A Little Something About FHA Loans & Credit Scores

 

Many FHA loan applicants have worked hard to build up their credit scores yet aren’t sure whether they can qualify for an FHA loan. A common dialogue from potential buyers about FHA loans goes more or less like this:

“I have a credit score of 536. Can I get an FHA loan? I applied for a conventional loan but could not get approved.”

One thing that’s important to remind borrowers of when it comes to questions like this--some wrongly assume that the FHA is responsible for loaning money. It is not. FHA loan standards are set in two places--one is the FHA loan rulebook, which states that a minimum credit score of 500 is required for consideration. But since the FHA does not lend the money for a home loan, the participating lender’s own credit score requirement is also a factor.

This point is very important. To reiterate: the FHA does not loan money or disburse funds. Instead, it guarantees the home loans which are issued by a participating lender. The lender is responsible for processing, approving or denying the FHA loan applications it receives.

If the borrower does not meet minimum FHA standards, the loan application will be denied. If the borrower meets minimum FHA loan standards, but cannot meet the lender’s additional requirements--which may include more stringent credit or income criteria depending on the loan and the situation--the loan may be denied.

FHA minimum credit scores are listed at 500 and above. Financial institutions can and often do require higher FICO scores. Among many lenders, the accepted basic minimum FICO score is 620 or better.

If you are considering applying for an FHA loan but know your FICO score is lower than 620, contact the FHA directly for a referral to a pre-purchase housing counselor who can give advice on how to improve credit scores and the overall chances of loan approval. Also, if it's not in your budget to hire third-party companies to “repair your credit,” then contact the FHA and ask for a referral to an FHA approved housing counselor on how you can accomplish the same results yourself.

Call the FHA directly for this type of assistance at 1-800 CALL FHA.

 

Then call Michica Guillory of The Guillory Group at (832) 768-1711 when you're ready to buy or sell your home.

BUYER BEWARE: On FHA Loans, Mortgage Insurance To Be PERMANENT

Changes are on the way as the Federal Housing Administration begins implementing new lending policies on April 1. These changes will significantly raise the cost of purchasing a home for anyone borrowing from an FHA-backed lender.

Effective next month, Mortgage Insurance Premiums (MIP) will increase and raise the cost of borrowing for purchasers short on funds for their down payment. MIP rates will increase by about 10 basis points (.10 percent) on most mortgages.  Two months later, on June 3, HUD will increase the minimum time a borrower must pay for mortgage insurance. The biggest surprise to the uninformed will be the change in rules making it impossible for most borrowers to cancel the MIP without refinancing into another loan not administered by the FHA. In other words, the MIP on an FHA loan will be PERMANENT for many.

Under current guidelines, buyers could request that the MIP be eliminated when the loan-to-value (LTV) dropped to 78 percent of the original loan and the annual MIP had been paid for at least 60 months. Most FHA borrowers will find it more difficult to eliminate paying for the insurance in the future. The new changes vary depending on the original terms of the loan. Anyone borrowing greater than 90 percent LTV will be stuck paying MIP for the life of the loan. The only way to eliminate this expense would be to pay off the loan or refinance. Borrowers with an initial LTV between 78 percent and 90 percent may eventually qualify to eliminate MIP, but only after a minimum of 11 years.

FHA backed loans are popular for several of reasons. FHA allows for a 3.5 percent down payment, refinances without appraisal, and its rates are usually low.

In order to avoid the MIP rate increases, home buyers should plan to apply with a lender no later than March 25. Borrowers hoping to avoid the new terms on canceling the insurance should apply by May 24.

Don’t wait before it’s too late to take advantage of today’s low rates.

Sorting through the maze of mortgage options is just another reason to seek professional advice from a qualified and experienced mortgage lender. Depending on your financial situation, there may be other loan products that meet your needs and cost less when everything is taken into account. The lowest mortgage interest rate does not always equal the best deal when all costs are considered.

For more information or to get started with your home search, call Michica Guillory, Broker, at (832) 768-1711.

How Do I Buy a House???

If you've never owned a home before, the idea of buying your first home can be pretty scary. Appraisals, inspections, lenders, contracts, earnest money, down payments...whew!

And while all these things are, indeed, a part of the home-buying process they shouldn't be frightening. Why? Because it's your Realtor's job to help you navigate the process all the way to closing. (And a Realtor doesn't cost a buyer a penny!)

So, what DO you need to do in order to buy a home? Well, you should start with what you've got in the bank. There is no Golden Rule of savings, but I like for my clients to have four to six months of income saved up. This way, there are funds available for earnest money, inspections and a down payment, if required.

You should also STOP MAKING LARGE PURCHASES! In other words, if you're embarking on the home-buying process it is not the time to buy cars, loads of furniture and tons of electronics. (See my blog post on debt-to-income ratio for a detailed explanation.)

