Q: Are lending restrictions loosening? – Dream Town agent in Chicago

SS: Lending restrictions are still tight, but they are starting to loosen up a bit with credit requirements, lower down payments and exception-based debt-to-income qualifications. We are seeing more lenders drop their minimum credit score requirement as low as 620, and there are some lenders that will go below 600. We’re also seeing lower down payment programs for jumbo (as low as 10 percent), conventional loans (some programs even as low as 3 percent) and “portfolio” lending options for non-warrantable condos, foreign nationals and investors.

Q: What are the most important factors in figuring out if someone is qualified to buy? – Exit Strategy agent in Wheaton

SS: The most important factors in figuring out if someone is qualified to buy are income, credit and cash:    

Income – Demonstrating the borrower’s ability to make their monthly payments is everything.  Well, almost everything.  To be sure, we need to clearly understand a buyer’s income: W-2, 1099 and K-1, bonus, commission, dividend, etc. We take the buyer’s total monthly mortgage payment (including taxes, association dues and home insurance) and divide it by their total monthly income. This calculates their housing debt to income ratio. Then we add in all other debt on top of the mortgage payment, and compare that figure to the buyer’s total monthly income. In general, we don’t want buyers to exceed 43 percent debt payments compared to their monthly income.

Credit – The borrower’s credit is equally as important when determining if they qualify for a home loan. Credit history is the primary measure lenders use to judge the likelihood that they’ll be paid back. A few key factors lenders consider are the length of credit history, timeliness of payment history and overall leverage of credit cards or other loans. The credit score will be used to qualify the buyer for a mortgage and will often determine the interest rate they will be offered, as well as the type of mortgage they will receive. Credit scores range between 350 (low) and 850 (high), and a healthy credit score is generally considered to be above 700. The higher the credit score, the better the interest rate and the lower the closing costs. For most lenders, the minimum score to qualify for a home loan is 620.

Cash – The minimum required down payment when buying a primary home is typically 3.5 percent of the sales price, which will allow the buyer to get an FHA loan – a great option for first-time homebuyers or anyone who can’t come up with a huge down payment. Also, FHA loans don’t penalize buyers with a higher interest rate if they have less than perfect credit. Conventional loans typically require a 5 percent minimum down payment, and jumbo loans 10 percent. However, U.S. Veterans receive 100 percent financing loans (no down payment).

• When purchasing a home, buyers should keep in mind that they will not only need to have funds for the down payment, but also additional cash for various settlement fees. These can range quite a bit depending on the type of loan and the area where they are buying.  The good news is that home loan programs allow buyers to get a credit from the home seller to help pay for settlement fees, as well as additional costs, like the first year’s taxes and insurance.
• Lenders also verify that the funds buyers will use for their down payment are in a liquid account, like a checking account or savings account. If they like to keep their cash in a pile under their mattress, they may have trouble getting approved for a loan and will need to deposit that cash into a bank account. Lenders need to see where all the funds being used in the transaction are coming from and that there is no way to document loose cash.
• Sometimes, in addition to the funds used for the down payment, there is a separate requirement for cash reserves. This varies from lender to lender, and will depend on the type of financing they are trying to get. Reserve requirements are more common if they’re buying an investment property or second home, rather than a primary residence. In most scenarios, the requirement will be equal to two to six months of mortgage payments in liquid reserves.

Q: My buyer is looking at a home that needs lots of work. They don’t have enough money to pay cash, and I don’t think it will pass for regular financing – any options? – Weichert, Realtors agent in Long Grove

Dan Gjeldum, Guaranteed Rate (DG): If you have a property that won’t pass typical appraisal standards due to issues with the home, buyers can obtain construction financing to immediately improve the home. Those products range from the 203k loan offered through FHA; the Homestyle Renovation loan offered through Fannie Mae; or a full blown construction loan. As long as the scope of proposed work encompasses and addresses the issues shown in the appraisal, the buyer will be fine closing on the home.