I find that most consumers who are concerned with their credit feel that a credit blemish from years ago will keep them [...]]]> It’s scary applying for a home loan.  The commitment to buy a home is stressful enough.  Adding the fear of being turned down for a home loan can be too much for a consumer.

I find that most consumers who are concerned with their credit feel that a credit blemish from years ago will keep them from homeownership forever.  That couldn’t be farther from the truth.  Loan guidelines for a federally backed FHA mortgage only requires 3 years from a foreclosure, 2 years from a chapter 7 bankruptcy and 1 day on a chapter 13 bankruptcy discharge!  What does that mean?   It means that regardless of your credit past, you can probably qualify for a home loan in just a few years.  Often consumers will qualify and not even know it. 

The key to building your credit after a financial catastrophe is creating credit activity immediately.  The most common mistake I see people make is they never re-establish credit following their financial fallout.  If your credit was horrible after a bankruptcy and you never opened a new credit account, it will remain horrible.  Most consumers think that there is no way to build credit because they will not qualify for a loan, which makes sense.  However, there is a way.

Here are some basic ways to build credit when your credit score is low:

• Open a Secured Credit Card-
  • You can open a $100 credit limit card if you deposit $100 to the lender.  You can often get these from any bank or credit union.  The lender is willing to issue the card regardless of your credit because it’s secured by your cash deposit. 
• Open an Unsecured Credit Card or Installment loan
  • After you’ve had a secured credit card for 6-12 months, you should establish enough credit to open an unsecured card.  The rates you’ll be offered will be fairly high, so try to pay the balances off during the grace period.  Avoid cards with annual fees if possible.  You can also then apply for an auto loan if you need one.
• Keep Your Credit Cards in Good Standing and Avoid Paying Unnecessary Finance Charges
  • Keeping your credit card in good standing includes paying your bills on time.  It also requires you to keep your balances low.  Never let your balances exceed 25% of your limit.  That may seem low, but keep it there and your score will remain high.  As your score builds, you can request higher limits.  You can then lend up to 25% of your new balance.  Also try to pay the balances off during the grace period to avoid interest charges.  I often tell clients to treat the new card like a debit card.  When you make a purchase, use your receipt and transfer that much money from your checking account immediately. 
• Monitor Your Credit and Dispute Incorrect Items
  • Most credit reports are inaccurate.  The last thing you need pulling down your credit is an account that doesn’t even belong to you.  Check your credit regularly with a monitoring system and dispute items that are incorrect.  You can also pull a free credit report on www.annualcreditreport.com.  This is very important for people who have gone through  a bankruptcy because creditors often do not update account information following a bankruptcy. 
• Pay Your Collections Early
  • When a collection has been on your credit for too long, it sometimes temporarily LOWERS your score when you pay a collection off.  Eventually, it will benefit your credit to have it paid, so pay the collection as soon as possible.  If you’re thinking of paying off a collection and are near qualifying, look to see when the last time that collection agency reported the debt.  If they haven’t reported any updates for a year or longer, you will likely want to hold off on paying that account in case.  It’s best to pay the collections before they report on credit.  If you’re score is far too low to qualify, pay them all.  Letting the collection balance linger can be bad juju.  The collection agency can sell the debt to another.  You can end up having multiple collections on your report for the same debt.  Not good.

Not all mortgage lenders are the same, but most follow the same minimum credit guidelines.  If you want to buy a home, shoot to achieve these goals on your credit:

• Try to achieve a minimum 620 credit score for two of your three credit scores.  This is the industry standard for obtaining a FHA loan, which only requires 3.5% down.
• Pay off all liens and judgments immediately.  You will not be able to buy a house if you have outstanding judgments or liens.
• Keep at least 3 credit accounts open at all times.  If a credit card company ever makes you mad, DO NOT CLOSE IT!  Just cut up the card and pretend it doesn’t exist.  Closing accounts is bad for your credit.  Mortgage lenders may also require at least 3 open credit accounts to qualify for a home loan.
• If you’re had a bankruptcy or foreclosure, it’s very important that you show you can pay your bills on time following the event.  Many lenders will turn you down for a home loan if you’ve had late payments following a bankruptcy or foreclosure.

If it’s possible, look for a loan officer who’s goal is to help you obtain homeownership regardless of where you stand now.  I tell all my clients that if they’re serious about buying a home, they will eventually get there if they follow the right advice.  Find someone who’s educated enough to give you the advice needed and is willing to work with you along the way.

The changes to seller concessions will have a large impact. Concessions include what the seller is contributing to the buyer in the transaction. A [...]]]> In January, the Department of Housing and Urban Development (HUD) announced the first major changes to FHA financing for the year changing the maximum seller concessions from 6% to 3%  early summer 2010.

