Posted by John Scott Smith on Thu, Apr 22, 2010 @ 03:38 PM
I am writing a series of posts covering different customer profiles to discuss for whom an FHA will work best. This is my first which is for the home buyer who has excellent credit.
If you are wondering "Is an FHA mortgage right for me?" there are two main things to look at.
- Do you have excellent credit?
- What is your available down payment?
Right now, I would define "excellent credit" as someone who has a middle credit score over seven hundred (700) although, there is still even better financing options available to home buyers with higher than a seven hundred and forty (740) credit score or even a seven hundred and sixty (760) credit score. (Above a 760, there is, generally, no further improvement.)
For clarification, if you're asking, "What is your 'middle' credit score?" here is the answer. You have three credit scores, one from each of the three credit reporting bureaus. Your middle score is NOT the average of the three. Instead, it is the score that is between the other two. Example: if the three credit reporting bureaus show that you credit scores are 723, 759, and an 805, then your "middle" score is the 759, because you eliminate the highest, the lowest, and the remaining score is your middle score.
As far as down payment, the maximum loan to value (LTV) with an FHA mortgage is currently ninety-six and a half percent (96.5%). The maximum LTV for a non-FHA mortgage (also called a "traditional mortgage") is ninety-five percent (95%) and you will be required to purchase Private Mortgage Insurance (PMI) unless you are putting down at least twenty percent (20%) for your down payment. There is an excellent calculator
here that shows you the PMI options and costs based on the combination of your credit score and LTV.
You can secure a traditional mortgage with PMI as long as your middle credit score is at least a 680. (If you have less than a 680 credit score, we will discuss it in a separate post.) Interestingly, according to this calculator if you are going to borrow 95% of the purchase price and are going to finance the PMI, your savings over the first five years of the mortgage is only eight dollars. Yes, that's only $8.
In my opinion, the takeaway is that the magic number is having a credit score of at LEAST a 680. Once you have that, as long as you are putting down MORE than five percent (5%), then the traditional mortgage is, most likely, the better choice. (If you need to work at improving your credit score, either to exceed the 680 threshold for a traditional mortgage or the
620 threshold to qualify for an FHA mortgage then fill out
this short form to speak with someone about your options.)
It would seem that the only instance in which FHA is the better choice for a borrower with excellent credit is when that borrower does not have much in the way of savings. Why? Well, for starters you can borrow up to 96.5% of the purchase price. AND, FHA allows all of that down payment money to be a gift from a relative. Further, FHA does not require that the borrower have any savings in reserve above and beyond the amount of money needed to close the mortgage. In contrast, traditional mortgages will require that the down payment is your "own" money (not a gift) and that you have two months of your mortgage payments set aside in savings AFTER you've paid for your down payment and closing costs.
While it is a personal decision, I would argue that it is *very* risky to tap your last dollar of savings to buy a house. If you've never owned a home before, please keep this in mind: Things. Will. Break. It's not a matter of "if". It is a matter of "when". And, "when" things go wrong, they will ALWAYS cost money to fix. Water heaters. Roofs. Furnaces. Etc.
To take this one step further, it is often seen as the best financial decision to wait to buy a home until you have at least twenty percent (20%) to use as down payment. There was an excellent article in the
Philadelphia Daily News, recently, that covered that exact topic. Yes, twenty percent is a LOT of money, but this is the opinion of financial advisors, including one of my favorites,
Suze Orman.
Does that answer your question(s)? What other questions or comments do you have for me? Please, post in the comments, below.
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Posted by John Scott Smith on Fri, Mar 05, 2010 @ 12:40 PM
As we've discussed, before, the changes in the FHA credit guidelines have been going on long before FHA announced their impeding updates. That's because while the FHA may insure the mortgages, the banks that originate them are under constant scrutiny by the FHA to insure that those mortgages perform and that the borrowers are able to afford them.
Right now, if you have lower than a 620 credit score, you'll want to address that and drive it up so that you will qualify for a mortgage. Further, if you already have a credit score that is above a 620, there are actions that you can take, right now, to improve it, which may qualify you for lower payments, less money down, or even more money out if you are trying to take equity out of your home with a cash out refinance.
The Washington Post just ran a good article on why your credit score may have recently fallen, even if you are doing everything right.
Here at MyFHA, we've turned to our own circle of lenders who regularly help our customers get mortgages and asked them for ways that you can work on improving your score, right now. This is what they shared.
Let sleeping dogs lie.
Do NOT initiate a payment plan on any old collection accounts. While it may seem counterintuitive, sometimes paying on an old account can change it from an "old" delinquent account into a "recent" delinquent account which can have a much more negative impact on your score than just leaving well enough alone.
Dance with the one that brought you.
