Want To Get A Mortgage In 2013?

Ah, remember the good old days, say just a few years ago, when all you had to do to get a mortgage was ask and then fight off the mortgage brokers?  If you haven't applied for a mortgage in the last year or two, get ready now for the new reality: Credit standards are tight and that's an understatement.

Lenders these days are engaging in "defensive underwriting".  While the Federal Housing Administration (FHA) allows borrowers with credit scores under 700 and down payments of just 3.5% to buy homes, that doesn't mean that you can get a loan on these terms.  Lenders are scrutinizing property appraisals, income tax returns and bank statements for any flaw, no matter how small that could be used to force them to buy back a loan.  Did you sell grandfathers pocket watch on ebay and make a one time deposit of a few hundred dollars to your checking account? Be prepared to explain where the money came from, with documents.  If your bank statement says there are seven pages, don't throw away the last three even though they contain nothing but the terms and conditions of your checking account; the lender will want them all and for at least the previous three months.

What to do?  If you're even thinking of applying for a mortgage in the next year or so, start getting ready now.  Pull your credit report from all three credit bureaus and carefully review them.  If they are less than perfect, now is the time ask for corrections and do so by old fashioned letter, not phone calls and emails and keep a copy of everything.  It's usually not a good idea to close credit accounts you don't use, you might even consider using them occasionally. If you carry a balance month to month on your credit cards, get it down to less than 20% of your over all credit line and pay on time. Resist the urge to open new accounts at stores just to get a discount on a purchase; old credit is better than new credit.

Next assemble your last three years of tax returns and look for anything that might raise a question with a lender and gather the documentation now to substantiate the return.  The same with bank accounts, review the last year at least for abnormal deposits, you'll need to explain them.  Unlike credit accounts, closing little used savings and checking accounts might help, certainly you'll have less paper to submit and explain.

The bottom line: if you want to get a mortgage these days, you must be prepared to submit the most trivial financial documents and explain them, your credit report must be as clean as you can make it and be ready to explain any negative information with documentation.  Start now.

FHA TIGHTENS LENDING AGAIN!

Beginning April 1, borrowers with on going credit disputes totaling more than $1000 will not be able to get a mortgage insured by the Federal Housing Administration.

This is a significant tightening for the FHA; previously there was no requirement that disputed credit account be paid off--before this rule a direct endorsement underwriter could determine if any of the borrower's debts should have an impact on the FHA's approval.

Now a borrower must either pay off the outstanding balance or document a payment arrangement that the lender must submit to the FHA before closing.  The payment arrangement will be counted into the debt-to-income ratio for the new home loan.

The rule excludes disputed accounts from more than two years ago, along with those related to theft.  But the lender must document an identity theft or a police report on the fraudulent charges.

The unintended consequences could be severe for those in the pipeline--kicking out many buyers, perhaps as many as 50%.  Bottom line, borrowers must clean up their credit reports before applying.

FHA To Raise Fees

If you're buying or refinancing with a mortgage backed by the Federal Housing Administration you can expect their fees to increase, unless you hurry.

The agency is raising its fees in an effort to try to restore its depleted reserves, which suffered from the rising number of home owners who defaulted on their mortgages, and to try to encourage the return of more private capital to the market.

FHA loans allow for down payments as low as 3.5 percent and they often have less stringent credit requirements, which have made them soar in popularity in recent years. (The agency insures loans but doesn’t issue them.) About 40 percent of all new mortgages for home purchases in 2010 were FHA-backed mortgages.

Starting April 1, it will increase its annual mortgage insurance premium for loans under $625,500,  from 1.15 percent of the loan amount to 1.25 percent. Starting June 1, larger loan premiums will see an increase of 0.35 percent of a percentage point, bringing the total premium costs up to 1.5 percent of the loan amount.

FHA also announced it will raise their upfront mortgage premium by 0.75 of a percentage point, which will now total 1.75 percent of the loan amount.

So, a borrower with a 3.5 percent down payment with a mortgage of $193,000 can expect to pay an upfront mortgage premium alone of $3,377, compared to the prior $1,930 but it can be rolled into the mortgage. The new fees will also apply to home owners who want to refinance their mortgages.

The raise in fees is expected to bring in $1.25 billion in additional revenue to the agency through September 2013. 

The upfront increase is pretty stiff and isn't going to help home sales recover, not such a good idea if you ask me, but then they didn't.

 

FORECLOSURE vs. SHORTSALE

ISSUE

Credit Score: 

• Foreclosure will probably lower your FICO score from 250 to 300 points and will affect your credit score for 3 plus years
• With a successful short sale, only late payments on mortgage will show and after sale, the mortgage is usually reported "paid as agreed", "paid as negotiated" or "settled" with a 50 point score hit for 12 to 18 months

Credit History:

• A foreclosure remains as a public record on a person's credit history for 10 years or more
• A short sale is not reported on a person's credit history.

Current Employment:

• Employers have the right and regularly check the credit of employees in sensitive positions; a foreclosure may be grounds for reassignment or termination.  If a person is a police officer, a military member or working for a government agency such as the CIA, any security clearances will be revoked and the person reassigned or terminated.
• On its own, a short sale is usually not reported on a credit report and will likely not affect employment

Future Employment:

• Many employers require a credit check of all job applicants and a foreclosure will likely preclude hiring.
• A short sale is not reported and should have no effect.

Deficiency Judgement:

• In South Carolina, the bank has the right to pursue a deficiency judgement and chances are they will.  As foreclosed homes sell at lowers prices and the market is still declining, the result may be a higher judgement.
• In a short sale, it may be possible to convince the lender to fore go their right to pursue a deficiency judgement.  Short sales often sell close to market value, making any deficiency judgement lower.

Insurance:

• Insurance companies are now checking credit records and a foreclosure will likely boost car insurance rates and other types of insurance as well, such as a renter's policy
• A short sale is not reported and should have no effect

Loans:

• A foreclosure makes one ineligible for a Fannie Mae backed mortgage for 5 years; other types of mortgages will have a higher perhaps prohibitive rate
• A successful short sale generates a 2 year waiting period for a Fannie Mae backed mortgage and likely will not affect other loans as it's not reported.  However, if asked, a borrow should answer truthfully.

So, in every instance, it's worth it to make every attempt to work with your lender to avoid a foreclosure, no matter how difficult that may be.  Start early.