The changes to seller concessions will have a large impact. Concessions include what the seller is contributing to the buyer in the transaction. A common concession is a credit from the seller to cover the buyer’s closing costs. A 3% limit on seller concessions is enough to cover closing costs on a purchase of around $250,000, but with a purchase price of anything less than $250,000 the buyer will be forced to pay some closing costs out-of-pocket. This will be a pain-point for many FHA borrowers in the months to come.

The change in concessions will also impact new construction transactions. Upgrades on a new home will be considered a seller concession if the purchase and sale clearly states that there was an increase in price for these upgrades. For example, supposing a buyer plans to purchase a new home at $295,000. In this transaction, the builder/seller is offering to pay the buyer’s closing costs up to $9,000, and the buyer is putting $20,000 down. The buyer’s loan officer arranges a loan with closing costs of approximately $8,000 for a $275,000 loan. In this instance, $275,000 x 3%= $8,250 — the buyer is okay.

However, as this is new construction and the buyer is purchasing from the builder, the buyer negotiates upgrades valued at $5,000. In this instance, the Purchase and Sale contract itemizes: upgraded flooring valued at $3000.00, and upgraded counter tops valued at $2000.00. In the underwriting process, the underwriter will likely consider these upgrades seller concessions. This additional $5,000 will be counted against the 3% limit. After a down payment of $20,000, your loan amount would be $280,000.  If you’ve been following the math, you will note that 3% x $280,000 = $8,400. The original $8,000 in closing costs, plus the $5,000 in upgrades will exceed the 3% limit. The loan no longer qualifies under FHA guidelines.

Another example of how this could affect a transaction?  Let’s suppose a buyer is shopping for a condo.  The seller is offering to pay for all the closing costs and Homeowner Association Dues for 1-year.  Both are considered a seller concession, so if the two figures total to over 3%, this purchase also would not qualify under FHA guidelines

If the seller is paying for something in behalf of the buyer, it is likely a “concession.”  Home buyers should be careful of any potential concessions offered if they’re planning on using FHA financing.

Why is HUD doing this?  The answer is simple, to protect home values.  Since buyers often need sellers to pay for their closing costs, HUD is trying to protect sales prices from being inflated to include these concessions.  Though a valiant cause, it doesn’t make sense to squeeze the little guy out.  FHA is now a perfect loan program for buyers in the higher income range and a small down payment.  This is not what FHA was intended for.  Here is an excerpt from HUD’s mission statement:

The Department of Housing and Urban Development (HUD) is committed to helping communities across America identify and overcome regulatory barriers that impede the availability of affordable housing. READ ENTIRE MISSION STATEMENT

Keep reading to learn more about the other changes mortgage guidelines and new rules as they come about.

UPDATE 6/9/2010

A colleague of mine (Ann Liberato, founding partner at Cobalt Mortgage) told me she spoke with someone at HUD and they confirmed the change is still happening but will likely take place in the fall of this year (2010).  We’re not sure why HUD is delaying the change but I hope that it is modified to allow higher concessions for smaller sized transactions.

I spoke with Ken Harney from the Washington Post a couple of weeks ago on this topic.  Ken also wrote an article about the changes to seller concessions for FHA financing:

One of the key attractions of FHA mortgage financing is going, going — but not quite gone. Sellers and buyers who move fast can still make the most of it.

Sometime this summer, the Federal Housing Administration plans to slash maximum “seller concessions” from 6 percent of the home price to 3 percent. Seller concession rules allow buyers to look to the property seller to pay for some services and taxes connected with the transaction — loan origination and local transfer fees, appraisals, inspections, closing and escrow costs, among others — though not the down payment.  READ MORE

I hope the national attention will persuade HUD to allow higher concessions on smaller transactions.

UPDATE JULY 28TH, 2010

 HUD is closer to changing their concessions from 6% to 3% but is open to hearing comments, according to an article on Mortgage News Daily.  I will be sure to let my voice be heard.  If you would like to have your voice heard as well, please follow the instructions as given from this article.

1. Visit http://www.regulations.gov
2. Scroll down about 1/3rd of the page and you will see a link for “What’s Hot –Most Visited Regulations”
3. Click on that link and you will see a list of pending regulation. Select the notice:  “Federal Housing Administration Risk Management Initiatives:  Reduction of Seller Concessions…”
4. That will take you to a page where the document outlining these changes is available for review.  Towards the top right-hand of the page, you will see a link in light-blue ink that reads “Submit Comment”…click on that link and fill-in your information, and type-in your comment.
5. Hit “submit” and let your voice be heard.

CLICK HERE TO READ MORE

HUD (The Department of Housing and Urban Development) [...]]]> The answer to this question varies depending on the loan program a buyer is looking at, but most buyers who have past credit problems rely on FHA loans as their fastest track back to homeownership.  This is due to FHA’s lenient credit guidelines compared to conventional loan programs.

HUD (The Department of Housing and Urban Development) just released updated guidelines on the very topic on December 16th, 2009 in their Mortgagee Letter 09-52.  This mortgagee letter specifically covers FHA guidelines for buyers who have sold their property for less than what they owed.

