Lee Morof's Real Estate Blog

Credit is of considerable concern when it comes to buying a home, but if you’re on the market for a new place in the next few months there may be some timely news that applies to you. If you haven’t heard about the changes to the Federal Housing Administration’s (FHA) credit score minimum, here’s some information on the recent reduction and how it may impact your home purchase.

Information On The FHA

Started in 1934, the FHA is the organization responsible for insuring the loans that are available to homebuyers in the United States. These loans are not provided directly by the FHA, rather the FHA serves as the insurer for the loans that are leant by financial institutions of the United States. While there are a number of guidelines that must be met by borrowers in order to ensure the FHA will back their loan, a lowered mortgage minimum credit score means that those with a less-impressive credit profile may have a better opportunity for home ownership.

The Minimum Credit Score Reduction

The strength or weakness of your credit history has a significant impact on whether or not you will qualify for a mortgage or even pre-approval, so for those whose credit has suffered the recent drop in the minimum will be good news. Previously, the FHA required a score of 640 so that a borrower could be approved for a mortgage, but the reduction by 60 points to a credit score of 580 means greater possibility for those who might fit into a lower credit category.

A Lower Mortgage Minimum And The Market

With the opportunity for home ownership that will be opened up to potential buyers, there is a strong possibility that the market will experience a noticeable shift. Many millennials are poised to enter the real estate market this year, and with more people considering a house as a result of a reduction, there could be an increased demand in housing purchases. While the prices in rural areas have been dropping off, the housing in metropolitan areas may experience a sizeable upsurge.

With the reduction of the mortgage minimum credit score by the FHA, there are likely to be some shifts in the real estate market in the coming year that will affect demand and price. If you’re on the market for a new home and are interested in a purchase that will align with your finances, you may want to contact your local real estate professional for more information.

Buying a home isn’t cheap. But if you’re determined to become a homeowner, the FHA home loan program can help. This loan program, ideal for first-time buyers with low incomes, can help you to build your credit and make home ownership a reality.

So why should you consider an FHA loan? Here are just a few ways you’ll benefit from these government-backed mortgages.

You Can Get Approved With Just 3.5% Down

Traditional mortgage lenders typically require you to pay 20% down on your mortgage, or 5% if you have good credit and agree to pay mortgage insurance premiums. But for a lot of younger people with lots of debt and low incomes, even a 5% down payment is an unrealistic burden. With an FHA loan, you can be approved for a mortgage with a down payment as low as 3.5% – which means a $200,000 home can be yours for as little as $7,000 down.

You Can Get A Loan Even With A High Debt-To-Income Ratio

Standard mortgages are difficult to get if you have a high debt-to-income ratio. Typically, lenders will want to see that your mortgage costs will consume no more than 28% of your income, and your total payments toward debts from all sources will be no more than 36% of your income. But with an FHA loan, you can get a mortgage with a 29/41 ratio.

You Can Qualify With A Low Credit Score

If you have a credit score under 700, you’ll pay higher interest rates on typical mortgages – and if it’s below 660, you may not get approved at all. But with an FHA mortgage, you can get approved for a 3.5% down payment with a credit score as low as 580 – or lower, if you agree to a 10% down payment.

FHA Closing Cost Regulations Are Better For Low-Income Buyers

FHA loans have different closing cost regulations than traditional mortgages. With an FHA loan, you can bundle closing costs into the mortgage or even use gift funds for 100% of the closing costs. That means home ownership is more accessible for people with lower incomes.

An FHA Loan Can Help You Find A Good Home

With most mortgages, you’re free to buy any home you wish as long as you stay within a set price range. But with an FHA loan, any home you buy must be habitable, sanitary, and safe – otherwise the FHA won’t approve your loan. That means using an FHA loan will ensure you get a good home.

Buying a home with an FHA loan is a great way to become a homeowner if a traditional mortgage isn’t an option for you. Call your local mortgage professional to learn more.

If you’re in the market for a new home, you’ll most likely need a mortgage in order to afford it. But for some home buyers, getting a mortgage isn’t easy. Banks and other lenders are often hesitant to lend money to certain consumers, often for good reason.

But sometimes, lenders’ reasons for declining you aren’t entirely valid. That’s why, if you’ve been denied for a mortgage, you’ll want to keep trying to get mortgage funds. Here are three factors that can influence the likelihood of approval on the second try.

