Understanding the Factors That Impact Your Credit Score

Understanding the Factors That Impact Your Credit ScoreMost consumers believe if they pay their bills on time, they need not worry about their credit score. Oftentimes, it is a rude awakening when they apply for a mortgage loan, car loan, or any revolving credit to learn they are not going to get the lowest rates available due to their credit score. This is because paying bills on time only accounts for 35 percent of your credit score. The remaining 65 percent is spread out among other factors that impact your credit score.

Credit Usage and Impact on Score

Nearly one-third, 30 percent, of your credit score is based on how much of your available credit you are using. For example, if you have combined credit available of $100,000 and you use $90,000, you will suffer a decline in your credit score. Those consumers who have similar credit lines and are using $9,000 will get a slight bump in their score.

New Credit vs. Old Credit

We seldom think about how long we have held a line of credit open. However, some consumers “exchange” credit lines for other credit lines due to special offers made by credit card companies. This is not necessarily a good idea since 15 percent of your credit score is determined by the age of your credit accounts. The longer you have had an account, the better in most cases. The calculation will take all open credit accounts, take the amount of time they have been open and get an “average age”. If you have six accounts which have been open less than a year and six that have been open five years, the newer accounts will count against you in this case.

Mixing up Credit Lines

A consumer who has only a mortgage and a single credit score will take a modest hit on their credit score versus a consumer who has multiple credit cards, a mortgage, and an auto loan. The types of credit you have will account for 10 percent of your credit score and the more varied your open credit lines, the better. While it is inadvisable to open new credit lines simply to show a variety of types, having installment loans, retail credit cards, and traditional credit cards is a good idea.

New Lines of Credit Opened

One danger many consumers are unaware of is suddenly opening new lines of credit. For example, a new homeowner may open a new account with a home improvement store, a general retail store, and a new credit card to help them furnish and repair their new home. This could be a red flag since the credit lines are new, and there is no established history on the mortgage, or the new credit lines. Since this factor accounts for 10 percent of your credit score, you could suffer a temporary decline in your credit score.

Consumers should be aware of the factors which impact their credit score, and also be aware of the factors that do not impact their scores. Understanding your credit score may be the most important tool you have when buying a home, or refinancing your current mortgage.

Please contact your trusted mortgage professional to discuss how your credit score may be impacting your ability to finance your next home purchase. 

3 Programs That Allow You To Buy A Home With No Money Down In 2018

3 Programs That Allow You To Buy A Home With No Money Down In 2018Home buyers are typically advised to put at least 20% down for a mortgage. Coming up with that amount can seem almost impossible if you have little to no money left over after paying bills each month.

Fortunately, if you want to buy a house but are worried about coming up with the 20 percent down needed for a downpayment, you still have plenty of options. There are still plenty of programs that allow you to buy a home with a low down payment or even no money down in 2018. 

Here are some of the best programs that designed for homebuyers who don’t have a massive chunk of cash to put down at closing. Maybe one of these options will be the perfect solution to make your dreams come true. 

#1 VA Home Loans 

If you are a veteran, in the National Guard and Reserves or an active-duty service member, then you may qualify for a VA home loan. The VA offers 100 percent financing. So, you don’t need any money down. The VA does not require mortgage insurance. There is a funding fee, which must be paid by the borrower. However, the lender can roll the fee into the loan amount. The funding fee is typically 2.15 percent of the loan amount. 

#2 USDA Loans

The U.S.Department of Agriculture (USDA) offers a zero-down mortgage for low to moderate-income families. This program was created to help rural development. The loans are only available in towns that have populations of 10,000 or less. However, this is quite a large area. In fact, the USDA program covers more than 97 percent of the United States. Many eligible smaller towns are located right outside major cities.

The USDA program was designed for first-time home buyers although there are some exceptions to this rule. USDA loans do not require mortgage insurance. There is an upfront guarantee fee of one percent. The lender can roll this fee into the loan amount. 

#3 FHA Home Loans

The Federal Housing Administration (FHA) provides one of the most popular low down payment mortgage options in the country.  Normally this loan product requires a minimum 3.5% down payment.  However, 100 percent of the down payment money can be a financial gift from a relative or a non-profit organization.  This allows a borrower to get into their home with no money down.

Contact your trusted mortgage professional to find out about these programs or others that might be right for you.

What You Need To Know About Short Sales

What You Need To Know About Short SalesOn the surface, a short sale seems like the perfect deal. However, before you take the plunge, you need to understand how this type of home purchase works.

What Is a Short Sale?

A short sale is a home sale in which the homeowner is selling the home for less than he or she currently owes on the mortgage. In most cases, this means that the buyer is paying less for the home than it’s worth, which leads to instant equity.

Short sales allow homeowners to get out from under mortgages without damaging their credit as much as a foreclosure. Lenders often agree to short sales because the foreclosure process is lengthy and expensive, so short sales can be more beneficial for both parties in the long run.

Advantages

When you buy a short sale, you can often get a nicer home for a lower price. In most cases, you will still be able to use financing to purchase a short sale.

A homeowner attempting a short sale also tends to be highly motivated, which means they will be willing to negotiate on almost any aspect of the sale.

