Credit Scores, Government Loans and 100% Financing
Rhonda Porter on 01 14, 2008
Today’s guidelines are changing so quickly that it really keeps you on your toes as a Mortgage Professional so I was not surprised to receive this email from a Real Estate Agent:
Just had a client tell me she can’t get a VA loan with less than a 720 score. Huh? These clients were ready to put an offer in on a house they really liked when the lender told them that….is there a minimum for VA/FHA or does it all depend on the look of the whole package? Also, can folks still get 100% financing? If so, what’s the score needed?
I’m guessing the lender referenced above does not have the option of offering FHA or VA loans because FHA and VA insured loans currently do not have credit score requirements. Some lenders are opting to exercise credit score minimums and/or risk based credit score pricing (720 would be a very high standard). For example, a memo I received last week from a lender stated that that for FHA/VA loans with a mid-credit score below 585 pricing will increase from 0.50 – 0.75 in fee. Brokers looking to protect themselves from buying back loans, may decide to use credit score limits and are implementing maximum debt to income ratios regardless of what the response is from automated underwriting (the computer). Before you start shreeking about how people with credit scores below 585 should not have a mortgage, please keep in mind that the borrower needa to have clean credit for the past 12 months in order to qualify for FHA or VA financing and I’m certain their file will reviewed with a fine tooth comb.
On a side note, since we’re talking government loans, VA loans are no longer restricted by conforming loan limits. New loan limits vary from lender to lender. The highest VA loan limit I’ve seen from the lenders that I work with is a cool million.
Folks can still get 100% financing and they don’t have to utilize a VA loan. Freddie Mac offers Home Possible and Fannie Mae offers MyCommunity and Flex with LTVs up to 100% of the sales price. These programs provide financing with credit scores as low as 575. With a Fannie Mae Flex 100, the rate is around 1-1.5% higher than what I quote for a 30 year fix plus private mortgage insurance (pmi). This is not a bad deal however the higher the ltv and lower your credit score is, the more expensive pmi is.
“A Minus” pmi is pricey! With a 575 credit score (assuming the loan is approved) the pmi rate is 2.57% of the loan amount (divide by 12 months to determine the monthly premium) as compared to a 620 score which would provide you a rate of 1.42% or a 680 mid score at 0.96%.
Here are some payment examples based on a purchase price and loan amount of $400,000 (this is not intended as a rate quote) utilizing a 30 year fixed Fannie Mae Flex with Borrower Paid PMI:
575 Mid Score Borrower: p&i @ 6.75% = $2594.39 plus pmi @ 2.57% = $856.67. Total payment (not including taxes and insurance) = $3,451.06.
620 Mid Score Borrower: p&i @ 6.50% = $2,528.27 plus pmi @1.42% = $473.33. Total payment (not including taxes and insurance) = $3,001.60.
680 Mid Score Borrower: p&i @ 5.875% = $2,366.15 plus pmi @ 0.96% = $320.00. Total payment (not including taxes and insurance) = $2,686.15.
The Seller can contribute up to 3% of allowable closing costs for ltv’s greater than 90%. Please keep in mind that any of these programs can have their guidelines changed (such as credit scores increased or loan to value decreased) or lenders may stop offering them in this market.
The “whole package” for a borrower is more important than ever with lenders adding guidelines to automated findings (which I can’t argue with). Even with a down payment, Fannie Mae and Freddie Mac’s Loan Level Price Adjustments will cost you if your credit score if off by one digit. It’s crucial for anyone considering buying a home (or refinancing) with credit scores under 700 to start early with a Mortgage Professional. Improving your credit scores can save you big time with your mortgage payment.
About the Author: Rhonda Porter
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31 Responses to “Credit Scores, Government Loans and 100% Financing”
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- Cheryl Johnson: Can someone point me
- Rhonda Porter: that line surprised
- Roger Ingalls: I was a bit surprise
- Roger Ingalls: Matt: I suspect y
- ARDELL: Not really, Rhonda.
On the low signal to noise board, they laughed at me when I told them 100% financing was still available. Of course, they were generally unaware that any financing was available.
Various interviews from news media will also have you believe that 100% financing is gone. That’s why I love having the opportunity to “get it out there” that it is available.
If someone has a real low credit score, personally, I’d rather they worked on making sure that what ever caused the low score has been remedied (not just repairing the score) before they take on the responsibility of a mortgage debt.
Well the point is more that if it’s available for people with low credit scores, it’s available for people with good credit scores. And there are actually some people out there that can do better things with their money than putting it into a house.
