If My Financials Aren’t Perfect, I Won’t Get a Loan in Today’s Market

Today’s lending environment is a much different world than a year ago. Lenders are requiring higher credit scores, more of a down payment, and an overall deeper analysis of your financial position to determine your credit worthiness. These stringent requirements are being put into place to help clean up the lending landscape, but does a cleaner lending world require you to a perfect borrower?

Although we are in housekeeping mode with tighter guidelines and requirements, the media likes to turn these much needed changes into wide spread panic. They would like you to believe that the mortgage markets are drying up and if you are not the most perfect borrower, that obtaining a loan is nearly impossible. This is simply not the case. I have loans approved everyday and I can tell you, perfect is not a word I would associate with any of the files that come across my desk.

If you go back to the CIA of lending series I wrote last month, you can get a feel of what lenders look for in a borrower. CIA stands for Credit, Income and Assets. All three of these come into play when applying for a mortgage. A Lender will look at all three of these as a whole to determine your credit worthiness. Although an extreme weakness in one of these areas could have the potential to disqualify you for a mortgage, strengths in an area could be used as a compensating factor to offset a weaker component.

I know we all strive to be perfect and in a perfect world, perfection may be attainable. However, in the real world, perfection is certainly not a commodity. Being perfect is not a requirement when applying for a mortgage. I look at loan applications everyday and I have yet seen a box to check for perfection. Every borrower and every transaction has its unique mix of obstacles. My job as a mortgage professional is to help you recognize and overcome these obstacles. In a greater sense, to help raise your own level of perfection to be perfect enough for loan eligibility. So, are you the perfect borrower to obtain a mortgage or are you just perfect enough?

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2009 Bay Area Conforming Loan Limits

The Federal Housing Finance Agency (FHFA) announced that conforming loan limits for 2009 will remain the same as loan limits of 2008, except in certain high cost areas which includes the Bay Area.

So we are all on the same page, conforming loans meet the standards set forth by Fannie Mae or Freddie Mac. Mortgages that conform to these guidelines are pooled together and sold to investors as mortgage backed securities, which is what keeps rates on 30 year fixed conforming loans lower than rates on non-conforming loans.

Currently in the Bay Area, the conforming loan limit is at $729,750 for a single family home. As of January 1st, 2009 we will be scaled back to $625,500. Although the lower loan limits may affect some Bay Area home buyers, we are still well over the 2007 limits of $417,000.

The 2009 Bay Area Conforming Loan Limits are:

• 1-unit properties : $625,500
  
• 2-unit properties : $800,775
  
• 3-unit properties : $967,950
  
• 4-unit properties : $1,202,925
  

If you are in the market to purchase a home with a loan between $625,500 and $729,750, you have about 50 days to take advantage of the current Bay Area loan limits which will expire December 31, 2008.

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Popping and Locking - Interest Rate Style

 

Popping and Locking is a form of street dancing combining a combination of various movements and poses. Popping is quickly contracting and relaxing muscles to cause a jerk in a dancer’s body. Locking compliments the popping by following the fast body movements and locking in a certain positions.

How do the mortgage markets relate to this form of dancing? As we all know, the mortgage markets are in flux. Interest rates are the masters of popping. They can move up or down two to three times a day or, in dancing terms, quickly contracting and relaxing causing a jerk in your mortgage process.

During the mortgage process, you must decide whether to lock in your rate or let your rate float after you have an accepted contract on your property. Floating your rate plays into the volatility of the market or the popping of the market. Floating can add stress of the already daunting home buying process. Even though you have decided on which mortgage program meets your long and short term needs, you still have the uncertainty of your interest rate until you lock the rate. Some people are willing to take the gamble as they are waiting for the rates to fall, but with any gamble you have to weigh your risk. Because the mortgage markets are volatile and rising interest rates can potentially disqualify you as an approved borrower you run the risk of losing your financing altogether. If the rate were to jump up several points, you may not qualify for the same program you are currently considering.

As a mortgage professional my job is not to gamble with your money. As a break dancer (only in my dreams), I recommend less popping more locking. Locking your rate is a safe, but smart play. Once you have an accepted contract and you lock a rate that is acceptable to you, it doesn’t matter where rates move. First of all, you have alleviated the mind games you create for yourself that comes with floating. Second, when you lock in your rate, you always come out on top. Here’s why…

There are only three things that can happen when you lock your rate. Interest rates will stay flat, interest rates will rise, or interest rates will fall.