Now is the time to stay with the lines of credit that you already have. No new ones, and do not cancel any old ones, either. If you want more credit or a different credit card, there will be plenty of time for that once you've closed on your new mortgage. Right now, keep the lines that you have, even if they are at higher interest rates than you could get somewhere else and even if they are with one of the "BIG BANKS" and you've decided (like a lot of other people) that you don't want to work with them, anymore.
Don't use it all up.
The magic number for the percentage of available credit that you use that reflects "well" on your credit score seems to be between ten and twenty percent (10-20%). This means that if you have ten thousand dollars ($10,000) in available credit, you should not carry more than one to two thousand dollars ($1,000-$2,000) on your cards at any one time. And, make sure that you spread it around. One of the lenders that we interviewed for this piece told us that they recently helped one of their customers increase their credit score by a full sixty-seven (67) points in less than one month by having them pay down one maxed-out credit card. That can have an enormous impact on qualifying for the best mortgage.
There you have it. These are the three quick steps that you can take to drive up your score in a short period of time. If you need assistance addressing more substantial problems with your credit, just let us know, and we'll put you in touch with someone who can help.
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Posted by John Scott Smith on Wed, Feb 24, 2010 @ 10:23 AM
I have seen an awful lot of information (and misinformation) flying around the web regarding the changes to FHA Credit Guidelines. Over at Housingwire, homebuilders are pulling a Chicken Little, suggesting that the sky shall, indeed, fall as guidelines and seller contribution toward closing costs are changed. And, at the other end of the spectrum, Hot Air suggests that we need to tighten credit requirements much, much more or else the end is neigh.
(As I have already said in a previous blog entry, FHA Commissioner Stevens has clearly stated that the purpose of the FHA is to serve the under-served buyer: the ones whom the banks are less willing to assist, which means that in the coming weeks and months, Hot Air will have much more material about which to complain.)
Historically, FHA mortgages have not been credit driven. FHA, which actually insures mortgages without loaning the money, itself, has not and does not, now, have a minimum credit score. In reality, though, the banks who actually do the lending part of the equation have been tightening up their credit qualifications.
As reported recently in the Chicago Tribune and Bloomberg, the FHA has stated that it intends to raise the downpayment requirement on borrowers with less than a 580 credit score to ten percent (10%) down. In order to qualify for only three and a half percent (3.5%) downpayment, you will need to have greater than a 580 middle credit score.
An even more important point in both the Tribune and Bloomberg articles is that most banks, brokers, and lending institutions are no longer giving FHA mortgages to borrowers with lower than 620 credit scores.
And, there you have it. FHA will require a ten percent (10%) downpayment if your middle credit score is less than a 580, BUT almost every bank and brokerage that is selling mortgages insured by the FHA (and, certainly, every one that I've found) is requiring a minimum 620 credit score to get financed.
What this means to you, the consumer, is that if your middle credit score is less than a 620, you will not be able to secure an FHA mortgage until after you've taken action to address your credit score. Period.
If you'd like to speak with someone about addressing your credit issues, just let us know, and we'll have someone contact you.
Author's note: Why am I including so many links within these articles? Well, as the late Senator Patrick Moynihan said, "Everyone is entitled to his own opinion, but not to his own facts." In the blogosphere, there is so much opinion being bandied about as fact that I want to make sure that here, we provide links back to the primary literature whenever feasible. I am keeping the information on this page factual, and I want to give you every opportunity to review the primary sources and form your own opinions.
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Posted by John Scott Smith on Mon, Feb 22, 2010 @ 02:29 PM
Over the weekend, John Rebchook of InsideRealEstateNews.com, wrote an excellent piece complete with video links on FHA Chief Stevens' visit and address in Denver, CO.
Now, over recent months, we have been hearing increasingly loud shouts that FHA should tighten its qualification guidelines, and FHA has decided to do just that. However, the FHA was specifically put in place in order to help people that were not being helped by the banks. As part of FDR's New Deal, the FHA was designed to help people of more modest means become homeowners, even when the banks were shoring up their assets which made it more difficult for borrowers to access capital. (Sound familiar?)
Fast forward seventy-eight years, and if FHA reacted to the current housing problem in the same way that other lenders were, by increasing both down payment requirements and credit score requirements, then wouldn't that be effectively pushing out the very people that it was created to help? As someone who follows developments with FHA closely, I've been concerned about this for some time.
Fortunately, FHA Commissioner David Stevens is committed to staying the course. When he spoke in Denver, Stevens said that “Our primary job is to help the under-served buyer in Atlanta, Georgia, or Detroit, Michigan, or New Orleans, Louisiana.” (Emphasis added.)
