to be told you can buy a house for $250,000, but do you know what a payment looks like for that size home?  Is it even a payment you’re comfortable with?  What are the costs involved with buying a home?  Are you eligible for any assistance if you’re a MN first time home buyer?  Do you know where you will be getting the money from for down payment and closing costs?

Even more important, for “what” are you pre-approved?  Many people say they’re pre-approved for a certain house price.  And while that is partially true, it’s not really what the lender is approving you for.  Based on your income and debts, you will be pre-approved for a PAYMENT.  This will include principal, interest, taxes and insurance (both homeowner’s and possibly mortgage insurance).

Depending on the home type you want, this payment may also include association dues and if you’re using a first time buyer program, it may include a payment for the assistance you’re getting.  This payment will determine the price of the single family home, townhome or condo you may purchase, BUT, the interest rate, taxes and association dues will truly determine the actual purchase price while keeping you within the payment limit.

There’s a lot to know about getting pre-approved.  The most important thing is education.  Understanding what pre-approval means, knowing your options and being comfortable with these are key.  We’d love to help make sure your pre-approval is a “YES!”

Dakota County Makes Similar Changes to MN Housing

MN first time buyer programs are required to follow specific guidelines in terms of maximum income limits and sale price limits. Recently, MN Housing announced changes to their income and sale price limits. Dakota County has as well.

Like MN Housing, they have reduced their income limits DOWN.

  • 1-2 Person Household Max $82,900
  • 3+ Person Household Max $95,335

    courtesy of Ponsulak|freedigitalphotos.net
    courtesy of Ponsulak|freedigitalphotos.net

They have also changed their maximum sale price to $273,570. This means that the purchase price of the property you’re purchasing cannot be higher than this price, not even by $1!

Dakota County is a fantastic opportunity for the those MN first time home buyers looking to purchase in the Dakota County area. They offer competitive rates with only a .5% charge in origination fee.

Their program has three different levels of down payment assistance which is based on the household income and household size. The levels are either 10%, 5% or 3.5% of the sale price toward down payment and/or closing costs. You must have at least $1000 of your own money into the transaction.

Dakota County also offers the MCC program which means not only can you get their assistance, but you can also get a credit of up to $2000/year toward your tax liability for as long as you have your loan. It’s always a good idea to check with an accountant to determine if this part of the program is right for you.

There is a separate approval process with Dakota County to determine if you’re eligible for their assistance. Your loan officer will run the income calculations to make sure you’re within their limits, but the ultimate decision as to whether you get the assistance is up to our partners at Dakota County.

We’re fortunate south-of-the-river to have such a great program. I’d love to help you figure out what programs are best for you!

You … from the Underwriter’s Perspective — The Final “C”

We’ve made it to the final “C.”  Thing about this “C,” is it really isn’t about YOU this time, as the title of this blog suggests.  It’s about the home you’re getting a loan on, lovingly known in our world as Collateral.

As lenders, we really want to make sure that the home we’re providing a loan on is a good investment.  Certainly, we don’t want to be left owning the home if anything goes south with your payments, but if it does, then at least we know we have a pretty good chance of selling it.

house dollar symbolIn order to determine the quality and value of the collateral, we order an appraisal on the home.  This is a third-party assessment in terms of value and marketability.  Since you paid a certain price for the home, we definitely want the house to at least be worth what you paid for it.

The appraiser will look at comparable properties to determine value.  They will look at like-styled homes.  If the home you’re buying is a 2-story, then they need to look at other 2-stories.  Comparing the home to a rambler, one-level, isn’t comparing apples to apples.  They’ll look at homes that have closed in the last 6 months or less and are located within a mile of the subject property.  If appraising a townhome, they need to find comparable homes in the same complex, if possible.  Similar size and amenities are important for comparison– number of bedrooms, bathrooms, etc.

Based on the comparables, the value could come in higher, which is great for you, but it doesn’t play at all into the loan.  For instance, if you’re doing 5% down and the appraisal comes in high enough to give you 10% equity, it won’t matter.  All lenders will lend on the LESSER of the appraised value or, in this case, the sale price.

If, however, the value comes in less than the purchase price, you may have to come up with more money.  In line with above, if you’re doing 5% down, the 5% is off the LOWER appraised value.  You’ll have to pay the difference between the price and appraised value.  More than likely, your Realtor will go back to the seller to re-negotiate the price down to the actual appraised value. Hopefully, this works out in your favor!

The appraiser is also looking at marketability.  They will look at the home style, location, as well as any concerning factors — like is the home backed up to an apartment complex or an active railroad?  These things won’t necessarily make it so you can’t get a loan on the home, but they absolutely affect the marketability of the home.

What about the condition?  Is the home in decent repair?  Does it have any major issues — foundation or structural concerns?  How about standing water or peeling paint?  Some of these things can be fixed and could become a “work order.”  The type of financing will determine what items are required to be repaired.