• Rates stay flat - You win because you just saved yourself time and effort.
  
• Rates rise - You obviously win, as you have a below market interest rate at the time of your closing
  
• Rates fall - You still win because most lenders will allow you to float down your locked-in rate to a lower rate if rates drop before your closing date. Most will do this for free because they don’t want you to move your loan to another lender over fractions of a percentage point.
  

Deciding to err on the side of caution may not win you Dancing with the Stars but you will win when it comes to the mortgage game. When it comes to popping and locking, I am definitely not the expert you are seeking. However, when it comes protecting your interest, I will be the first to join you on the dance floor.

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The CIA of Lending: A is for Assets

 

Assets can make all of the difference in qualifying for a home loan. Your assets can be the ultimate compensating factor to offset your income and/or lower credit scores. This can also be the biggest obstacle to overcome as this is where your down payment and closing cost will come from. Also, depending on which program and lender you go with, 2 months up to 12 months of asset reserves may be required to close the loan. This means a lender would like to see 2 to 12 months of your principal, interest, taxes and insurance in some sort of account (checking, savings, stocks, bonds, 401k or other investment accounts) or source (car, antiques or something else of value that can be sold for a profit).

As I explained in my last few posts, the CIA of Lending Series, all is not lost if the A segment of your total CIA is lacking. There are other viable alternatives and sources to compensate for your assets, such as:

1. Gift funds from a friend or family member to use for down payment
   
2. Seller paying a portion or all of your closing costs
   
3. FHA financing allowing just a 3% down payment
   
4. First time homebuyer programs with 100% financing
   
5. Payment and interest deferred 2nd loans to cover down payment and or closing costs
   
6. Selling or refinancing existing assets such as a car or boat
   
7. Non-occupying co-borrowers
   
8. Borrowing against a 401K or IRA
   
9. Pledged Asset Mortgages (borrowing against stock, bonds or CD’s without liquidating them)
   

As you can see, you do have options, but note that some of these alternatives may have tax ramifications as well, so you may want to get your tax advisor and financial advisor into the mix before making any final decisions.

I hope my series on the CIA of Lending has been helpful. If you want to see how far your personal CIA will take you in a home purchase, don’t hesitate to contact me. I am always available to provide you with additional insight on your financial matters.

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The CIA of Lending: I is for Income

 

Continuing our discussion of the aspects of the CIA of lending, we turn our attention to income. As you would figure, income dictates exactly how much home you can afford. A lender uses two ratios to determine this.

FRONT END RATIO – HOUSING EXPENSE

The first ratio is your housing expense. A lender will total your principal mortgage payment, interest payment, taxes, insurance, mortgage insurance (if applicable) and home owner association fees (if applicable) and calculate the percentage of your Monthly Housing Expense compared to your Gross Monthly Income. This will make up your front end ratio. The Fannie Mae standard is 28% for your front end ratio.

BACK END RATIO – HOUSING EXPENSE + MONTHLY DEBT

The other ratio, which carries more weight than the front end ratio, is your back end ratio. The back end ratio consists of the housing expenses mentioned above plus all of your monthly debt (credit cards, student loans, car loans, alimony or other monthly financial obligations). This ratio should be equivalent to 36% or less of your monthly gross income.

IDEAL SCENARIO

Here is what an ideal scenario may look like:

Yearly Gross Income: $100,000
Monthly Gross Income: $8,333
Monthly Credit Card Debt: $110
Monthly Car Payment: $364.72
Monthly Boat Payment: $200

Purchase Price: $375,000
20% Down Payment: $75,000
Loan Amount: $300,000
Loan Program: 30 Year Fixed at 6%

Monthly Principal and Interest: $1,847.15
Monthly Taxes: $390.63
Monthly Hazard Insurance: $87.50
Total Monthly Housing Expense: $2,325.28
Front End Housing Ratio: $2325.28/$8333 = 28%
Back End Housing Liability Ratio: $3000/$8333=36%

OK………I know what you are thinking, this is the Bay Area, what can you buy for $375,000? But, given the recent market events, there are quite a few properties for less than $375,000 (1746 listings in just San Mateo and Santa Clara County today…want a list? Send me an email.)