Now that the insurance premiums have been modestly increased from 1.75% to 2.25% of the total loan, and the minimum credit score in order to qualify for 3.5% down payment has been raised to a 580, the under-served buyer can still get the help that they need, and the FHA can shore up its reserves.
There will still be cries to raise the down payment even more. Critics will say that buyers need more "skin in the game". My hope is that Commissioner Stevens will become a more vocal proponent of letting FHA be what it was established to become.
What do you think? Is FHA on the right path, or should it tighten its requirements, further?
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Posted by John Scott Smith on Thu, Nov 19, 2009 @ 05:56 PM
When you are looking for a mortgage, you will be asked about your credit. Is it good? (Nowadays, better than a "640" is "good") Is it bad? Can you qualify for this loan? There are going to be LOTS of questions. Personal questions. And, you won't always know the answers to those questions. That is why I'm writing today's blog entry.
I've heard for years that EVERYONE is entitled to one free credit report per year. So, how do you get that report. Well, that's exactly what I set about to doing, this afternoon. Equipped with a mug of coffee, a package of Nutty Bars, and a phone, I set out on my mission. For you. You and the Nutty Bars.
There are three credit bureaus: Experian, Transunion, and Equifax. All three of them are supposed to provide you with a mailed copy of your report at no charge, if you ask for it. And, ask is what I did.
I sat and dialed. You can reach out and touch the Experian automated answering thingy at 800-311-4769. I found that phone maze was not too difficult to maneuver. You'll get a confirmation number, and I was told that my report would arrive in my snail-mail box within ten business days. Note: the "free" report is the basic report. The one that comes with a numeric representation of your credit score will cost you a few bucks, but the big thing that you are looking at, right now, is whether anyone is showing that you have a history of late payments (delinquencies), any collections (creditors to whom you still owe money), or any write-offs (companies that wrote off your debt as "uncollectible".) Whether you want to spend the money on the number score is up to you, and it would probably be a good idea to pay at least one of the three to give you a credit score.
With Experian down, I took another sip of coffee, and got right down to my next call. This was going to be easy...
Next up, Transunion. They are reachable at 800-916-8800. This was another easy phone maze to navigate. I got through that one, quickly, and the very polite, recorded voice at the end told me that my report would be there in six to eight days. Even faster than Experian. Whodathunkit?
Finally, with my Nutty Bars already gone, and my mission all but complete, I called Equifax...
Well, let me tell you, there just may be a special circle in hell reserved for those nice, nice people at Equifax...Now, I'm a fairly intelligent guy. I even have a Master's degree in education, so, at the very least, I'm no moron. Perhaps someone (maybe even someone from Equifax!) can tell me how my "free" report with Equifax ended up costing me eight dollars, then? No worries. I was on a mission for you. Besides, I knew that I could expense the eight bucks, anyway. So, here goes. Credit card number, check. Expiration date, check. Security code? Check. (These people REALLY want their eight dollars...)
Right after I successfully entered all of that information, they immediately transferred me to a man with a ridiculously thick accent. How would I like to sign up for the credit monitoring service? "No thanks. Can I, please, have my eight dollars credited back?" (Now, it was getting personal...)
"When you get your report, you can request your money back if it was charged to you, erroneously."
Sure. I'm betting that getting my money back will be a piece of cake...Regardless, it was worth the eight bucks to complain to you about this deceptive company. Mission accomplished.
But. I'm not. Quite. Done. There is one other important thing.
During my research, I had found a website, www.annualcreditreport.com that said you could get all of your free credit reports throught them. My fear was that this was one of those scam sites. (Think catchy, musical commercial with recurring characters offering "free" reports, as long as you sign up for their credit monitoring service...I'm sure those guys spend a lot of their time having cocktails with the Equifax guys...)
Amazing discovery: This site is actually the real deal. I logged on there and ordered all three of my reports without having to place a single phone call: it was all done online. (Nice!) And, two of the reports, Experian and Equifax, even allow you to print your report right then and there! The third, Transunion, is in the mail. Sweet! The drawback? It takes a while. Each of the three bureaus requires an authentication, then you go back to AnnualCreditReport and start on the next bureau...Time consuming, but well worth it.
Ok. That sums up my afternoon. Conclusion? DEFINITELY go to www.annualcreditreport.com where you won't need a credit card (because you pay NOTHING.) But, best of all, you won't have to worry about getting whacked for the eight bucks, submitting an expense report to the accounting department, and then explaining both to your boss and to all of your readers how you've been "had" by an automated phone system...
Disclosure: I don't really think that those Equifax people are hell-bound. It's just that to see a company that so clearly is trying to get you to make the wrong choice so that they can try and squeeze eight dollars out of you is dishonest, misleading, and, in this day and age, inexcusable. I'm sorry, but in my opinion, that behavior represents the very worst that businesses can be. My $.02.
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