For instance, FHA financing will require any peeling paint, in or out of the home, to be scraped and repainted IF the home was built before 1978.  This is due to the possibility of the paint being lead-based.  FHA is all about safety.  If a work order is called, the work must be completed prior to closing in order to pass the FHA appraisal.  What if the seller won’t do the work?  You an check out the 203K loan we offer to help in this situation.

The appraisal is an opinion.  This is why we have the underwriter look at it as part of your file.  Of course, being that we’re placing a lien against the property, the collateral “C” is a big part of the underwriter’s decision.  But, as explained in the last three blogs, it’s not the only “C.”  As with the others, there is more that’s taken into account with Collateral and this is just a summary.

At least now you have a good idea of what goes into YOU from the underwriter’s perspective.  If I can help you navigate these waters, please give a shout.  It would be my pleasure!

You … from the Underwriter’s Perspective — The Third “C”

Another piece to your underwriting puzzle — Cash.  I love this one because cash actually isn’t an acceptable source of down payment or closing costs.  The better term for this “C” is assets, or what you have available for the transaction, but then it wouldn’t be with the other cool “C” kids!

You may wonder why cash isn’t allowable, I mean, it’s money and that’s what you need to

courtesy of  ddpavumba|freedigitalphotos.net
courtesy of ddpavumba|freedigitalphotos.net

buy a home, right?  True, but cash isn’t traceable.  We have no idea if it was yours from the tips you made at your server job, money saved at home, a gift from family, an unsecured loan or quite possibly, money derived from other unacceptable sources.  This is why we tell you NOT to make deposits into your accounts using cash with our list of things “not to do” in the loan process.

So if cash isn’t allowed, then what do we look for?  The obvious sources of assets are checking, savings and money market accounts.  We’re looking to make sure that the only deposits going into your accounts are funds from your employment and we determine this by looking at the last two months bank statements.  More statements may be requested depending on how long you’re in the process.  Any other deposits will be questioned, because again, the money could be an unsecured loan or untraceable funds.

Some people have CDs (certificate of deposits), mutual funds, stocks or bonds.  These are certainly acceptable sources.  We would need to prove ownership of the accounts by the last two months statements, prove that you liquidated the funds and have them in your account.  For bonds, we would get copies of the actual bonds.  A Roth IRA is also usable.  Typically, you can pull everything out you’ve put in with no penalty.  You aren’t able to take any of the funds you’ve earned from the investment though.  Since I am not a financial planner, I would get their advice on this.

Retirement accounts are other acceptable sources of assets.  Most of the time we use retirement or 401K statements as reserves.  That means, we’re looking at the balances just to make us feel good about the transaction.  Sometimes, certain programs require reserves.  For instance, we need to prove you have at least 2 months of the new house payment leftover after closing.  Or if you’re retaining your current home while purchasing the new home, we may need to prove six months reserves for BOTH the current house payment and the new house payment.  These guidelines vary by program.

Another source of assets is a gift.  Acceptability of this is dependent on the loan type, but in most instances, a gift is okay as long as it’s from a family member.  There are guidelines on how to get a gift, including a form to be completed called a gift letter.

I’ve mentioned unsecured loans and how they aren’t acceptable, but are any loans acceptable for the money you need?  Yes!  If the loan is secured against another home you own, a retirement account or a car, for instance, then a loan is okay.  If the loan is against anything but the retirement account, we must use the monthly debt payment in your qualifications.

Another form of funds for down payment and closing costs could be from an assistance program, like those found with MN Housing or Dakota County Bond.  These aren’t assets you possess, but would serve proof that you have the funds necessary.  All of these programs would require you have at least $1000 of YOUR own money into the transaction, verified via your bank account or some other asset account.  A gift is NOT acceptable for this $1000 as that would not be considered your funds.

Even the seller can contribute to what you need for closing costs, but there are limits to this and it’s a negotiation between you and the seller.

Of course, there are other forms of assets that I may not have touched on.  To know what you need to purchase a home, it’s best to sit down with a professional to look at all your options!  Last “C” coming up next — Collateral.

You … from the Underwriter’s Perspective — The Second “C”

As I write this blog, it occurs to me that a borrower is being defined in these posts by what the 4 C’s are.   I want to be clear that I realize you’re a person too, just like the underwriter.  This is why we have underwriters,  people to hear the story, understand the reasons for things and bring the human element to making a loan decision.  No situation is the same, and though guidelines have to be applied to be fair in assessing risk, there is room for interpretation and common sense.

That said, they are still looking at those components that make up a decision.  Today’s blog looks at Capacity.  This has to do with your ability to repay the loan, your ability to afford the payment.  This “C” is two-fold, as it looks at your employment AND your income to see if you’re a good credit risk.

jobConsistency and stability are key with employment.  We need to demonstrate a two-year work history, at a minimum.  This doesn’t necessarily have to be at the same job/employer. Sometimes, if we’re trying to make a case for your line of work, we may go back further.  Some loan types will allow being a full-time student as part of your work history.