A Second Appraisal Might Change Your Circumstances

Sometimes, a mortgage lender will deny a loan because the property value of the home in question isn’t large enough to back the loan. If your mortgage lender declines you because of a poor loan-to-value ratio, getting a second appraisal could help. A lot of appraisal companies will give wildly different appraisals on the same property, with some brokers reporting valuation differences of up to $1.3 million.

Bear in mind that you cannot get two appraisals through the same lender, so if you choose to have the home appraised a second time, you’ll need to find a new lender.

Cleaning Up Your Credit Report Can Work Wonders

What’s on your credit report will have a large role in determining whether or not you get the mortgage you want. If you’ve been denied because of entries on your credit report, you’ll want to take every step possible to correct those report issues. If you’ve been more than 30 days late on a payment in the past, it will show on your credit report and affect your score – but by calling your creditor and asking them to remove the negative, you can bring your credit report back into good standing.

You’ll also want to pay off any and all past due balances as soon as possible. If you can’t pay what you owe in full, you’ll want to negotiate with your creditor to pay part of the amount. This will result in the debt showing on your credit report as “paid as agreed”, which will boost your credit score.

An Extra Down Payment May Be A Good Idea

Sometimes, a lender will decline a borrower if the borrower is asking for too much money. If you’re pursuing a mortgage worth more than 95% of the property value, you’ll probably be declined. But if you make an extra down payment, you can lower your loan amount – which may incline your lender to approve your application.

If you’ve been declined for a mortgage, don’t give up. As you can see there are steps you can take to get approved.

The mortgage process is a long and complicated one, with a number of similar-sounding terms that can easily confuse first-time homebuyers. A pre-approval is not the same thing as a pre-qualification, and it’s important to understand everything that goes into a pre-approval. Being declined during the pre-approval process means you’ll have a hard time getting the funds you need to buy your home, so it’s important that you know what the process is going to look like before going into it.

How does a pre-approval work, and how can you make sure you won’t be declined? Here’s what you need to know.

What Is A Mortgage Pre-Approval?

A mortgage pre-approval is a step that happens somewhere near the start of the home buying process. Being pre-approved means you have a preliminary loan commitment from a mortgage lender. Pre-approval isn’t necessarily a guarantee that you’ll get a mortgage, but rather, a statement that if all goes according to plan, your lender will most likely issue a mortgage to you.

Pre-approvals can make the mortgage process shorter and easier, but they’re not legally binding. If you later find a better mortgage through another lender, you don’t have to take out a mortgage through the lender that pre-approved you.

What Do You Need To Be Pre-Approved?

In order to be pre-approved, your lender will need to evaluate your finances and your ability to pay for your mortgage. You’ll want to meet with your lender and provide them with bank and creditor documents that clearly show your income, your assets, and your debts. You can expect your lender to run a credit check on you in order to determine your employment status and verify that you’ve accurately reported your finances.

If you meet your lender’s criteria, you’ll receive a commitment letter that states what size of a mortgage your lender is willing to give you.

Red Flags: Sure Signs That You’re Destined To Be Declined

You can be declined for a mortgage pre-approval for any number of reasons. If you have a poor credit score, a high debt-to-income ratio, or a low or unstable income, you likely won’t meet the lender’s minimum borrower requirements – and you’ll be declined. To avoid being declined for a pre-approval, you’ll want to ensure you always pay your bills on time, negotiate with your creditors to pay off your debts, or boost your income.

A mortgage pre-approval can help you to narrow your home search and access a mortgage loan. That’s why it’s important to ensure you don’t get declined during the pre-approval.

If you’re about to seek approval for a mortgage, you’ll want to ensure you have a solid credit score and clean financial records to boost your likelihood of being approved. There are certain characteristics that lenders want to see in a mortgage applicant before they agree to give a loan, and you want to prove that you’re a responsible borrower. But certain behaviors can easily tank your application and crush your home ownership dreams.

Before you seek approval, make sure your finances are in order. Avoid these three mortgage-killing habits while your lender evaluates your loan and you’ll quickly find yourself holding the keys to your new home.

Using Up Most Of Your Available Credit

It can be tempting to start buying furniture when your mortgage is about to be approved, but you’re better off waiting on the shopping trip until after you get the green light from your lender. Using a significant amount of your available credit – or applying for new credit – will impact your debt-to-income ratio and change your credit score. You might even end up getting yourself a higher interest rate or reducing your credit score to below the qualifying range – so don’t go credit-crazy until after you’re approved.

Being Late On Your Monthly Bills

Payment history makes up one third of your credit score, so you’ll want to make sure you pay all of your bills on time and in full if you’re looking for a mortgage. A single 30-day late payment on a bill can easily knock 50 to 100 points off your credit score. Even worse, some lenders require a full year of on-time payments before they’ll even consider you for a mortgage.

