Excluding Debt from your Loan Application

There are certain debts that show up on your credit that can be excluded from your Debt to Income ratio (DTI) when applying for a mortgage. Some debts, however, cannot be excluded and may affect your ability to qualify for a loan.

The most common debts borrowers try to omit from their DTI are:

• Student loans with deferred payments
• Car loans paid by someone else
• Installment loans with less than 10 payments left
• Business loans paid by a self-employed business.

In order for any of these debts to even be considered for omission, certain stipulations apply.

Student Loans

FHA loans do not allow student loans to be excluded for deferred student loans. All student loans, including deferred student loans must have a monthly payment calculated in the debt to income ratio.

Conventional guidelines do not permit the deferment of student loans. If you are applying for a Conventional mortgage, you will have to count the estimated payment into your DTI regardless of how long the loan will be deferred.

Car Loans

Car loans must have 12 months cancelled checks to show that these debts were paid by someone else. If the car loan is less than 12 months old, it is not possible to omit this payment from the DTI.

Further, the loan applicant must be a co-signer on the car loan, and not the primary borrower. This means that the person paying for the car loan must also be on the car note as the primary borrower.
A car lease, however, can never be omitted from the DTI. When you turn a leased car into the car dealership, it is expected that you will lease or buy another car, incurring a debt that would be similar to your current car lease payment.
Conventional and Government guidelines allow for the exclusion of car loans paid by someone else if the above documentation is provided.

Installment Loans

Most lenders still allow the omission of installment loans with less than 10 payments from the DTI. There are a few lenders who will not allow this now, so it is best not to count on it as a guarantee.

Conventional and Government guidelines both allow for the exclusion of these debts, but some lenders could have a credit overlay that is impossible to overcome.

Business Loans

Business loans are tricky to exclude, and are at the underwriter’s discretion.

When attempting to omit business loans, remember that it is always easier to prove that installment loans are paid by a business because these loan payments have a fixed amount.
Revolving debts have revolving payments, so it is extremely difficult to prove that a business has been paying for this account for 12 months.
Documentation that is necessary to prove that a loan is paid by a business includes, but is not limited to:

• 12 months cancelled checks from a business account
• Business account bank statements sourcing the funds may be required
• If the account reports on your credit report as being a business account, this could also help sway the underwriter into omitting accounts paid by your business. Or the original note showing that the account is a business debt could help the cause as well.

Help Your Loan Get Approved Faster

For the past twenty years, three standard mortgage practices have occurred behind the scenes during the mortgage process:

• Verification of Employment (VOE)
• Changing of the “mortgagee clause” on your homeowner’s insurance (HOI) declaration page
• Credit supplements, such as a Verification of Mortgage (VOM) or supplements to verify credit card or student loan monthly payments

In the past these three procedures have usually occurred without the applicant’s knowledge. The lender was just required to send in a copy of the applicant’s signed Borrower’s Authorization that gave written permission to release information. But privacy policies have tightened on the employer, HOI, and consumer-credit levels, and these standard practices now need the mortgage applicant’s verbal approval before they are completed. 

If you are alerted by your Human Resources or Payroll Department that Miracles Happen, LLC is requesting a Verification of Employment, please give them permission to provide this information.
Likewise, if your HOI company lets you know they have received a request from Miracles Happen, LLC to change the mortgagee clause (basically just changing the lender name) on your insurance declaration page, please give your permission to make the change.

You may also receive a phone call from our credit vendor, Credit Plus. This is the credit agency that Miracles Happen uses to pull your initial credit report. As you work with Credit Plus quickly, you will need to provide any needed information or perform any requested conference calls with your current creditors. This will help to expedite the underwriting process. If you ever feel uncomfortable returning a call to Credit Plus or providing them with any requested information, please feel free to call us (Miracles Happen, LLC) contact first to verify their authenticity.

Following these three basic suggestions will help your team at Miracles Happen, LLC  prepare your loan file for underwriting in a timely manner. Please be sure to call at anytime to discuss further. We look forward to speaking with you soon.

The Basic Details to Know about FHA Mortgage Refinance Loans

Refinancing an FHA mortgage loan is very similar to refinancing other types of mortgage loans, both conventional loans, VA loans and USDA mortgage loans.

FHA mortgage loans has its own list of requirements and regulations that govern refinance loans.  If you’re considering an application for an FHA refinance, here are a few general things you should know about going into the process.
In the FHA loan rulebook under the section, “Purpose of a Refinance Transaction” we learn, ” A refinance transaction is used to pay off an existing real estate debt with the proceeds of a new mortgage;
–for borrower(s) with legal title, and
–on the same property”.

The rules also state that an FHA borrower is “eligible to refinance the loan, as long as he/she has legal title, even if he/she was not originally on the loan.” That’s important to know in cases where a home was inherited or otherwise had ownership transferred in a way permitted under FHA loan rules.
How much can an FHA borrower refinance the loan for? According to the section titled, Maximum Percentage of Financing for a Refinance” we learn that there is no set dollar amount for FHA refinances. Instead, “The maximum percentage of financing for a refinance transaction is governed by:
–the occupancy status of the property
–the use of the loan proceeds, and
–how and when the property was purchased”.

The rule book adds that in general, an FHA refinance loan “may never exceed the statutory limit, except by the amount of any new upfront mortgage insurance premium (UFMIP). However, the maximum mortgage may exceed the statutory limit on certain specialty products.” Contact a participating FHA lender to learn which of those specialty products might be available to you–not all lenders may offer them.