People often ask how long they have to be on a job after they’ve been off work.  Maybe they were laid off, had a medical situation or even stayed home with kids.  Whatever the reason, if you were unemployed for over 90 days, more than likely you’ll need to be back to work for six months.  The biggest thing to note, is that working in a temporary position or for an agency, even if full-time, doesn’t work for qualifying, because it’s just that — temporary.

And what about job-derived income?  Normally, we look at what your average hours per week are or your base salary is to compute income.  Some people get overtime, bonus or even commission.  In order to use this income for qualifying, there needs to not only be a two-year history of receipt, but it needs to be increasing or at least stable.

What if you hold two jobs?  The quick answer — it depends.  In most instances, to use income from both jobs, we need to prove you’ve worked two jobs for the last two years concurrently.  And what about the job your spouse has even though he/she isn’t on the loan?  Unfortunately, we cannot use their income unless they’re obligated on the loan with you.

What if you don’t work?  The question then becomes, where is your income derived from?  Do you receive pension, disability, retirement, social security, alimony, child support or even dividends from assets?  These can all be considered as income assuming a few things — we can show a history of receipt and can we determine that the income will continue for another three years (some of the above don’t have the 3-year rule). The length of history required varies on the type of income.  For social security, we may just want two months; but for support, we may need six months of on-time receipt.  Again, they all have different rules per type.

All income is looked at in relation to your monthly, recurring debts to determine the actual qualifications.  We look at “gross” income, before taxes, to calculate your ratios — the percentage the underlying program allows you to spend on a house payment.  A typical ratio is 45% of your gross monthly income can go toward your monthly debts AND the house payment.  These vary by program.

As with credit, there are certainly more things to know about this topic.  The main gist is everyone is different, as is their situation.  It’s best to chat about yours to prepare you for your homeownership journey.  Next up, Cash!


You … from the Underwriter’s Perspective – The First “C”

Do you cringe or shudder when you hear the word “underwriter?”   Do they seem like an untouchable person?  Almost like the Wizard of Oz?  It’s not a bad word and certainly not someone to fear.  As a matter of fact, good underwriters are actually our allies.  They want to help people buy homes.  But how do they do that?

In the mortgage world, we have something called the 4 C’s.  These are the things that an riskunderwriter reviews to determine your credit worthiness and ability to get a loan.  The first “C,” and I would say the most important “C,” is Credit.

The first step is looking at your score.  Score requirements differ based on the loan type you’re doing.  In general, a 620 middle score is required for FHA financing and usually we need 680 for conventional financing.  Some programs,  including first time buyer programs, require a 640 score.  Scores aren’t created equal — in general, the more history and on-time paid accounts you have, the better.  This isn’t a suggestion to go open accounts to get more credit; that could actually bring your scores down. And so you know, scores can range from about 300-900.  The higher the better, of course!

This is just part of what the underwriter looks at.  It should go without saying that your payment history is key, so making payments on time is incredibly important.  The underwriter is primarily concerned with the last 12 months.  Consistent lates are a problem, but sometimes, if they are confined to window of time, you may be able to write an explanation to tell the underwriter the “why” it happened and the “why” it won’t happen again.

What about that collection account that was put on your report years ago?  This depends on the size of the collection and what it was from.  Medical collections are something we can ignore, but a collection that was in the last 12 months or so, may require that you pay it off.  Lots of collections are a cause of concern for an underwriter. There are items called profit and loss accounts too — which means the creditor wrote off the past due amount.  Next step is for this to go to collection.  These typically need to be paid.

How about disputes?  Most people aren’t aware they have disputes.  You may have one if you disagreed with a bad mark on your report or disagreed with anything that the creditor reported.  Disputes  stop the account from affecting your score – positively or negatively.  This is why lenders don’t want to see them on the report and will require, that with your lender’s help, the verbiage is removed from the respective accounts.  While in the loan process, make sure you don’t dispute anything.

Are you an authorized user on an account?  This means that someone, usually your parents, may have added you to an account to help you with credit, like a gas card.  You’re not responsible for this account or this balance, so it’s not actually helping or hurting you.  It doesn’t affect your scores, but is something lenders remove from their reports or we will have to count the monthly debt against you.

And last, what about major derogatory items — bankruptcies, foreclosures, short sales or judgments?  These can absolutely be deal breakers.  Judgments will actually need to be paid and typically prior to closing on the house.  Regarding the other items, each loan type has different waiting periods from the date the event occurred.  Not only that, the underwriter will look for a good letter of explanation as to why the it occurred and you must have re-established good credit.

This isn’t an all-inclusive list of what the underwriter is looking for, but it’s a good start.  Knowing and understanding your credit is the first step to homeownership.  I am happy to help you prepare for meeting today’s credit guidelines.  And come back to read about the next “C” — Capacity. 

The Little House that Couldn’t … Pass FHA

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

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

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

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

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

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

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

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

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