And, I’ve mentioned this before, but I like the move to single 100% mortgages over 80/20s. Less risky for the borrower.
100% transaction are definately still here and so are stated income financing. Just saw a stated, but the borrowers were razor blade close to 800 FICO’s.
Kary, I’m not sure if there are 80/20’s out there. Most second mortgages want to stick at 90% ltv and I have one lender who will go to 95%.
I haven’t worked with my “alt a” lenders in sooooo long… I should probably contact them to see if 80/20’s are back.
I generally prefer the one loan scenario, too. Depending on what the person’s financial landscape looks like…if they’re planning on comnig into a lump sum of money and want to pay off the second because they have nothing better to do…then the piggy back mortgage may make more sense.
It’s the customer’s choice from what ever programs are available.
Tim, I just quoted a VOA (verification of assets/no income verified) jumbo for a refi…this person also has 800 scores. I would much rather do a “no income verified” than a stated income loan. It’s better to have the income blank on the loan ap than to have the borrower put something in that may or may not match their tax returns.
I’ve been getting more questions about 4506’s recently too (not my clients…from blog readers). I may have to do a post about that!
Rhonda:
There are still decent 80/20’s out there, but nowhere near as many. One file loans (w PMI or LPMI) are usually preferred today, but there is still a place for the 80/20s.
The underwriting landscape has definitely shifted in the month or so. Files that we would normally think are a shoo-ins have been getting pushback on automated underwriting engines, and once they get to a live UW, the pushback continues. These are on files w/700+ FICOs and low risk factors.
They are getting done (and sometimes the delays turn out to be a blessing, in a falling rate environment), but not without a much greater effort on the LO’s part.
Now is TRULY the time to be working with a Mortgage Professional!
Rhonda wrote: “It’s the customer’s choice from what ever programs are available. ”
That’s true. The situation you described (money coming later) would certainly be good for an 80/20. I was just addressing the liability aspect of having an 80/20.
It’s a pet peave of mine that when a LO who does not have FHA/VA available for a client, they steer them to the product they have without letting them know of FHA/VA options.
Of course, this is easy for me to say since we are a HUD direct endorsed lender.
Rhonda:
I have not had VA and FHA loans available to broker to borrowers in the past, but knew about the advantages and disadvantages of both. If it was a better route to go with either, I would tell my client to use a lender who could. Borrowers wanting cash out between 65% and 95% on a man-home was probably the most frequent use of FHA.
I have since changed my business model to allow me to originate both. You can call me Johnny Come Lately, I suppose, but it is better late than never to get on the right bus. It’s pretty full these days!
[...] Rhonda Porter, one of the writers I truly enjoy over at Rain City Guide, wrote this excellent article on the above topic. It’s a good read for anyone looking into any of these kinds of loan programs. [...]
very interesting article about why this mortagage mess is just the begining and everyone is focused on sub prime, but it will hit other types soon …
http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/
Thanks, srini. Today I received more memos from various lenders (many of whom where mentioned in the article you linked) restricting guidelines further.
It’s truly amazing what attractive financing is still available on the residential side. Ironically financing commercial properties in my area has become much more expensive and LTVs offered are atrocious relative to where they were 9 months ago. All that despite the fact that commercial market fundamentals remain sound.
I’M A REAL ESTATE AGENT IN MD LOOKING TO PURCHASE A HOME AS PRIMARY FOR $390-$405 I’VE PURCHASED HOMES IN THE PAST GOING STATED I DONT HAVE ANY HOMES AS OF 8/06 IS ANYONE DOING STATED IN MD 95%-100%
A.KYLE, you would need to contact someone in your state. I’m not aware of 95-100% LTV Stated Income loans of the top of my head (it may be out there).
You might be able to find 95% LTV using bank statements to document your income; however I’ll be the rate will be high. Good luck!
I am a CA resident looking to buy a home. 10 years ago my husband and I bought a home that went into a short sale. Our credit score is around 655, we can afford a mortgage but do not have any money to put down. We’ve had a few lenders tell us that 100% financing does not exist.
Can anyone refer me to a lender that may be able to help us?
N. Espino, I recommend finding a lender in California who specializes in FHA financing. It’s not zero down…it may be your best bet. If you want to email me, I can send you a few recommendations for Mortgage Professional’s in California (I’m not positive if they do FHA).
Another option for you would be to meet with a California Mortgage Professional who can council you on improving your scores (680 would provide more options for you).
