April 25th, 2016 5:51 AM by Jackie A. Graves, President
government has made borrowing money easier for homebuyers with less traditional
housing situations and lower incomes while making it more difficult for buyers
with burdensome student loan and
other debt to get mortgages. The changes are intended to reflect the realities
today’s new borrowers face.
In December Fannie Mae, the
quasi-government mortgage finance giant, launched HomeReady, a new mortgage
designed for low- to moderate-income borrowers with nontraditional sources of
income. For example, HomeReady lets applicants report rent from a roommate or
tenant as income.
Borrowers can now count money
provided by parents as income in applying for mortgages. Down payment money
that doesn’t come from a gift generally must be reflected in the borrower’s two
most recent account statements.
Among the requirements: The
property must be in a lower-income neighborhood, or in some locations the
borrower’s income must be no higher than the area median income (AMI). In other
locations, the borrower’s income can’t exceed 80 percent of AMI. Fannie Mae
says its fees for the loan are likely to be the same or possibly lower than
market rates, though a lender might charge interest slightly higher than market
rates to account for the lending risk.
Meanwhile, the Federal Housing Administration, a major insurer
of mortgages to lower-income buyers, has tightened loan standards for its
popular FHA-insured mortgage. Among the new rules: Two percent of a borrower’s
deferred student debt—loans that are currently not in repayment—must be
included in her debt-to-income ratio (DTI), an important figure used to judge
mortgage applicants. Lenders usually want borrowers’ debt, including education, auto, home, and other, to be no more than 43
percent of gross income. The rule is intended to ensure that a homeowner can
afford mortgage payments once the student debt is no longer deferred.
Take a mortgage-seeker earning,
say, $40,000 per year, or $3,333 monthly. With a debt-to-income ratio of 43
percent, that borrower could afford $1,433 per month in total debt payments.
Under the new rules, if the mortgage applicant also had a student-debt load
after college of say, $27,000, she’d have to subtract 2 percent of that amount,
or $540, from that $1,433 per month. That would leave $893 per month to cover
all debt payments, including the mortgage. On the other hand, the FHA has
reduced the premium it charges on the mortgage insurance it provides—a boon to
Dean Wegner, sales manager for
Academy Mortgage in Scottsdale, Ariz., says the FHA loan is useful for those
recovering from financial straits. “A key advantage is the waiting periods after
a significant credit event,” he says. For example, the FHA will consider
insuring a borrower three years after a short sale; in contrast, that borrower
might have to wait up to four years for a HomeReady mortgage.
Wegner advises his first-time
borrowers to buff up their credit score, which is based on credit history,
before seeking a loan of any kind. A credit score of 680 will get you a decent
mortgage rate, but for the best mortgage rate you’ll need 740 or better.
To raise your credit score, pay
bills on time and keep low balances on credit cards. Regularly check credit
reports from the three credit-reporting bureaus—Equifax, Experian, and
TransUnion. Get errors corrected. Don’t pay a service to actively monitor your
reports; order a free report from one of the three companies every four months
The FICO score is
the one to get; it’s usually closest to what your lender will use to judge you.
Your bank and/or credit card company may provide it free. (Consumers Union, the
policy and avocacy arm of Consumer Reports, is pushing for a free FICO score for all.)
By Tobie Stanger - To view the original article click here