Archive for the ‘Qualifying’ Category

Q: My two sons and ex-wife are in the market for a mortgage. My sons’ FICO scores are in the high 700’s but my ex-wife’s score is in the low 700’s (3-4 years ago, she declared bankruptcy). Can your software handle three FICO scores on a single inquiry ?

A: Great question!

First, let me explain how lenders view credit scores. You’ll typically have one “primary borrower” on an application. That person is usually the one who is makes the most income. It’s the middle score of that primary borrower that usually determines the rate and program for the loan. Any “co-borrower” will also be on the application, but their credit scores are often considered a “compensating factor” which means they can help, but don’t carry the same weight. A very small number of lenders will average credit scores of both borrowers.

Our system is set up like that of the lenders whose programs we search, allowing for two borrowers (one primary borrower and one co-borrower).

I don’t know what your son and ex-wife’s incomes are, but if your sons make enough money to support the loan, your wife doesn’t even have to be on the loan. She can still be on the title to the property without being included on the loan. If her income is essential to qualifying, however, then the good news is that her bankruptcy may be old enough that it doesn’t have a major impact on the loan. (Though as you point out, it would likely be best if one of your sons is the primary borrower because of their high credit scores.)

I would recommend they run their rate search using the information of the two borrowers with the highest documented income. If those two are your sons, then great. If your ex-wife is the primary wage earner, she should be listed first. After they compare mortgage rates using our mortgage search engine, a single loan officer will contact them to discuss their loan needs, and can help them decide if there is a better way to handle the application.

Optimizing your credit score to get a better home loan is dubbed “Lipstick on a Pig” in a recent Forbes story by reporter Maura Desmond. She consulted my colleague, John Ulzheimer, a credit scoring expert with Credit.com (and former credit industry exec) who warns that credit score manipulation is the next subprime crisis. This quick credit rescoring service, offered through mortgage lenders and brokers, can identity problem areas in your credit reports and suggest fixes to boost your credit — such as paying down a maxxed out credit card, for example.

Is it fraud? Or it is fair play in a system that is heavily influenced by the numbers (that we don’t always understand in the first place)? What do you think? Would you be willing to play the system to increase your score if it meant saving thousands on your mortgage?

“Dani” asks:

My score is right around 620 and I’m looking to get my first home. My question is, should I wait until I improve my score to buy and risk rates going up, or buy a home while rates are lower now? Together my husband and I make about $56,000 a year and want to buy between $120,000 and $130,000. But we want a 30 yr fixed rate and don’t have a lot for a down payment. We’re also wondering if that is possible to get one loan with private insurance instead an 80/20 loan with our credit score?

1. You indicate your credit score is around 620. I want to make sure you have checked your three bureau credit scores through MyFICO.com. The middle of those three scores is the one most likely to be used to qualify you for a rate and program. If you are using credit scores from another source, they are not the same scores that mortgage lenders use and will not be as useful. And since scores can vary widely between the three credit agencies, you’ll need all three to make sure you have the correct number. Make sure your husband has checked his too. Typically the lender will use the score of the person with the higher income, which may be you or your husband. (Our system will search mortgage programs using all three scores, and take into account each lender’s criteria for evaluating those scores.)

2. The price range in which you wish to buy sounds reasonable for your income, but the fact that you have little saved and lower scores does worry me. If you get too strapped with the purchase, you’ll have nothing to fall back on when the normal expenses of homeownership crop up. You may want to look for a real bargain (depending on prices in your area), even if it’s not your dream home, to keep your expenses low. Don’t worry so much about where rates are headed as whether you are ready to buy a home or not. If you feel pressured or rushed, you are more likely to make a poor decision.

3. You may well qualify for a low-downpayment loan with Private Mortgage Insurance (PMI) but don’t rule out a piggyback loan (80% first, 10/15 or 20% second). Compare both. The only way to know for sure what your options are is to find out what loans are available to you. In addition to using our mortgage search engine to compare mortgage loans at LenderRateMatch, I would also recommend you talk with a lender who offers FHA loans. These government insured loans are offered by private lenders, and can be more lenient on credit factors as well as offering a low downpayment. They had fallen in popularity in the past few years, but there is a resurgence in them now that other options have dried up.

