Things are moving so quickly in the market with the coronavirus being at the forefront, everyone is feeling hardship across the board.
FHA Loans provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. It is one of the largest insurers of mortgages in the world, insuring more than 46 million mortgages since its inception in 1934 and it's the only government agency that operates from its self-generated income.
Self-generated income which means the Mortgage insurance premiums that is collected from borrowers via lenders are used to operate the program.
FICO scores tells the lender what type of credit risk you are and what your interest rate should be to reflect that risk by utilizing a FICO formula.
The most commonalty used :
Equifax Beacon 5.0
Experian/Fair Isaac Risk Model v2
TransUnion FICO Risk Score 04
We’re seeing what’s “good” for rates can be bad for lenders, and what’s “good” for the market can be bad for home buyers. This tug of war has caused servicers to implement drastic measures to keep up; includes raising the minimum FICO. If you have questions or concerns please contact your lender right away.
Your debt to income ratio or DTI, is a figure that allows a lender to analyze your monthly spending habits. They use your DTI to determine how you manage your money.
You want your debt to income to be as low as possible to ensure that your chances of being offered a lower rate is better.
How much debt do you have this month?
Think about all of the bills you have to pay for the upcoming month.
For example, Brandi pays $720 monthly for rent, $235 monthly for her car note, $200 monthly for her car insurance, and she makes about $100 monthly in credit card and utility bills. Brandi earns $4000 every month before taxes. So if we add up Brandi’s debt expenses and divide them by 4000, we get approximately 31%.
An article from consumerfinance.gov recommends keeping your debt to income ratio below 43% based on evidence from studies on mortgage loans. So when our friend Brandi is ready to move from her apartment into a new home, the bank will be eager to get things started for her, knowing that her debt to income ratio is low and that she has the ability to repay her loan.
Another factor that can help your debt income ratio is paying your bills on time and in full. Most banks offer the option to have money from your account wired directly to the institution you wish you pay. You can even customize the time and date that the wire will be released. As a result, before applying for a mortgage loan be sure that the job you are currently holding will provide you with the means to pay your current bills and a house payment.
Higher income means more flexibility to play around with financing options. What lenders don’t want to see is that you spend six months at every job and then bail. It shows instability and lenders won’t be so open to lending their money to someone who is in the business of making risky decisions by jumping from job to job.
Be sure to use that steady job to help build your savings. Why? Because of a thing called a Cash Reserve. Your cash reserve is your safety net. Money that you have saved up between your bank accounts will be evaluated by your lender. This extra money lets the lender know that if you fall on hard times or your expenses for some reason go up, you will still have the money to pay your household bills and still make regular payments on your loan, therefore keeping your DTI constant.
What lenders typically look for is a cash reserve that will hold you over for two or more months, so be sure to pad those savings accounts.
A meaningful proportion of current student loan borrowers will likely be flirting with a risky DTI just from student loan debt. 16% of Student Loan Borrowers Will Likely Have a DTI Over 20% Just From Student Loans. Below shows sample data from Lendedu: 10,000 pre-qualification applicants used.
The above statistics derive from proprietary data provided to LendEDU by student loan lender Funding U. DTI ratios for nearly 10,000 pre-qualification applications for private student loans were calculated by Funding U using metrics like projected first year salary, projected student loan debt upon graduating, and projected monthly student loan debt payments
Debt to income is an important factor when applying for a home loan. Be sure to take this critical component into consideration when you go to speak with your lender.
Buying a house is not something you should do without some good financial knowledge and advice. Your first mortgage should be thoroughly thought out and well planned. Now that you’re thinking of purchasing a home, use the next 12-18 months or so to prepare yourself.
Houses are not cheap. In order to pay for one, you’ll have to get a home loan and pay it off in monthly installments. How much you’ll have to pay is dependent upon your mortgage lender and your credit score. You credit can take a while to build and even longer to repair if it’s damaged, so start working on it early. See an article by Megan Ortiz on how to Establish, Raise, and Maintain your credit score HERE . Get into the habit of paying everything on time even if it doesn’t go on your credit report. Make a detailed list or a spreadsheet of all of your financial responsibilities from utility bills to student loans. If you practice good habits, eventually they will become second nature. Be meticulous about getting things paid on time or early if you can. Practice makes perfect.
Loan officers are going to calculate your debt to income ratio, so the less debt you have the better. Things like car notes and credit card payments will be looked at and taken into consideration before a lender will agree to give you a loan. If the total amount of the debt you already have plus the debt you will have after being given a home loan will exceed 43% of your total income, you’re going to have a tough time getting someone to lend to you. So be sure to calculate your debt and pay it down to the lowest amount possible.
Before even looking at homes, it’s a good idea to sit down and chit chat with a loan officer. Let him or her know your intentions, what kind of home you wish to buy and how much you’re willing to spend. He should be able to run some numbers for you and give you a breakdown of how much you can afford and how much his company would be willing to lend to you, including rates and such.You want to feel comfortable doing business with your chosen mortgage company so ask as many questions as necessary. Any loan officer that isn’t willing to take his time with you and answer your questions isn’t worth your time.
Start keeping your tax returns, pay stubs, and banks statements in a safe and secure place. In this digital age, it’s easy to order your financial documents from the IRS or from your bank, so be sure to acquire and retain a few copies somewhere at home, as these are documents that you will have to provide to your mortgage company when they are processing your loan.
As we all know, getting a new home is exciting and I’m sure you’ll be busting at the seams with new decorative ideas for your home. However, keep in mind the hefty amounts of money that have to be spent just to purchase the home (closing costs, down payments, etc.). Don’t go spending all of your extra money, preparing for a new home and then end up without a home to put all of your stuff in because your credit report came back indicating that you don’t know how to handle money.
In order to qualify for a loan, you must have a solid work history. The reason why? Because no one is going to want to lend to you if they don’t know that you have the means to repay them. Having a job is good, keeping a job is even better. Another thing is the type of pay you receive. If you’re on salary where you work, you’re more than likely in a career based job, which means you’ve probably been in your position for a while and you aren’t likely to leave that company any time soon. If you’re on an hourly job, and you haven’t been there for a solid 18-24 months you may have a harder time convincing your loan officer that you aren’t going to default on your loan.
The biggest tip that I can give you is to be prepared. Acquiring a new home is a big step, and it’s not one that should be taken lightly. If you aren’t financially ready to buy a new home, take these few steps to get yourself ready. There is nothing more joyous than owning your own home, you deserve it!
If you search the internet for 'home buying' you'll find an abundance of tips and tricks but they're all pretty much the same.
The end result is you purchasing your dream home so we're here to help you through the process from start to finish.
There are 4 categories:
(A) Conventional that conform to standards require as little as 3% down. 20% down no PMI required
(B) FHA (Federal Housing Administration) permit as little as 3.5% FICO Score of 580 or higher
(C) VA requires no down payment, no minimum credit score. May pay a VA funding fee.
We're here to help you along the way. When you're ready to purchase let us know!