If you’re a first-time home buyer, you’ll find it a little harder to qualify for a mortgage than the first-time buyer who walked in your shoes two years ago.
The credit crunch on Wall Street and record foreclosure rates have made investors nervous about home buyers who have small down payments and lower credit scores.
While the number of first-time buyers is down, there are plenty of folks who are tempted by falling home prices and low interest rates. What kind of loans are out there for them?
The kind of loan you’re offered starts with your credit score. According to Fred Glick, a mortgage lender and real estate broker based in Philadelphia, Fannie Mae and Freddie Mac are looking for credit scores of at least 660.
“We’re absolutely accepting loans where borrowers have credit scores in the 600s,” said Craig Nickerson, Freddie Mac’s vice president of expanding markets. “There’s no question that the stronger the credit of the borrower, the better product they can obtain.”
“But there is a matrix based on the credit score and the down payment" that can change that number,” Glick explained. “If you put down 5 percent, you’ll need a credit score of at least 660. But if you go with an FHA loan, you can put down [as little as] 2.25 percent and allegedly they’ll take a 580 credit score.”
“With a credit score over 700, you can still get 100 percent financing,” Nickerson noted.
FHA loans are making a strong comeback, according to Allen Jones, a spokesperson for Bank of America.
“In the calendar year 2006, Bank of America originated $1.5 billion of FHA loans. In April 2007, we originated $1.1 billion in FHA loans,” he explained. In 2008, Bank of America expects to fund $5 billion in FHA loans. “With the changes FHA has made over the past year, it has become a sweet spot for us.”
Who is a good FHA candidate? “Someone in a first or second job out of high school or college, who is working and can afford the property but might need help with the down payment. With FHA, a parent can provide the down payment assistance as long as the borrower can afford the payment,” Jones said.
Jones said that the average credit score of an FHA borrower is about 620, although “there are plenty of 500s and plenty of 700s” as well.
In San Francisco, RPM Mortgage’s Dick Lepre said that his company no longer accepts applications from borrowers who have a credit score of less than 680. “Everything is being ratcheted up. It’s as if somebody took every credit guideline and raised it 20 points,” he said.
When it comes to down payments, lenders want to see at least 5 percent down for a normal conforming loan of up to $417,000, according to Victor Benoun, owner of The Mortgage Source, a mortgage brokerage based in Studio City, CA.
“If you’re borrowing more than $417,000, lenders want to see at least 15 percent equity in the property, although they’re cutting that back to 10 percent to make up for a declining market,” Benoun said.
Which makes FHA’s 3 percent down payment requirement seem doable. In addition to having the cash for a down payment, Benoun said many first-time buyers are having trouble coming up with enough income to support their mortgage.
“Lenders would normally say they’d like to see 25 to 28 percent of your gross income going against your housing expense and now that has been relaxed a bit more to include ratios of up to 40 percent of your gross income. Once you get past the ratio of 42 or 45 percent of your gross income, you may not be able to do a conforming loan,” Benoun explained, adding “I have clients now who are self employed and they’re not showing enough income to qualify.”
May 15, 2008.
The beauty of home ownership is found in the value of time. The longer you own a home, the more valuable it becomes to you as an asset. On one hand, you are paying off the mortgage over time, which is increasing the equity you have in your property. On the other, real estate tends to appreciate over time. This double whammy is what makes home ownership so attractive.