We wish you the best with your first home purchase!

Q: I am interested in purchasing a FSBO (For Sale By Owner) home in my area. What steps must I absolutely not neglect in securing the best possible mortgage?

A: What a great question! The smartest homebuyers always think about the financing before they start home shopping. After all, while buying a home is expensive, by the time you pay off the home loan you may have paid twice that!

We have a number of articles on our site that should be helpful to you as you prepare to get a mortgage, but here are the most essential tips I can offer:

1. Get your three-bureau FICO credit scores from MyFICO.com. Lenders are becoming much stricter in their credit score requirements, and as a result, you want to make sure yours is as strong as possible. If you find any mistakes or incomplete information, give yourself plenty of time to straighten it out.

2. When you compare mortgage rates and fees, make sure you are comparing apples to apples. You always want to ask a lender to quote you the “par rate.” This is similar to the dealer invoice pricing, and allows you to accurately compare a rate against another. (Our mortgage rate search engine automatically does this for you so you.)

3. Get pre-approved from a lender in writing. This will give you negotiating leverage with the home seller, as they know you are good to go if all other details of the purchase work out.

And although these aren’t home mortgage tips, I’d also recommend you get a real estate attorney to write up or review your purchase contract, and that you get an independent home inspection from an ASHI certified inspector.

Good luck – I hope you find your dream home!

Q: I purchased a house in my name only several years before getting married. The title is in my name only. I expect to lose the house through foreclosure and my credit has been destroyed. Will my bad credit prevent my wife from being able to apply for a future mortgage in her name if she is the only person listed on the mortgage/title to the new home?

A: The fact that the mortgage and loan were in your name only means foreclosure should not appear on your wife’s credit report. If she has sufficient income, and meets the credit qualifications to support a new loan on her own, then she will be able to buy a home in her name only in the future. (She can get the loan herself and you both can still hold title jointly.) However, if your income is required to support the loan, then the lender will want to review your credit as part of the application.

Nearly a quarter of a million more families could be eligible this year to purchase or refinance their homes using FHA-insured mortgages, due to a temporary lifting of loan limits. The Economic Stimulus Act of 2008 will allow HUD’s Federal Housing Administration (FHA) to temporarily increase its loan limits and insure larger mortgages at a more affordable price in high cost areas of the country.

Beginning today, HUD will offer temporary FHA loan limits that will range from $271,050 to $729,750.The maximum amount of $729,750 will only be applicable to extremely high-cost metropolitan areas such as: New York, Los Angeles, San Francisco and Washington, D.C.

Will an FHA loan help you?

FHA loans aren’t government loans. Private lenders make these loans, but they are insured by the federal government. They feature low down payment requirements, but they will not work for you if you cannot document an adequate stable income or if you owe more than your home is worth.

Spouses with very different credit scores seems to be a popular topic for our Ask the Expert column. Here’s what “Marissa” writes:

I recently got married last year, and my husband and I are hoping to buy our first home this year. (We are currently renting.)

How will my past credit history effect my husband and I in getting a mortgage loan, and what are some ways I can improve my credit to help with this process?

First, Marissa, as you may have discovered you and your hubbie have different credit scores. Your credit reports are completely separate, except for any joint accounts which should appear on both your credit reports. It’s perfectly OK to keep your credit separate, especially while you work on rebuilding yours.

As far as the mortgage goes, if your husband is the primary wage earner, or can qualify for a loan based on his income and credit qualifications alone, he can buy the house and simply add you to the title. (In fact, in most cases, the house will be titled jointly anyway).

If you are the primary income earner, then your challenge is greater because the lender will want to qualify you based on your credit scores. Talk to your loan officer once you use FreeRateSearch to search, as you may find a program that fits your situation sooner than you realize.

You also said you want to clean up your credit. It’s great that you have settled everything, and it doesn’t sound like you have any outstanding issues. However, as you have learned, paying off collection accounts doesn’t help your credit score. Collection accounts are still negative as long as they are on your reports.