Disadvantages

Although purchasing a short sale can be lucrative, the process isn’t easy. Short sales can take as long as nine months to complete, which is much longer than the time required for the typical home purchase.

Because the homeowner owes more on the mortgage than you will be paying, the bank must agree to the price. This means that even if the homeowner is willing to accept your offer, the bank can still reject it.

If the home secures more than one mortgage, all of the lenders must agree to the sale before it can close. This can lengthen the process even more.

Even though the bank will hold up the process, they will want you to be flexible. Banks are less likely to approve offers from buyers with multiple contingencies, such as a house that needs to sell before closing.

Should You Purchase a Short Sale?

The decision to make an offer on a short sale home is personal. Although there are many obstacles and potential disadvantages, you may be able to save money and build equity quickly if you are able to complete a short sale successfully.

Keep in mind that most banks considering a short sale will want to see a well-qualified borrower who offers flexible closing terms, so it’s best to contact your mortgage professional for a pre-approval before you make an offer on the home.

Pros And Cons Of Buying A Foreclosure

Pros And Cons Of Buying A ForeclosureWhen a homeowner stops making regular mortgage payments, the bank can foreclose on the property. This means that the bank takes possession of the property in an attempt to recover the debt the homeowner owes. In some cases, the bank may try to recover this debt by selling the property at auction. In other cases, the bank will simply list the foreclosed home for sale.

Choosing to purchase a foreclosed home has both advantages and disadvantages for the buyer. Weighing these advantages and disadvantages carefully is essential.

Pros of Buying a Foreclosure

When you decide to buy a foreclosure, you will be working with a seller that is inherently more motivated. The longer the bank owns the property, the more money they lose. For this reason, banks are often more willing to negotiate on all of the terms of the sale, including the price, closing costs and other important factors.

Buying a foreclosure also ensures that you are getting a house that is already vacant, so you can move in whenever you are ready. In addition, you can be sure that the title on the home is clear.

In most cases, you will be able to finance a bank-owned foreclosure with a mortgage, and you will be able to obtain an inspection if you want one.

Cons of Buying a Foreclosure

Buying a foreclosure also comes with disadvantages. For example, banks usually require additional paperwork when you are purchasing a foreclosed home.

In addition, most banks will refuse to complete any repairs on the home before the purchase. Most foreclosed homes are sold as-is, which means you may have to repair some problems or do some updates after you buy the home.

Finally, because the bank has only owned the home a short time, they cannot provide comprehensive disclosures related to the property’s current condition or history. This means that you may end up purchasing a home without being fully aware of the problems you’ll need to address.

Making a Choice

Buying a foreclosure isn’t the right option for every buyer. However, if you are a careful shopper, potential benefits are available.

Before making an offer on a foreclosed home, be sure to consult an experienced mortgage professional to get your pre-approval in order so you can complete the purchase quickly if you choose to move forward.

 

How To Qualify For An FHA Loan

How To Qualify For An FHA LoanBorrowers who cannot qualify for a conventional mortgage are often able to obtain an FHA loan. However, to secure this type of loan, you must still meet certain requirements.

What Is an FHA Loan?

FHA loans are mortgage loans that are backed by the Federal Housing Administration. It is designed to help borrowers who are unable to meet the requirements for a conventional mortgage or other types of financing. These loans can be used to purchase single-family and multi-family homes.

What Are the Requirements for an FHA Loan?

When you apply for an FHA loan, the underwriter will consider many of the same characteristics considered when you apply for a convention loan, including:

  • Your credit rating
  • Your income
  • Your outstanding debts
  • Your down payment
  • The value of the home you intend to purchase

In order to qualify for an FHA loan, you must have at least a minimum credit score. However, the minimum credit score for FHA loans is much lower than the minimum imposed on conventional mortgage applicants. This allows more borrowers to qualify for financing.

Before approving your application, the underwriter will compare your revolving debts to your gross income to calculate your debt-to-income ratio. Your debt-to-income ratio must be below a certain threshold to qualify. However, this threshold is higher than the threshold typically imposed for conventional loans.

The underwriter will also want to see proof of your income, as well as evidence that your income is reliable and likely to continue. In addition, the underwriter will review an appraisal of the property to ensure that your loan amount is appropriate.

In general, FHA loans allow a much lower down payment than a conventional mortgage. Many borrowers will be able to obtain an FHA mortgage with only a 3.5 percent down payment. However, if your credit score is below a certain threshold, you may need a larger down payment.

Things to Consider

Although an FHA loan has less stringent qualification requirements than a conventional mortgage, there are also drawbacks. For example, you will be required to pay an upfront mortgage insurance premium and a monthly mortgage premium.

Like other mortgages, FHA loans offer a variety of loan terms, including 10, 15, 20 and 30 years. Both fixed rate and variable rate options are available as well.

To determine whether an FHA mortgage is right for your needs, contact your trusted mortgage professional.

Understanding Your Debt To Income Ratio

Understanding Your Debt To Income RatioWhen you are filling out a mortgage application, the lender will be asking you for specific financial information. One of the reasons they ask for this information is to enable the underwriter to calculate your debt to income ratio.