The new FHA guidelines say a buyer cannot buy for 3 years if they were delinquent on their previous loan leading up to the short sale.  This timeline is identical to FHA guidelines on a foreclosure.

The guidelines do say a homebuyer can buy immediately following a short sale IF they were current on their mortgage and other installment debt payments at the time of their short sale and if the proceeds from the short sale were accepted as a payment in full.  In other words, if you were not late and the bank accepted your sale, you can buy again.

HUD does say that you cannot buy using a FHA loan if the purpose of the short sale and new purchase were done to take advantage of declining market conditions or to purchase a similar or superior property at a reduced price.  In other words, don’t abuse the guidelines to get a better deal.

To sum up the guidelines, you can buy immediately after a short sale but you cannot have been late on your loan and you can’t buy if your short sale was done to benefit from current market conditions.  Which scenarios would this apply to?  Here’s a few that would fit the requirements:

• You are forced to move do to a new job and location.  You have to sell your home and you owe more than it’s worth.
• You cannot afford to keep your home, such as losing your job, and were able to sell your home before becoming late on the home loan payments.  You then buy again when you have a new job and can afford the payments
• You have a balloon payment due and cannot afford the payment.  You sell for less than what you owe due to market conditions and later buy.

In today’s broadcast, Frank Garay  and Brian Stevens (the hosts of the show) shared some information that I thought I would share. 

In World War II, the government issued millions of dollars in War Bonds [...]]]> Every day, I watch a small internet video news report for mortgage professionals from a website called, “Think Big Work Small” (www.TBWS.com). 

In today’s broadcast, Frank Garay  and Brian Stevens (the hosts of the show) shared some information that I thought I would share. 

In World War II, the government issued millions of dollars in War Bonds that were set to mature in 40 years, which means they would all mature by 1985.  However, many people have not claimed their bonds either because they forgot or didn’t live long enough. 

According to www.TreasuryDirect.gov, 25,000 payments for these bonds are returned to the Department of Treasury as “Undeliverable.” 

If you or somebody you know may have an unclaimed bond, follow the link below to the treasury’s website to search.

HERE IS A LINK TO THE WEBSITE

This means if you receive a cashier’s check and you deposit these funds into your bank account, the funds may be held until the check clears.  This is the first I’ve heard of this.

There are [...]]]> I just received a notice from Talon Title and Escrow that some banks are now holding funds from a Cashier’s Check!

This means if you receive a cashier’s check and you deposit these funds into your bank account, the funds may be held until the check clears.  This is the first I’ve heard of this.

There are many situations where this can affect a consumer, but I will point out a glaring problem related to this in a real estate transaction.  If you sell your home and plan to use the proceeds of your sale to put down on your new purchase, your down payment could be “held” until the check clears!  In other words, you would be homeless for the “holding period”. 

I would check your bank’s policy in regards to this topic if you’re planning on selling and buying a house in the near future. 

Talon pointed out that having your funds wired into your account is another solution.

Here’s a link to their blog

It sounds like most clients now know where to send their payments.  There has been some issues related to escrow accounts not paying taxes or insurance.  There have also been issues where borrowers received escrow [...]]]> One of my clients and good friends sent me a link to an article that sums up the debacle pretty well. 

It sounds like most clients now know where to send their payments.  There has been some issues related to escrow accounts not paying taxes or insurance.  There have also been issues where borrowers received escrow refunds from overpaid escrow accounts and having their checks bounce!  That was news to me.

Here’s a link to that article

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Nothing is set in stone yet, but there’s obviously a lot of interest in this topic.  Some skeptics say that many of [...]]]> Rumors have been going around about the $8,000 first-time-home-buyer tax credit being extended beyond December 1st, 2009.  There’s even rumors of it being increased AND including all buyers, not just first time home buyers.

Nothing is set in stone yet, but there’s obviously a lot of interest in this topic.  Some skeptics say that many of the buyers would buy anyways.  Though this may be partially true, my personal experience with my buyers have been the exact opposite.  All of them know about the tax credit and want to take advantage of it.  Some of my buyers are rushing to get to buy a house before it expires.

Here’s an article regarding this that was posted yesterday in the NY Times.

UPDATED

Here’s a similar article posted in the Boston Globe on September 17th.

Supposedly, this model is designed to help more qualified borrowers get the loans they deserve and filter more borrowers from potential default.  Mostly, it’s geared towards punishing repeat default borrowers more.  Borrowers who have an infrequent delinquency [...]]]> It appears that there will be a new credit scoring model.  The new model is being dubbed “FICO 08.” 

Supposedly, this model is designed to help more qualified borrowers get the loans they deserve and filter more borrowers from potential default.  Mostly, it’s geared towards punishing repeat default borrowers more.  Borrowers who have an infrequent delinquency will not be hit as hard as they did in the past.

Here’s a LINK to an article on the Wall Street Journal regarding the new scoring model.