Mortgage Credit and Financial • Steps 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: Preserving the Dream of Home Ownership
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 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 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 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? • 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? • 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 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 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 Loans • 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 Seeking 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 Buying • 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 Payment 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 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 • 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 • 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 • 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 • 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) 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) = $2,000 • Net cash benefit (after taxes) = $1,700 • Divided 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 units • Loan 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: $643,847 • Eligible Areas: Entire county of San Diego, Except: La Mesa, Poway, Del Mar and Solana Beach (non-participating cities).