The debt to income ratio is what most mortgage lenders use to determine the level of risk they are taking when they agree to provide you a mortgage. Most mortgage lenders will use your debt to income ratio to determine your interest rate, down payment requirements, and in some instances, escrow requirements.

How Lenders Calculate Debt to Income Ratio

When your loan is being underwritten, the lender will look at both a “front-end” and a “back-end” debt to income ratio. There are two separate calculations for these ratios which are:

  • Front end – this calculation is based entirely on your housing costs. The lender will add up all housing costs including mortgage payments, interest payments on your mortgage, personal mortgage insurance, and insurance payments. The total will then be divided by your current monthly income before taxes and other deductions to find the ratio. Ideally, a lender would not want this number to exceed 36 percent.
  • Back end – the debt to income ratio on the back end includes all expenses including housing. Your lender will likely use your open credit accounts showing on your credit report which could include car loans, revolving credit lines, and student debt. For most mortgages, your debt to income ratio should be no higher than 43 percent.

Current Rent and Housing Expenses

If you are currently paying more than 36 percent of your total income for rental expenses, the lender may consider this when calculating your front-end ratio. For example, if your current rent payment is 40 percent of your total gross income and you can demonstrate you have been making payments on time, as agreed for a long period of time, the lender may be more flexible with the terms of your loan. Keep in mind however, you could pay an interest premium if this is the case.

The back-end ratios are also important. This is because for a lender to have your loan backed by a Fannie Mae, or other approved mortgage backer, your ratio would have to be lower than 43 percent. There are exceptions to this rule but in general, a borrower would face challenges obtaining a mortgage if their debt ratios are too high.

Lowering Debt to Income Ratio

There are two ways to improve your debt to income ratio. The first is to earn more money and the second is to lower your debt. Lowering debt can be accomplished by paying off some of your outstanding debt, putting a larger down payment on your home purchase, or taking a mortgage with a lower interest rate. For most consumers, paying off debt is the best way to lower their ratio.

Keep in mind, even if you have open credit lines that are not being used, your mortgage lender may take them into consideration when calculating your debt to income ratios. Before closing an account however, talk to your mortgage lender about what options you should explore. In some instances, a lender may offer you a shorter-term loan or a loan with an adjustable rate to help you qualify.

Borrowers should be aware that their credit scores are not tied to their debt to income ratios. However, a lower debt to income ratio combined with a higher credit score can make a big difference when it comes to what loan programs a lender may be willing to offer to you.

Contact your trusted mortgage professional to find out more about debt to income ratio and other factors necessary to qualify for a home purchase or refinance. 

What You Need To Know About Your Home Appraisal And Your Mortgage

What You Need To Know About Your Home Appraisal And Your MortgageWhen buying a home, there are certain steps a buyer should go through before the home sale is official. First the buyer makes the offer, then the offer is accepted.

Next the buyer schedules the inspection and home appraisal. Finally, everyone is ready for closing.

It’s easy to overlook the impact of some of these steps, but when it comes to a mortgage, the home appraisal is actually quite important. Banks want to see that they are lending money for an investment that is worthwhile, so that appraisal is a crucial step to getting financing. Here is what buyers need to know about how the appraisal could affect their mortgages.

Understanding The Home Appraisal Process

The home appraisal gives a home valuation expert the chance to evaluate the home a buyer’s considering to determine its market value. Home appraisers are highly trained, state-licensed professionals that know how to evaluate homes and assign value to them.

The appraiser will use various approaches to determine the final appraised value. The appraisal typically happens after an offer on the home was approved but before the lender loans the money.

The Appraisal And Mortgage Approval

The appraisal is one factor that a mortgage lender considers when deciding whether or not to approve a final loan request. Even if a borrower had preapproval, a low appraisal could cause the mortgage to fall through.

Why is this? A lender only wants to lend enough to cover what the home’s actual value, and if the appraisal comes in lower than what the borrower is asking for, the lender can deny the loan.

If the lender does not deny the loan completely, they may refuse to lend more than the home’s value. In order to buy the home at the agreed price, the buyer may need to come up with the difference in cash at closing.

What Can Buyers Do If The Appraisal Is Low?

If an appraisal comes in low on the home someone wishes to buy, the buyer shouldn’t panic. It is possible to get a new appraisal at a higher value.

First, consider the condition of the home. Did the seller let some things fall into disrepair? If the seller fixes those items, a new appraisal may be higher.

Does the home look rundown or cluttered? This shouldn’t affect the appraisal, but it can sometimes cause the appraiser to trend lower. Sometimes, simply asking for a second opinion might get a slightly different appraised value.  That said, if the appraisal is low, make sure to evaluate the purchase price. Is it in line with current market conditions and the overall condition of the home?

If the answer to that question is no, then the offer may be too much for the home. The appraisal, in this case, gives the buyer the opportunity to reevaluate the purchase decision.

When it comes to mortgage approval, the appraisal is one of the critical steps in the process. If a buyer has shopped wisely, the home should pass with flying colors, and soon the home sale process will be over.  As always, your trusted mortgage professional is the best resource for appraisal information in your local market.