Mortgage Credit and Financial Mortgage Credit and Financial Steps to Home-BuyingSteps to Home-Buying

Today we are going to be discussing the following three topics:

Your credit score: How you build and keep a great credit score.

Mortgage Qualifying: How to position yourself to buy a home.

Mortgage Loans: What are the main types of home loans?

Bert Morrison

40 year financial executive in the field of mortgage banking

Owned and operated significant mortgage brokerage firm for 21 years

15 years in senior management roles with Shearson American Express

Strong proponent of financial literacy - 10 years with Financial Planning Association

Senior Lending Officer with Envoy Mortgage, a national mortgage bank operating in 46 states

Our Mission:Our Mission:

Preserving the Dream of Home Preserving the Dream of Home OwnershipOwnership

What is a Credit Score?What is a Credit Score?

Your credit score tells the story, in numerical form, of how you handle your credit - it is a snapshot in time of the information in your credit report.

Mortgage Lenders use “FICO Scores” to evaluate credit risk.

A Fico score uses advanced math and analytics to arrive at a credit score.

Why is Your Credit Score so Why is Your Credit Score so Important?Important?

It summarizes the risk, in the Lender's eye, of loaning money to you; it reveals the statistical likelihood of repayment.

Your credit score helps to determine the cost of money to you -whether for a credit card, auto loan or a mortgage.

Your credit score can determine how much you pay for other services, such as insurance.

What are the Sources of Credit What are the Sources of Credit Scores?Scores?

Three national credit bureaus publish credit scores: Equifax, Transunion and Experian.

All three publish scores based on data in their system and your scores range from 300 to 850; the higher the score the better!

Each credit bureau may have a different credit score for you as it may have different data; Mortgage Lenders use the “middle” of your three scores.

Benefits of Credit ScoringBenefits of Credit Scoring

You receive a quick answer when you apply for a loan.

Credit decisions are more equitable - decisions are only made on the facts associated with credit risk

Old credit problems count for less in your score

How are Credit Scores Calculated?How are Credit Scores Calculated?

Your payment history - Your lender wants to know if you pay your past credit accounts on time. (35% of your score)

Balances owed - Credit “utilization” determines the impact on your score - keep your balances less than 30% of your available credit. (30% of your score)

Length of credit history - A longer credit history is helpful -if you have no credit, now is the time to start building a credit history. (15% of your score)

Types of credit used - Your score will take into account the “mix” of your credit accounts. (10% of your score)

New credit - Opening multiple accounts in a short period of time can represent a greater risk to the lender. (10% of your score)

What is in Your Credit Report?What is in Your Credit Report?

Personal information - So that you are properly identified.

Summary of your accounts - Reflecting your current and historical credit activity.

Inquiries - When you apply for credit you authorize the creditor to pull your credit - this results in “inquiries”, too many of which can affect your score.

Negative items - Any adverse credit will most likely show up, such as late payments, collections, judgments, bankruptcies, and the like.

How to Improve Your Credit ScoreHow to Improve Your Credit Score

Pay all credit accounts on time

Bring all accounts current if you have missed payments - the longer the period of time without late payments - the higher your score.

Keep your balances below 30% of available credit - if you have used most of your available credit it may indicate that you are “over-extended”.

“Clean up” your credit -pay off collections or have them removed - seek credit counseling or a “credit repair” company for assistance if needed.

Don't be a credit junkie! Limit the number of open credit accounts.

The Fair Credit Reporting ActThe Fair Credit Reporting Act

Requires that Equifax, Experian, and Transunion provide you with a free credit report once a year. Go to annualcreditreport.com

This free credit report will show you all of the information recorded with the bureaus, however it will not show your credit score.

You can obtain your credit score by going to creditkarma.com

Employment Criteria for Approving Home Employment Criteria for Approving Home LoansLoans

Employment factors are used by Lenders to approve home loans including:

The stability and duration of your income.

Types of income: salary, commission, bonus income, net income from business - all types of income are considered.

Non-salaried income is typically averaged over two years.

Length of time in the workforce (Time in college counts if your work is in your degree field!)

Additional Credit Considerations when Additional Credit Considerations when Seeking to Buy a HomeSeeking to Buy a Home

Each borrower must have a minimum of 3 trade lines

Credit must be reported for at least the past 12-24 months

The minimum credit score for some programs is 620-640

The lower of two middle scores is used if two borrowers.