BUT WAIT….COMPENSATING FACTORS COUNT

The above ratios are just the industry guidelines and not necessarily the end all be all. With compensating factors, (i.e.…excellent credit score and/or assets) these ratios can be extended. For an FHA loan, for example, the back-end ratio is set at 45% and I have seen this pushed as far as 50%. With conventional financing, I have seen the back end pushed to 60%.

If you are curious as to how much of a home you could qualify for, contact me for a no obligation meeting to determine how far your personal CIA will carry you. What do you have to lose?

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Free Credit Report

 

Since my last post, I received a numerous requests about how to receive a free credit report? Here are a couple of sites to check out:

• www.FreeCreditReport.com
  
• www.AnnualCreditReport.com
  

These are great places to receive a credit report, but you need a credit report that will actually give you scores. Most companies will charge extra to show you scores. So the best site that I have found is www.Credit.com. This is one place that will send you a credit report and send you credit scores for free. However, you have to remember to cancel your memberships within their 30-day period, and you only receive one of the three bureau’s report. Not the perfect solution, but it’s free and it will give you an idea of where you stand.

I hope this helps!

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The CIA of Lending: C is for Credit

 

We ended last week by talking about the CIA of the lending world. CIA standing for Credit, Income and Assets. As the turmoil in the financial markets continues, lenders require more from you as a borrower when it comes to your CIA.

The Centerpiece of Your Creditworthiness – Your Credit Score

As we explore the components of the CIA in detail, we will start by looking at the centerpiece of your creditworthiness, your credit score. Your credit score is the first impression you send to a lender. Your credit score reflects how you handle debt and a great indication of how you will handle your financial responsibilities in the future. Your credit score can affect every aspect of your mortgage. It can determine the mortgage programs available to you, the upfront costs to obtain a mortgage and most importantly, the interest rate you receive. Not only does your credit score affect all aspects of your mortgage, but can ultimately be the deciding factor in your loan approval.

How Your Credit Score is Reported

Your credit score can range from 350-850, the higher your score, the better your credit. There are three main credit bureaus: Transunion, Experian and Equifax. Each give you a grade according to what your creditors report to them. More than likely, each credit bureau will have three different scores for you. Some creditors do not report to all three bureaus and each bureau has small variables that differentiate their scoring. To compensate for the difference; a lender will use your middle score from the 3 bureaus in qualifying you for a mortgage. Even though there are some differences in the bureaus, they all basically use the FICO (Fair, Isaac and Company) scoring model to determine your credit worthiness.

The Components of Your Credit Score

Want More FREE Information?

We are only scraping the surface when it comes to credit, as I could devote an entire blog to credit and have an endless amount of content. If you want to know more about credit and your credit score send me an email and I will send you an audio CD which explains How the Credit Scoring Model Works and my 15 Things You Need to Know About Your Credit Score Handbook.

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The CIA of Lending

 

As we all know and hear on a daily basis, the lending landscape has changed and it is continuing to change. The majority of the changes are for the better, but some of the interpretations of the changes are not. One example being, in today’s market the qualifications required by a lender to obtain a mortgage are much tighter than a year ago, but the interpretation by the general public is that obtaining a mortgage in today’s market is nearly impossible. The truth is, lenders do require more stringent criteria when deciding to lend money for your home purchase. Please note, the keywords in that sentence are ‘more stringent’ and not ‘near impossible’.

There are three key components that come into play when you apply for a mortgage. In the lending world we label this the CIA of lending. The CIA stands for Credit, Income and Assets. All three factors determine your likelihood and ability to obtain a mortgage and are considered in determining your risk factor to the lender or the likelihood of defaulting on your mortgage. The better your CIA, the higher the percentage you have of obtaining a loan, the less you will pay upfront to obtain that loan, and the lower your interest rate will be.

The CIA can also compensate factors for one another. If you have a lower Credit Score, a high income and substantial assets can compensate. Minimal assets can be offset by a steady income and a higher credit score. Even if your CIA is totally out of whack and you do not qualify for a loan at this time, all hope isn’t lost. My best advice is to sit down with your Mortgage Professional and they will be able to walk you through the appropriate steps in aligning your CIA.

Since the CIA can make or break you when it comes to obtaining a mortgage, I will detail these individually over the next few posts. In the meantime, if you have any questions, comments or concerns don’t hesitate to drop me a line.

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