Posts Tagged ‘Credit Scores’

An old wives’ tale comes true

June 24, 2010

I’m sure you’ve read or heard about things not to do when trying to get a mortgage that could disqualify you from buying or refinancing a home. You know what I’m talking about – a story that happened to someone somewhere, but could never happen to me…

I remember hearing a story of a couple that bought two luxury cars days before closing on their new home. Long story short – they no longer could buy the home!

Now it is doubtful that many of us would go out and buy one (let alone two) luxury cars right before closing. But that old wives’ tale may be coming true more often now than it ever has before.

I always warn my customers not to do anything in regards to credit once I’ve obtained a copy of their credit report. Don’t buy a car, don’t open a new credit card, don’t run up a higher balance on an existing credit card, don’t pay anything off or down if it isn’t needed to qualify. That advice is needed now more than ever thanks to Fannie Mae’s Loan Quality Initiative.

The purpose of the Loan Quality Initiative is to keep a close eye on any potential changes to a borrower’s circumstances from the application date to the closing date. Lenders will do this by pulling a copy of a loan applicant’s credit report up to the day of closing. This has always been a possibility – a random credit pull for quality control purposes – but now it is becoming standard practice.

If your credit report is pulled on the day of closing, and there is a credit account opened after your initial credit pull, your loan could be pulled back into underwriting to be reviewed before being allowed to close. If that happens, there will definitely be a delay in closing.

How can you prevent this from happening? Don’t do anything to your credit once you’ve been qualified for a new loan. Don’t apply for any credit, don’t let anyone make an inquiry on your credit report, don’t go out and purchase furniture or appliances on existing credit cards.

In short, don’t do anything until after you close on your loan. You’ve heard about the credit crunch, and this is simply another aspect of it. Remember this isn’t a single lender or bank’s guideline, but one from Fannie Mae. That means everyone will be subject to these new standards.

Have questions or comments? You know how to find me!

one more thing

January 21, 2010

The Federal Housing Administration (FHA) is channeling their inner Steve Jobs with their continued amending/changing of loan guidelines. You know how Steve operates… even though it appears he is wrapping up the annual “state of Apple” speech, he often comes back back on stage saying “one more thing” and proceeds to introduce a new product offered by Apple.

While Steve talks about a cool new product, currently, the FHA releases tighter loan guidelines – definitely not as fun!  No one knows for sure when the tightening of loan guidelines will end, but recent changes include:

  • a 580+ credit score is now required in order to qualify for the minimum down payment of a 3.5%
  • credit scores lower than 580 will require a 10% down payment
  • the up front mortgage insurance premium will increase from 1.75% of the loan amount to 2.25% of the loan amount
  • seller contributions to closing costs will be reduced from 6% of the purchase price to only 3% of the purchase price

As always, it is more important to know how these changes will impact borrowers. Let’s take a look at each of the changes and their potential impact:

  • CREDIT SCORES – While the FHA itself has not required credit scores, lenders have required a minimum credit score of at least 620 for some time now. The lender required 620+ credit score will probably not change, so the FHA 580 credit score requirement will not apply in most cases.
  • UP FROM MORTGAGE INSURANCE – The up front mortgage insurance premium has been required in some form for as long as FHA loans have existed. The up front premium is charged to the borrower BUT rolled into the loan amount – meaning the borrower is NOT paying the fee out of their own pocket at closing. Ultimately this will only slightly reduce the max purchase price of the borrower.
  • SELLER CONTRIBUTIONS – If a borrower only has enough for the minimum down payment on an FHA loan, the seller usually pays the closing costs and prepaids on the borrower’s behalf.  Under the old guidelines, a 6% contribution of the purchase price would easily cover all closing costs and prepaids on the loan.  However, 3% of the purchase price may not cover everything and borrowers will need to find other sources (gift from a relative, low OR no closing cost loan, etc.) to cover any additional funds due at closing.

In the grand scheme of things, these changes should not have a dramatic affect on borrowers qualifying for FHA loans.  It will primarily reduce the amount of house a borrower can afford to buy.

That said, planning ahead becomes more and more important.  Gone are the days of easy financing and no planning needed.  Anyone looking to buy a home using the tax credits (for first time home buyers OR move-up buyers), need to talk to a professional and make sure everything is in order now instead of waiting until the tax credit deadline and realizing (when it may be too late) that there is a potential problem!

Conventional and FHA loans revisited

January 8, 2010

In 2008, I released a series of posts comparing the pros and cons of conventional and FHA loans.  If you haven’t noticed, a lot has changed in the last couple of years.

On that note, I thought it wise to make note of new guidelines and highlight some changes to existing guidelines for both conventional and FHA loans. For reference, I will also provide links back to the original posts from April to June 2008.

Minimum credit score requirements (click here for the original post):

  • Lenders now require a 620+ credit score for FHA loans (a 660+ credit score for some programs). Credit scores between 620-660 may see a slightly increased interest rate.  – this is a change from no minimum credit score requirements
  • Conventional loans also require a minimum credit score of 620+, but interest rates for scores under 680 see a noticeably higher interest rate. – this is a change from possible approval below 620 and higher rate adjustments occurred below 620.

Credit history requirements (new requirement):

  • Brand new – FHA loans now require borrowers to have at least three active OR recently closed trade lines (accounts) in their credit history.  See this recent post for more details.
  • Conventional loans do not have this requirement.

Minimum down payment requirements (click here for the original post):

  • FHA loans require a minimum down payment of 3.5% regardless of the credit score. – change from 3%
  • FHA down payment assistance programs are no longer allowed.
  • Conventional loans require a minimum down payment of 5% and a 680+ credit score in order to obtain Private Mortgage Insurance.  – no change in the amount needed down, but the minimum credit score requirement is new
  • If a borrower’s credit score is below 680, then a 20% down payment will be required on conventional loans.

Private Mortgage Insurance (click here and here for original posts):

  • FHA loans still require an up front Mortgage Insurance Premium fee of 1.75% of the loan amount. The fee is rolled into the loan amount. – change from 1.5% up front fee
  • FHA monthly mortgage insurance payments are still lower than conventional loans.
  • Conventional loans do not have an up front fee, which is why their monthly premiums are higher than FHA loans.

The last couple of years haven’t changed the overall differences between FHA and conventional loans.  They have however tightened up the qualifying guidelines making planning ahead crucial. If you are looking to buy (or refinance) a home in the next 6-12 months, give me a call to help ensure you everything is in order when you make an offer on a home.