Q: Can my client purchase a home using FHA financing with negative items on their credit score?
Consumers with negative inquiries must wait up to seven years before they can purchase another home, depending on the type of property they purchase. For short sale properties, the waiting period is two years; for foreclosure properties, the waiting period is seven years; and for FHA-financed properties, the waiting period is three years.
The potential borrower must provide updated documentation (i.e., bank statements, updated bills and updated credit scores) that shows they are back on track financially. In addition, they must also attend a one-hour one-on-one course with an approved housing counselor through the Department of Housing and Urban Development (HUD) at least 30 days prior to submitting an application for an FHA loan. A good lender will help navigate your clients through the necessary steps prior to applying for the FHA loan.
If clients with short sales/foreclosures/bankruptcies on their credit reports are looking to buy a home, what process would you take them through to achieve their goals?
Openness and honesty regarding any negative items on one’s credit score is the key to moving past the problem. The loan process may take a bit longer, but now is still an optimal time to get back on track. In addition, advise your clients to:
• Pay bills consistently and on time. Even if they are unable to pay off credit card balances every month, making consistent payments that meet or exceed the minimum due is very important.
• Keep balances low. Have clients try to restrict credit card usage to emergencies, and only make purchases that are intended to be paid off quickly.
• Take advantage of free credit report services. Each bureau (Experian, TransUnion and Equifax) offers a free credit report each year – use those services to make sure there are no fraudulent activities and to become aware of any negative credit issues.
• Use services like Credit Karma. Credit Karma is a free service that can monitor a credit report and even stimulate a credit score. It can even look over credit card utilizations, and consumers will be informed every time there is an inquiry on their report. Think of it as a continuous report card for credit. The best part is it’s absolutely free!
• Save wisely. If a consumer saved $100 with each biweekly paycheck, in two years they would save $2,400. SaveUp is a service that offers rewards based on savings, and it’s absolutely free. Saving is extremely important, as it will help with making a larger down payment, as well as show financial stability.
Should my client apply for credit during the mortgage process?
No! Applying for new credit during the mortgage process can negatively affect one’s ability to secure a loan. An ideal borrower would have a credit score of 740 and their debt-to-income ratio would be below 45 percent.
Obtaining new credit during the process can potentially lower your client’s credit score and alter their debt-to-income ratio. Remember, credit is pulled in the beginning of the mortgage process and verified towards the end, and it is important to continue to have stability before, during and after the process.
Why are FHA loans popular?
FHA loans are an attractive option to customers because they allow them to utilize a lower down payment option. Rather than the traditional 20 percent down payment, homebuyers only have to put down as little as 3.5 percent (or more, depending on the loan amount). Additionally, consumers with less-than-perfect credit (greater than 640) can be eligible for an FHA loan as long as they also have revolving credit, no major delinquencies, steady income and show that they pay their bills on time.
What are some recent FHA changes?
As of April 1, 2013, the FHA has increased its premium by 0.1 percent (10 basis points) for a loan amount less than or equal to $625,500. Loans greater than $625,500 are subject to a 0.05 percent increase (five basis points). In addition, another major change occurred regarding the use of mortgage insurance premium (MIP).
Previously, MIP was required for five years, or until the principal was paid down to 78 percent of the total loan-to-value. As of June 1, 2013, MIP is required for the entire duration of the loan. These are just a few of the highlighted changes on the Mortgagee Letter 2013-04 provided by HUD. Contact a mortgage lender if you have any questions about FHA loans.
Ben Cohen is a senior vice president of mortgage lending at Guaranteed Rate. with more than a decade of experience in the industry, he has consistently been recognized as a top mortgage originator in America, and was ranked 44th in 2012 by Mortgage Executive Magazine. For more information about a new or existing mortgage, contact him directly at 773.654.2055 or online at www.guaranteedrate.com/bencohen.