Co-Signing Someone Else’s Loan

Co-signing on a loan is generally risky under any circumstances, but if you’re trying to get approved for a mortgage, taking on liability for someone else’s debt will change your debt-to-income ratio. Being on the hook for a debt you don’t own makes you look like a risk to lenders – if the primary borrower on the loan you co-signed stops making payments, you’ll need to pay the loan, and that could divert your cash away from your mortgage.

Getting approved for a mortgage is a critical part of the home buying process, but too many would-be homeowners torpedo their own chances of getting a mortgage by making poor decisions.

If you’re in the market for a mortgage, you may want to set up a pre-qualification meeting with a mortgage professional. Even if you’re not 100% sure who you’d like to apply for a mortgage with, pre-qualification can still be a valuable step to take. And given that it only takes a few minutes, it’s something every potential homeowner can do.

So why should you go to a mortgage pre-qualification meeting with a mortgage lender? Here are just a few reasons why it’s a great idea.

It’ll Give You A Good Idea Of How Much House You Can Afford

A mortgage pre-qualification is not the same thing as a pre-approval. When you pre-qualify for a mortgage, your lender will use information that you provide – information like your debts, your income, and your assets – to determine what size of a mortgage you can afford. This affordability information discovered during pre-qualification is then verified during pre-approval.

Pre-qualification usualy doesn’t involve a credit check, and it only takes a few minutes. The advantage of a pre-qualification is that it helps to guide your house hunt. When you know what kind of a home you can afford, it’s easier to navigate the real estate market.

It’ll Help You To Budget Your Expenses

A pre-qualification is a great way to get your household budget sorted out as a homeowner. When you pre-qualify, your potential new lender will tell you what kind of a mortgages would work best for you and your situation. That means you can easily budget for estimated mortgage expenses and know what to expect before you apply for a mortgage.

Some Agents And Sellers Require It

The pre-qualification phase is the first step in the mortgage process. When you’re buying a home, agents and sellers will want to see that you have a good chance of getting a mortgage, as this makes the sale much easier. For that reason, a number of sellers and real estate agents highly prefer buyers who have been pre-qualified – and some of them simply won’t sell to a buyer who hasn’t been pre-qualified.

Mortgage pre-qualification is a great way to sort out your budget, determine what kind of a home you can afford, and persuade a seller to sell to you. And given that it only takes a few minutes to get pre-qualified, it’s a simple step that simply should not be skipped. Contact your trusted mortgage professional today to learn more about getting pre-qualified for a mortgage.

Being pre-approved for a mortgage isn’t just a way to get a step ahead, in many cases it’s a necessity to buying a home. Many sellers don’t want to go through the negotiation process of selling their home only to have the buyer drop out when they can’t get approval for the mortgage they were relying on.

The Difference Between Pre-Qualification And Pre-Approval

Pre-qualification is a faster process than pre-approval and is usually a best estimate based on how the borrower answers certain questions about their financial history and status.

Pre-approval is way more valuable to a borrower than pre-qualification because it is a commitment from a lender for a decided amount after they have completed an in-depth verification process based on the submitted documentation.

Preparing For The Pre-Approval Process

The majority of lenders will require the same documentation in order to pre-approve anybody for a mortgage, but there is more information they will need in certain cases.

Anybody applying for a pre-approval will need to ready at least two years’ worth of financial information, including W-2s, Form 1099s and federal tax returns as well as current banking and financial records.

Here is where the pre-approval process gets more in-depth, not only will the lender need to see how much money the applicant has in their bank, but they will need proof as to where the money came from. The lender will need to know the difference between income, gifts or investment withdrawals to help them make their decision.

Having this information ready in advance will speed up the process significantly.

Prepare Proof Of Assets And Allow A Credit Check

Applicants will be required to prove ownership of all assets and will need a letter to prove that any cash gifts given to them to assist with the payment are not loans that need to be paid back. This is important information that will help a lender make a decision, so having the letter ready will save a lot of time.

The lender will also need to check the applicant’s credit to compare it to the applicant’s income. Many people refuse the credit check because they are afraid it will impact their credit score, but the impact is very low and the lender needs this information. It is also a good way to learn about any errors in the credit report early, before they can pose a problem down the line.

The process is not nearly as intimidating as it appears, and an experienced real estate agent can help you prepare everything you need well in advance of applying for pre-approval.