Under “Types Of Refinances” we learn;
“FHA insures several different types of refinance transactions, including
–streamline refinances of existing FHA-insured mortgages made with or without appraisals
–no cash out refinances (rate and term) of conventional and FHA-insured mortgages, where all proceeds are used to pay existing liens and costs associated with the transactions
and
–cash out refinances.”

FHA FICO Score Minimums

It's true that the FHA does list a minimum FICO score of 500, but very few lenders offer this financing option.  Many lenders have "Overlay's", or "Additional Required Guidelines" to qualify for a home mortgage.  Why is this? The lower the fico score, the higher the likelihood of the borrower defaulting. The risk of a borrower defaulting can count negatively against the lender and the loan officer.

HUD tracks borrowers defaults and tracks which lenders and loan officers were involved in the transaction and wrote the loans, it si called "Lenders Compare Ratio". The FHA's Lender Compare Ratio is calculated for all lenders. This ratio is geographically based, comparing the rate of early defaults and claims for single family loans in a geographic area to other mortgagees in the same area.

Both the mortgage lender and the loan officer have Compare Ratios that follow them throughout their careers.  The more defaults that their borrowers have, HUD can essentially not allow that entity or person to issue FHA loans in the future. So the risk factor is not just there for FHA but also for the lending entity and the loan officer.

Many lenders have a minimum FICO score requirement of 620 to a 640. This is to mitigate their risk with their Compare Ratio. To only require a 3.5% down payment, a minimum score of 580 is required. 

The minimum required FICO Score to get an FHA loan is 500.  For borrowers who have FICO scores below 580, 10% down payment of 10% equity for a refinance is required with FICO scores below 580 (500 to 579).

However, these score requirements are the FHA minimums, not the lender’s standards. Many lenders FICO scores vary from the FHA loan rules and are usually more strict than the FHA guidelines FICO score requirements.

There are a few items a person can do to improve their credit score or even correct credit reports (without paying third parties to do so on the borrower’s behalf). Paying off or paying down debt, paying accounts on time are the best ways to improve your scores.

Credit scores are a critical part of the loan approval process. Striving to get a high credit score and a repayment history with 12 months of not missing a payment is vital to increasing your FICO scores.

To be eligible for an FHA loan, you have a maximum of one (1) non-mortgage late in the past 12 months. Though this is not recommended, it is possible to have one late payment in the past 12 months.

Whether your FICO score is in the 700's, 800's or if your FICO score is on the lower end of the minimum standard of FHA, we can help you get the financing you need to either purchase a home or refinance your current FHA loan.

The Truth About "No Closing Costs" Loans

When shopping around for a mortgage, a lender may offer you “no closing costs” on your loan.

The words “no closing costs” sound quite enticing as these costs can range from 2-5% of the loan amount. For a $200,000 loan, that range can be from $4,000 to $10,000 – quite a bit of money!

One thing you need to know about these types of loans, however. There’s no such thing as a free lunch. You’ll either pay for those costs yourself or you’ll pay through a higher interest rate. No bank or lender will pay these fees for you.

What are closing costs?

Closing costs are just as the name implies: the fees you’re charged in connection with obtaining your loan. These fees include:

• Origination – The fee lenders charge for arranging your loan.
• Title survey – Background check on the home’s title to ensure it’s free and clear of liens or other issues.
• Title insurance – Lenders request this insurance to protect themselves and you if it’s discovered later that the title isn’t clean.
• Attorney’s fees – What the title attorney charges to endorse a clear title and close your loan.
• Recording fee – What your local town or county charges for recording the new record.
• Underwriting fee – This fee covers the cost of the underwriter – the company that evaluates your mortgage.

Loan Refis: Closing costs “rolled in”

For people refinancing a loan, closing costs are generally rolled into the new loan. This is because people refinance to take equity out of home to pay down credit card debt, fund a college tuition, or make home improvements. 

Or, you may be underwater and are refinancing to take advantage of a lower interest rate. In this case, you aren’t taking cash out but your closing costs are still rolled into the new loan.

Home Purchases: Where closing costs come into play

In order to entice you into doing a loan application for a home purchase, a bank or lender may advertise “no closing cost” loans. This type of advertising is patently false as you will have to pay closing costs – even if the lender “waives” them.

What does this mean?
First, you will need to pay the local recording fees, escrow and insurance pre-payments. No bank will pay these fees for you as they’re non-negotiable – everyone has to pay them. (Even I had to pay them when I purchased my new home.)
Second, in order to offset the cost of the other fees, such as the appraisal fee or attorney’s fee, the lender will increase the interest rate. So you end up paying much more on the back-end.
Picture a scale – perfectly balanced. You have the loan’s interest rate on one side and your fees on the other. To keep the scale balanced, a lender offering to “waive” your fees will need to increase the interest rate in order to keep the scale balanced.

 

Tip: Look for the lowest combination of rate + fees

Generally speaking, banks charge lower fees and higher interest rates. Mortgage brokers have higher costs and lower rates. Every lender has their own scale – which is why it pays to compare apples-to-apples using your Good Faith Estimate.

One other word of advice: Be extremely wary of paying an up-front application fee or “deposit.” Some lenders will charge you $500 to $700 deposit to begin your loan application process. Don’t fall for it.

Once you change your mind and decide to go with another lender, you lose this deposit. (See my post, “Good Faith Deposit and Other Upfront Fees” for additional details.)

As always, what’s most important, when shopping for a mortgage, is choosing the right company that will deliver.

Here at Miracles Happen, we work with you every step of the way – from delivering pre-filled out forms to coming to your home for a closing. See our Customer Review page for the unvarnished truth (we let our customers do the talking and don’t change a thing they say).

And, if you’re ready to begin home shopping – give us a call. Or, simply get your no-hassle rate quote in seconds!