A few days ago I addressed issues that lending will not allow any longer. Among them was use undocumented cash, using income that isn't file on a tax return for qualifying purposes, or borrow extra money for repairs on a home without using one of the FHA rehabilitation programs.
Lending these days isn't all negative-let's talk about what current lending rules ALLOW rather than dwell on what they don't.
1) Less than pristine credit.
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Assessment of credit has undergone some easing in the past 12-18 months. The FHA loan has always been a mortgage that made exceptions for those that had suffered difficult economic events, righted the ship, and were on the road to recovery. However, during the past few years, even though FHA allowed lower scores based upon difficult events such as job loss or bankruptcy due to medical issues, lenders would not allow these exceptions. Lately we are seeing the return to common sense lending with regard to folks whose credit scores may not have entirely recovered but have made obvious strides to correct their credit issues and get back on firm financial ground. It is not uncommon to find a lender that will accept a credit score down to 580. But keep in mind it isn't just about the credit score, it is about what happened, what has been done to prevent it from happening again, and how promising the future of the borrower looks financially. Conventional lending too has eased somewhat on credit scores-now lending down to a score of 620 in some cases, though a cost analysis of both the conventional as well as the FHA loan would be in order to give the consumer the benefit of the best program.
The Consumer Financial Protection Bureau is also taking a look at credit and credit scoring to determine what reforms need to be made in that regard. Most recently they have determined that medical collections will not be scored the same way as other collections. In the next year or year and one half it should be easier for people who have endured medical hardship to obtain mortgage financing.
I do not want to convey that these loans are easy approvals and will close with no question. Often the road to approval is a long hard slog, but with proper documentation they can close.
2) Low down payments.
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There was a lot of talk during the mortgage meltdown about increasing down payment requirements for mortgage loans. It is true that many 100% programs did end up in the trash can. But, there are still low down payment products available. FHA requires 3.5%, conventional lending requires a 5% minimum but both of these types of loans do allow the down payment to be a gift from a family member. Conventional lending used to have a 3% down mortgage. From what we hear that one is making a come back before the end of the year. Of course there are two great 100% financing programs left - - VA which is the best loan available for a veteran and USDA which has income and geography limitations but it is possible to purchase a home with little or no money down.
3) Reduction of job time restrictions.
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It is probably still true that some lenders require 2 years at one job before they will approve a mortgage loan but this is no way an across the board requirement. Time on the job requirements change by type of loan, previous employment situations as well as education experience. For instance if a borrower graduated from college or a technical program three or four months ago and is working in their field, the education is counted as job time. If a borrower who works in a factory moves from one company to another company doing the same type of work, the previous experience counts. Typically lenders do like to see two years of job time, but there are many exceptions to this rule.
4) Fewer assets required.
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Typically with government loans such as FHA, VA and USDA, the monies that have to be available just have to cover the costs of the mortgage-so down payment (in the case of FHA) any closing costs not being paid by the seller, and the costs of inspections etc. While it is always a good idea to have some money saved up for emergencies or repairs once home ownership is upon you, these loans do not require what is known as "reserves." However, in the case of lower credit scores, having some money saved whether in a savings account or a retirement account may give the underwriter another reason to approve the loan as a savings habit has been established and that is a positive thing.
5) Expansion of total debt ratios.
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The total debt ratio is the ratio that is computed using the total payments that go to consumer credit plus the house payment divided by gross income. During the recession lenders tightened up on debt ratios. Many banks would not allow a loan that had over a 38% total debt ratio to be approved. Even during the worst days of the recession FHA, VA, and USDA wrote to 41% total debt ratios and FHA often capped at 43%. Since the economy has improved somewhat, conventional lending will allow up to 43% and FHA often will got to 50% depending on credit, assets and other compensating factors. This year's QM mortgage rules (Qualifying Mortgage) on debt ratio limitations which is designed to protect consumers from having a house payment that exceeds their ability to pay, didn't involve government loans or Freddy Mac and Fannie Mae loans-which is essentially about all of the loans done in the US these days. It does cover what is known as non-conforming loans or loans or loans that do not meet the criteria of having government backed guarantees. In any event, many banks took the opportunity to reel in what they would approve or not approve even though the programs themselves allowed for higher ratios.
So the take away from this little lesson in positivity is that mortgage lending while not the piece of cake it was pre-2008 is still alive and well. Before you get discouraged and think you can't obtain mortgage financing, look around. You may be closer to home ownership than you thought.
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