Thank you. I would appreciate it if you could recommend a few Mortgage Professionals out in my area. I’m in the Fontana, CA area.
N. Espino, please send me an email and I’ll do that: rhonda (at) rhondaporter (dot) com. Thanks!
Your article is excellent! Can you recommend someone who has a license in Florida, particularly in Parkland area, and who can provide the same excellent services you provide? Thank you.
Thanks, Robert. if you send me an email (so I have you an address), I’ll try to find someone for you.
My husband and I are trying to buy a bank owned property in Texas. It needs some updating, it has been empty for almost a year. We are qualified for a FHA loan but we are wanting to take out a second for the repairs. Our credit scores are in the 650s is this possible? Thanks
Not everyone with BAD credit got themselves there. Some people make the mistake and lend there signature to people they trust and they go and ruin it on them. As long as the money is coming in every month you should be able to be approved and buy a house. Leslie I think you can get out a line of credit for repairs..NOT sure if you already bought the place it has been awhile BUT good luck!
Kim, you’re right that co-signing and really damage your credit. Often times, the person you’ve done the favor for might be embarrassed that they’re not making payments on time for the car loan or mortgage that’s been co-signed. They may not realize that it’s not only their credit they’re dinging, it’s the co-signer too.
Leslie’s comment slipped by me somehow. Second mortgaes are much tougher to qualify for…if she’s looking to buy a home via FHA, she should try a FHA rehab loan which will allow for repairs.
Hi,
I’m am hoping you can help me. My husband and I had bought a multi-family home in Canarsie Brooklyn back in 2007. There are two floors with two separate entrance, we bought the house with an excellent tenant on top. We got pregnant that year with twin babies and we are currently in two bedroom 1 bath of the 4 bedrom house. With the twins and 900 square footage to work with we need to move. We have no equity at this point. We are looking into purchasing a home in Staten Island for no more than $300,000, my husband is a NYC Correctional officer making 70k right now and it will jump to 100k in July and that’s not including overtime. I make 45k currently. Our credit score is a little shaky as I was on bedrest during my pregnancy. My husband credit score is 650 he is also in the military. My question is do you think he will qualify for VA loan? We have about 12k in savings right now. Will it be a good idea to get the 2nd home? We need bigger space for the kids and are thinking about doing this spring next year. Will we qualify at all for 100 percent loan at this point? As of next year we should have a good amount save but we obviously want to have emergency money should we have a problem with a tenant so we dont want to use all that money on mortgage. Your help and input will be greatly appreciated. PS my husband has been with NY Corrections for 5 years now and I have been with my company for 3 years we are both secured at work.
Lele, there’s no way for me to answer whether or not you would qualify for a VA loan at this time. Please meet with a local mortgage professional to review your scenario.
VA will look at your last 12-24 month history more than credit scores. Late payments on your credit report may negatively impact you.
VA loans have an allowed DTI (debt to income ratio) of 41%. If you’re all ready pushed on your existing home and not able to sell it…this will put you in an unfavorable position (assuming you may have other debts).
Lele,
Coincidentally I once did a transaction with a VA loan for a man who worked for the same people your husband does. There was an issue at the end involving his cost of travel from home to work that almost, surprisingly, disqualified them at the end. It’s a quirk of VA loans that has to do with a residual income calculation not done on any other type of loan. Due to the cost of travel by train from home to work, the only way the sale closed was by my forfeiting the entire RE commission to reduce the purchase price to the level VA would loan them.
This makes Rhonda’s recommendation all the more relevant and make sure that you go to someone who does A LOT of VA loan processing and have them run it past the underwriter in advance. Finding one with an in-house underwriter and lots of VA Loan experience would be the preference.
Ardell, your point about running it by an underwriter in advance is priceless! Lele, please make sure who ever you select as your mortgage orignator has access (preferably in-house) to a VA underwriter. Your scenario should not “blow up” at closing–these issues need to be addressed up front. Good luck!
Regarding 100% financing, I’ll have to do a post about USDA loans which does offer 100% loan to values–very similar to VA with a financed funding fee of approx. 2%…the property must be in a rural area and there are income limits for the borrower. More to follow soon…right now I’m running of to a WAMP Board Meeting.
Rhonda,
I have to admit we were all flabbergasted when the purchase almost fell through because of the cost of the man’s train ticket to work. I’m pretty sure VA is the only type of loan that factors in this type of cost item. Is “residual income” the right term for that quirky VA evaluation during loan processing?