I assume you have your three-bureau credit reports. If not, get them from AnnualCreditReport.com. You should be focused on two things: 1. Making sure everything is accurate and complete and 2. Building positive new credit references to outweigh the old negatives.

If there is anything inaccurate or incomplete about the way your collection accounts are being reported, you have the right to dispute those errors with the credit reporting agencies. If the information cannot be confirmed with the source (and it may not be, given you settled these debts a couple of years ago), the listing must be removed.

Secondly, you should have at least two current, active, positive credit references on your credit report. If you don’t, you may want to ask your husband to add you on to one of his accounts as a joint accountholder. Choose a major credit card with a long positive payment history and a low balance. Once it reports to your credit, you’ll benefit from the entire history on the account.

For more strategies, please visit the FreeRateSearch.com Information Center where I have published several articles about credit and credit scores.

Let us know how it goes!

“Marla” asks: I have $20,000 and my new husband has $9,000 in credit card debt. Should I pay off his credit card and only have 11,000 for a down payment on a house, or should I use the entire $20,000 for the down payment?

Great question! There are several things to look at here.

My first question would be: who will be getting the mortgage? Just because you are married, doesn’t mean you both have to be on the loan. Whether you decide to get a loan together, or in the name of just one of you, depends on your income, credit scores and qualifications. If your credit scores are significantly higher than your hubbie’s, and your income alone is sufficient for the loan, then you could get the loan using your down payment and keep him off the application. (In most cases, even if one of you gets the loan, however, the home title will have to be held jointly because of state property laws.)

However, let’s assume you will get the loan together. You need to get both of your three bureau credit scores to make sure they are accurate, and to see who has the higher credit scores. Usually the credit scores of the person with the highest income will be used as the primary borrower, and the other person will be the co-borrower. If your credit scores are significantly different, you may have some work to do on his (or your) credit before you buy.

The other thing to look at is what a different down payment will do to your loan options and rates. Loan programs and rates often change quite a bit when you go above certain thresholds such as borrowing more than 80% of the home’s value, 90%, or 95%. If you have enough money for a 20% down payment, for example, and your credit scores and income qualify you for a good loan, you may want to put the money into the house and then tackle the debt.

Keep in mind that the lender will be looking primarily at the “debt ratio” not your husband’s overall level of debt. To figure your debt ratio, it will take into account the required monthly payments on your mortgage (including principal, interest taxes and insurance) and other required debt payments. For your husband’s credit cards, that may mean only looking at a required payment of $200 or so, depending on the minimum payments reported for his credit card debt on his credit reports. If you don’t have much other debt (car loans, student loans, etc.) then that minimum payment may have little impact on the debt ratio or the loan.

I would recommend you run a search and then ask your lender to help you evaluate these various scenarios to find which one gets you the right loan. Remember, once you are registered, you can change your search criteria as well. So you can run the loan with the $20,000 down payment and then with a smaller one. (For the most accurate results, though, you should both have your 3-bureau FICO scores.)

Finally, the biggest challenge for you two may not be choosing a loan but marrying your different styles of handling money. It sounds like perhaps you are a saver and he’s a spender. Not only do opposites attract (as I can say from personal experience!) but, money clashes can also push apart a couple just as easily. A great book for the two of you to read together would be Olivia Mellan’s book, Money Harmony.

Good luck on your home purchase and the best to both of you!

A reader using the FreeRateSearch.com site asks:

Q: Should the monthly debt for rate search include credit card minimum payments, student and auto loans only, or must it include other debts such as first mortgage payments, utilities, insurance, etc.?

A: The FreeRateSearch.com engine automatically calculates your debt-to-income ratio for your new proposed mortgage loan so don’t include it. You only need to list other non-mortgage debt payments (such as credit card minimum payments, student and auto loans). Utilities are never included in calculating mortgage debt ratios.

A reader asks:

Q: Our mortgage is in my name only because my wife has bad credit and any re-finance would also be in my name only. Can I use her Social Security income in my annual income amount?

A: No, you cannot include your wife’s income if she is not on the loan. But if you do include your wife on the loan, there is no reason her Social Security income cannot be included if it can be verified.