Next, choose a mortgage company and get a pre-approval (not a pre-qualification) so you can see how much money a lender is willing to put on the line for your dream home. This is also the time when you'll find out whether a lender believes you're financially ready to handle the responsibility of owning a home.

Also consider attending first-time home buyer seminars so you can hear the questions and concerns of other aspiring buyers. And you can hear the answers of professionals who can help remove the fear of the unknown.

Then it's time to figure out what's important to you. In other words, what do you expect from your home? That's right...you should have an expectation of your home. Otherwise, you'll be in the streets looking at house-after-house and never quite finding what you want. You need to consider whether you want one or two stories; whether you want your bedroom next to the children's; what schools you want to be near; the commute to and from the job; tax rates; association dues and the list goes on!

But don't worry. That's what MG Willard Properties is here for. We already have the bases covered. You do your part and then call us when you're ready for a Realtor to do their part. Call us at (832) 768-1711 Monday-Saturday from 9 a.m. to 5 p.m.

What Is Debt-to-Income Ratio?

All over Houston, people are living out their American dream and buying their own home. And all over Houston, some people are living a nightmare because they bought a new car to put into that new home…before they closed on their home.

So, what’s the big deal? The big deal is a little thing called “debt-to-income ratio.”  Understanding this common real estate term can save you plenty of headaches when buying a home.

What It's All About

This fancy term describes a lender’s simple way of illustrating what percentage of your income is available for a mortgage payment after your other major monthly debt is paid. This “other” debt might include student loans, car loans or even that Sears credit card that mysteriously keeps getting used.

In other words, this ratio tells a lender how much a home buyer can reasonably borrow and pay back. This ratio is determined at the beginning of your home buying process during pre-qualification.

Conventional loans largely have a qualifying ratio of 28/36, and these two numbers represent two different facets of your debt.

The first number represents the maximum portion of your monthly gross income – that is, before taxes – a lender will allow for essential housing expenses, including loan payments, property taxes, home owners’ association fees, private mortgage insurance and hazard insurance.

The second number represents the maximum portion of your monthly gross income that the lender allows for the debts mentioned above plus your recurring debt including auto or student loans, credit card payments and other such debts that may not be paid off quickly.

Let's Run The Numbers

For this example, let’s say a husband and wife earn $81,000 a year. Here’s how a lender might calculate their debt-to-income ratio for a conventional loan with a qualifying ratio of 28/36:

• Annual Gross Income = $81,000
• Monthly Income = $6,750


• $6,750 x 28% = $1890 allowed for housing expense or PITI (principal, interest, taxes & insurance)


• $6,750 x 36% = $2,430 allowed for PITI plus recurring debt

Closing First, Car Last

So, if this family’s debt plus housing expenses remains at or below $2,430, then they can be on their way to owning a home.

But if their debt suddenly exceeds this number they may destroy their chances of getting a home loan. So, if this couple buys that Nissan Altima they’ve been eyeing since the end of football season, they can say goodbye to their dream home.

And it happens all the time. Just days before meeting at the closing table, clients purchase everything from cars to refrigerators, from bedroom sets to summer wardrobes, and they forget they’re in the process of buying a home. Dreams are literally lost at the closing table.

Realtors have a saying, “If you buy a car while trying to buy a home, you just may find yourself living in that car.”

When entering into the home buying process it’s important to set priorities, get a Realtor, make a plan and stick to it!

Are You Ready for a Home, But Your Credit Isn't?

If you're waiting for your credit scores to improve and you're not getting any help in the process, your dreams for a home of your own may be on hold...indefinitely.

There is no silver bullet or magic formula for improving credit scores. It's a matter of paying bills on time, making sure any discrepancies on your reports are cleared up and not maxing out your credit limits.

But there are people and organizations that can help you with this process if the idea of cleaning up a 5-, 10- or even 20-year-old credit report seems daunting. I have a client whose median credit score has improved more than 50 points in a matter of months after cleaning up his reports with Experian, TransUnion and Equifax.

If you're ready to make that step, we can help get you going in the right direction to cleaning up your credit and -- the ultimate goal -- home ownership. Just fill out the form to the right and we'll be happy to help!

About The Guillory Group Brokerage

At The Guillory Group, we guide our clients through every level of their residential real estate transaction. Of course, we always enjoy helping clients buy their dream home. We also can help you sell your home or even lease it. We even help families lease homes until they're ready to buy. 

And for our clientele who need a little extra help, we partner with credit repair specialists and lenders who are well versed in programs available for first-time home owners, public servants and educators, mortgage grants and down payment assistance.

If you're ready to talk, we're ready to listen. Just fill our our contact form, and we'll call you back ASAP!