Loan qualification


A couple of days ago one of my favorite loan officers shared some information about a problem facing many would-be buyers who are trying to get approved for an FHA mortgage after a short sale.  Here’s a couple of surprising things I learned that could squelch some dreams.

Most of us probably know that FHA requires a 3 year wait from the date of the short sale, (conventional 4 years), but here is the kicker:  Did you know that for DU underwriting it is actually 3 years from the reported date?  That means that if the 1st or 2nd lien holder didn’t report the account as closed until 10 months after the close of escrow, a buyer would not qualify until 3 years and 10 months after closing!

And it’s not just short sales.   FHA looks at a short sale, deed-in-lieu, foreclosure, and loan modification, (YES, even a loan mod) as the same derogatory event, and as noted above they require a 3 year wait from the reported date.  Approval for an FHA loan is normally based on running the application through the Desktop Underwriter (DU) automated underwriting program.  The DU program reads the dates entered on the credit report so if that is incorrectly reported, the loan will be denied.  In the case of a short sale, it might be helpful to find a lender who agrees to manually underwrite the loan so that the correct dates are used.

Besides the date, the other item that could trip up a buyer is how the old mortgage debt is reported.  If the account is reported as closed, but still shows the amount not paid off in the short sale as a balance on the account, the reported balance will probably disqualify them in DU by calculating a payment and inaccurately increasing their debt-to-income ratio.

Advice from my loan officer:  Following a short sale, borrowers should check their credit report from all 3 reporting agencies about 6-8 weeks after closing.  If the sale is not reported, and/or it does not show a zero balance they should contact their previous lender to get it corrected. Then, get a DU or manual underwriting approval well before shopping for a home.  It may mean the difference between buying again in 3 years versus facing an unanticipated and disappointing wait!

 

 

Advertisements

San Diego real estate broker Marti Kilby describes the precuations you should take when buying a foreclosed property.


 

As I’ve recently noted, getting a home loan these days can be extremely difficult unless you have a 20% down payment, a credit score in the mid 700’s and sufficient income so that your housing costs are no more than 28% of your gross income.  In fact, according to the Financial Institutions Examination Council, roughly 25% of all conventional home loan applications submitted in 2010 were rejected. 

These stringent qualification requirements are for loans backed by Fannie Mae and Freddie Mac, but luckily they aren’t the only game in town.  Today, more and more borrowers are taking advantage of the less demanding criteria for FHA loans. The Federal Housing Administration has been in existence since 1934 and has become the largest government insurer of home loans in the world today.

Although every lender might have slightly different requirements, here are the basics needed to qualify for an FHA insured loan:

  • Technically, 580 is the minimum acceptable score, but in practice lending institutions require a minimum of a 620 mid score.  The mid score is the middle score when credit is pulled from all three major reporting agencies; Experian, Equifax, and Transunion.
  • Housing expenses, (mortgage, taxes and insurance) must not equal more than 31% of your gross income, and all payments, (including cars and credit cards) must not exceed 43%.
  • The down payment must be at least 3.5%.  If the down payment is less than 10%, most lenders require a credit score of 640.
  • There is also an Upfront Mortgage Insurance Premium paid at closing and usually financed into the loan.  This premium is 1.75% of the base loan amount.  There is also an annual premium paid on a monthly basis.  This amount will be based on the loan-to-value ratio.

An FHA loan is an excellent choice for first-time buyers, or anyone with less than perfect credit or a small down payment.  If you’re thinking of buying in San Diego,Orange orRiverside County, please give me a call.  The time to get qualified is before you start looking for a home.  There is nothing worse than finding the perfect home, only to discover you can’t get a loan!

I think we all agree that the lack of regulation in the mortgage lending industry was a primary cause of the housing market collapse.  Not everyone with a pulse should qualify for a zero- down, $400,000 mortgage.  However, the new rules being proposed by the federal government could be the fatal blow to a struggling housing industry that is barely surviving on life-support.

The cornerstone of the proposal is the idea that the very best rates and terms for conventional loans would be reserved for the very best borrowers…..sounds somewhat reasonable, until you understand what an exclusive club that would be, and how difficult it would make buying for first-time or lower-income borrowers.

