Mortgage Updates

July 14th FHA (Federal Housing Authority) will activate "Decision Credit Scoring."

Good news for buyers with higher than average credit scores, bad news for the predominate FHA customer with scores between 600 - 639. FHA is following Fannie & Freddie into risk based pricing. (See last blog)

Lenders now have a premium grid based on loan to value and credit scores. Customers with higher scores over 680 - 850 and maximum loan amount will see a .25 break in the amount of the upfront "financed" mortgage insurance premium (UFMIP). Scores from 640 -679 will remain at the 1.5% upfront premium and folks with scores 600 -639 the upfront increases to 1.75%. In total the UFMIP will range from 1.25 – 2.35 percent for the lowest scores.

Borrowers with credit scores must be underwritten through an AUS system and classified by FHA’s TOTAL Mortgage Scorecard. Borrowers without credit scores can still be manually underwritten and deemed as eligible through alternate credit documentation. The UFMIP will then be determined by LTV (loan to value) in a separate lenders grid. The maximum LTV will render a 2.00 UFMIP.

All monthly premiums are increasing from .50 to .55 per thousand dollars of loan amount.

What about TOTAL Mortgage Scorecard? What do I as a consumer need to know?

The score card includes excessive payment-to-income ratios and debt-to-income ratios (front and back ratios). Most important of course is your credit.

The score card reviews borrower’s credit histories. A bankruptcy discharged within the last 2 years and late mortgage payments, foreclosure with 3 years... will refer the application for underwriting analysis for any of these reasons or if any mortgage trade line including lines of credit payments, during the most recent 12 months shows:  ---

3 or more late payments of greater than 30 days or 1 or more late payment of 60 days plus one or more 30 day late payments; or 1 payment greater than 90 days late.

The Refer Decision from TOTAL suggests that, absent additional factors the credit risk is to high for FHA to insure. This is where good communication is so very important. If you as a buyer have a lower credit score, resulting from a couple of lates, and high ratio’s you will need a knowledgeable and communicative loan consultant.

To overcome the Refer Decision from the TOTAL Scorecard, certain compensating factors need to be presented. Compensating factors give the underwriter reasons to approve a loan that was referred by the AUS TOTAL Scorecard decision.

What are compensating factors? Let me give you some examples. Compensating factors are really prudent steps any first time home buyer can take when making that buying decision or should I say preparing for the purchase of a home. Those steps are:

1. Setting a household budget. – Knowing where you spend your money goes a long way towards spending it wisely.

2. Set a target house payment. If your rent is $1,200 and the price range for the house you may be interested in commands a $1,700 payment; pretend you are making that payment. Only, take the $500 difference and put it in a savings account. This way your “higher” ratios are offset by a 6 – 9 month history of making that effective payment.

3. With savings in the bank … a GREAT compensating factor is months of reserves. Especially IF you put them there.  Also, it's great to have the cash to purchase things like water hoses and a lawn mower without taxing your credit card and adding debt.

4. If you are a “conservative” credit user… that can also be used as a compensating factor… That means you have several open trade lines… but they are not maxed out and you have 75% “room”.

These are just some ideas to help you. So you see the more your Loan Consultant knows about your lifestyle, the better she can help you. Be open in you communication. Be honest. It’s interesting what can make a big difference. 

As always... your comments are welcome. - Ingrid