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!

 

 

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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!