First, a 20% down payment would be required.  In some parts of the country, you can buy a nice home for $150,000, but even so that would mean a down payment of $30,000 – a big number for a lot of people.  But here inSan Diegowhere a nice 2 bedroom condo is going to cost you around $320,000, a buyer would need $64,000, which is most likely a staggering sum for anyone considering a condo purchase.

If you think that sounds a bit harsh, you’ll love the other suggested requirements for the so-called “Qualified Residential Mortgage” or QRM:

  • Strict debt-to-income ratios.  A max of 28% of gross monthly income could be used for housing expense and total monthly debt could not exceed 36%.  Currently, both Freddie Mac and Fannie Mae guidelines take other factors besides DTI into consideration, and Freddie can go up to an overall debt-to-income ratio of 45%.  And of course, this is fully documented income, so tough luck for the self-employed.
  • To refinance your existing loan for a better rate you would need a minimum of 25% equity, and if you wanted to take out any cash, 30% equity would be required.  Today’s requirements vary by lender, but are no where near that strict.
  • Pristine credit.  If you were 60 days late on any account in the past two years you would not qualify.

So to put this into perspective, let’s see what someone might be able to afford here inSan Diegowhere the median household income is $67,000.  Their total monthly housing expense, including tax and insurance could not exceed $1,563.  This means they could purchase a single family home for $295,000 (if they could find one that would qualify for conventional financing), but would need a down payment of $59,000.  Presuming their monthly take-home pay is $4,466 and they are currently renting a 2 bedroom apartment for $1200, and after all other expenses they could still manage to save $500 a month, it would take these would-be home buyers 9.8 years to save for the down payment!

What if you don’t qualify?  Get ready to pay-up.  The mortgage industry estimates that non-QRM rates will be from .75 – 3.00% higher, again pushing more people out of the market with higher rates.  So if you are like the majority of today’s borrowers and don’t have a big down payment, make an above average income and have perfect credit you could be paying 8.00% interest while the QRM borrower will pay just 5.00%.  Sounds really fair and I’m sure that will mean a big boost to the housing market, right?

This is a total over-reaction that threatens to kill the small gains and recovery that we’ve seen in the past year.  I agree that reforms are necessary, but requirements should not be so stringent that home ownership is only accessible to a privileged minority.  If only the wealthy can purchase a home, some of our troubled neighborhoods (where the QRM buyers won’t want to live themselves) will be owned by investors and would-be buyers will be doomed to a life-time of renting from them.  I don’t know about you, but to me this doesn’t sound like a way to re-build neighborhoods or salvage the American Dream of home ownership.

Just in time for Christmas, Fannie Mae put new rules into effect on December 13th that will make it even more difficult for homeowners who have had a foreclosure to buy again.

Under the new lending guidelines that control qualification standards for Fannie Mae backed mortgages, a borrower who has had a foreclosure will now have to wait seven years before being approved for a new mortgage.  That is up from the current wait time of four years.  Another provision of the guideline revision tightens the acceptable debt-to-income ratio (DTI) to 45%, down from 55%, and includes stricter scrutiny of all installment debt.  Under the new guidelines, even one missed payment on a credit card could mean the difference between approval, and not qualifying.  Fannie Mae currently guarantees 28% of all residential loans.

While we all understand the need to move away from the “if you have a pulse, you qualify” standards of a few years ago, these new guidelines seem downright punitive!  On one hand the Fed is pumping money into banks urging them to make more loans to stimulate the economy, yet at the same time the new regulations make it more difficult for banks to lend.   And why the increase from four to seven years?  There is no rational reason for this extended wait time.  The only thing I can figure is that this is intended to scare homeowners considering strategic default into continuing to pay an inflated mortgage on a grossly devalued home.

Although there are several provisions of the new guidelines that may benefit some borrowers, overall this is not an effective way to get the housing market back on its feet.  Thanks Fannie:  You’ve just provided one more reason why I believe we’ll continue to see an increase in short sales over the coming year.