One can buy a home again after a foreclosure, short sale or bankruptcy after waiting 2-7 years, depending upon programs (exceptions exist).

Costs Associated with Home Costs Associated with Home BuyingBuying

Down Payment - Ranges from 0% to 20% down depending upon loan program.

Closing costs - These are “fees for services” rendered, including loan, property appraisal, escrow fees, title insurance (1-3% of purchase price)

Prepaid Expenses - Funds deposited into escrow to pay for “prepaid” expenses, including home insurance, real estate taxes and interest.

In addition one must consider the costs of moving, furniture, window treatments and the like. Maintenance is an on-going expense that must be budgeted.

Sources of Funds for the Down Sources of Funds for the Down Payment and Closing CostsPayment and Closing Costs

Save! Save! Save!

Sell an asset

Borrow against an asset

Borrow against a 401k (check with your CPA)

Convert an IRA (check with your CPA)

Obtain a gift from a relative

Money Saving StrategiesMoney Saving Strategies

Check your credit six months before buying - the higher your score the better your loan terms!

Have your home loan approved in advance - Full loan approval (not “pre-approval” positions you to make a stronger offer because you can close faster………and time is money to the seller!

Ask the seller to pay for closing costs - a definite possibility if you have a strong offer.

Consider your interest-rate options - in exchange for a slightly higher interest rate the Lender may be able to pay for some or all of your closing costs.

Explore your program and down payment options as you can reduce your mortgage payment and perhaps the cost of mortgage insurance.

Loan Type: Conventional Loan Type: Conventional

Eligibility: U.S. Citizens or Green Card Holders

Housing Type: 1-4 Family Units

Max Loan Amount: $417,000

Minimum Down: 5%

Minimum Credit Score: 620

Loan Type: Fixed and Adjustable

Minimum Cash Investment: 5%

Mortgage Insurance / Guarantee Fee: LTV over 80%

Income Limit: None

Loan Type: FHA Loan Type: FHA

Eligibility: U.S. Citizens, Green Card Holders, Visa allowing temporary residence (H1-B)

Housing Type: 1-4 Family Units

Max Loan Amount: $417,000 and $625,500

Minimum Down: 3.5%

Minimum Credit Score: 640

Loan Type: Fixed and Adjustable

Minimum Cash Investment: 3.5%Mortgage Insurance / Guarantee Fee: 1.75% upfront (financeable) 1.35% annual premium

Income Limit: None

Loan Type: VA Loan Type: VA

Eligibility: Eligible Veterans

Housing Type: 1-4 Family Units Max Loan Amount: $417,000 or More! (Available VA entitlement + Down payment = 25% of loan amount.

Minimum Down: 0%

Minimum Credit Score: 620

Loan Type: 30 Year Fixed

Minimum Cash Investment: 0%

Mortgage Insurance / Guarantee Fee: 2.15%

Income Limit: None

Loan Type: USDA Loan Type: USDA

Eligibility: U.S. Citizens or Green Card Holders

Housing Type: Single Family Detached

Max Loan Amount: $417,000

Minimum Down: 0%

Minimum Credit Score: 620

Loan Type: 30 Year Fixed

Minimum Cash Investment: 0%Mortgage Insurance / Guarantee Fee: 3.5% Guarantee Fee (Financeable)

Income Limit: Yes - Depending on Area and Family Size

Mortgage Credit Certificate (MCC) ProgramMortgage Credit Certificate (MCC) Program

The MCC program allows eligible borrowers to apply for and receive a tax credit equal to 20% of the mortgage interest paid during any one calendar year.

Example: Purchase a home with $200,000 loan amount at 5%

interest:

Annual interest: $10,000 x 20% (tax credit) = $2,000Net cash benefit (after taxes) = $1,700Divided by 12 = $141 extra income credited to you each month for loan qualifying!

Eligibility: Must be first-time homebuyers, citizens, green card or qualifying visa holders.

Housing Type: 1-2 family unitsLoan Types: MCC can be used with FHA, VA or Conventional financing.Income Limits: $72,300 for 1-2 person families; $83,145 for all others.Maximum Sales Price: $643,847Eligible Areas: Entire county of San Diego, Except: La Mesa, Poway, Del Mar and Solana Beach (non-participating cities).