So, you want a buy a house. Many people often ask me about the evaluation process. What does it take?
Broadly, mortgage lenders consider the three Cs of credit to decide if you qualify for a home loan and for how much. Those three Cs are character, capacity and collateral.
Character refers to your credit history. How have you previously managed your bills? Lenders will look at your credit report and credit scores to see if you’ve been paying your bills on time.
Credit or FICO scoring is a system creditors use to help determine your credit worthiness. (For now, mortgage lenders only use FICO scores, not the other scoring system such as Vantage scores.)
Credit scores
Credit scores range from a low of 350 to a high of 850. Generally, scores of 740 or higher are considered excellent credit scores. Scores under 620 are considered weak or bad.
I tell all borrowers, if their scores are 800 or higher, they are next to God. Mortgage lenders determine your score by the lowest middle score of all borrowers. They pull credit scores from the three credit bureaus Experian, Equifax and Transunion.
Bill-paying history, the number and type of accounts a buyer has, late payments of 30 days or more, outstanding debt compared with the maximum credit amount, and the age of those accounts are all factors in determining scores.
To boost a score, most mortgage loan originators can refer homebuyers to their credit resellers to optimize their credit. In short, it’s a plan to improve credit scores by doing things like paying accounts down, for example.
If you don’t have any credit, you can manufacture credit by going to your bank with $500. Ask for a credit card on a liened account, tying up the $500. Then, each month, borrow against the credit card and pay it all back each following month. Two or three credit accounts, with at least one being two or more years old, is ideal.
Capacity
Capacity refers to a buyer’s income. How much money do they earn in relation to what the monthly house payment is going to be along with other debts. This is called your debt ratio or debt-to-income ratio.
For example, let’s say the buyer’s monthly gross income is $12,000. The proposed house payment of principal, interest, property tax and fire insurance is $5,000. The monthly car payment is $400 and the monthly credit card debt is around $200. The DTI math would be $5,600 divided by $12,000 which equals 46.7% DTI.
Capacity has some broad reach. It is household income, and it can even include non-occupant co-signers. That is all parties applying for the mortgage. It can include averaging overtime income, alimony, child support, disability benefits, VA benefits, Social Security, commissions, interest income, rental property and investment income.
Collateral
Collateral refers to the property itself. A mortgage lender is making the loan to a person while using the property as collateral.
It’s the security or guarantee from the borrower that can be foreclosed on if the loan is not paid back or not paid back timely.
When purchasing a home, the whole point of the appraisal is to assure the mortgage lender (who is considering the loan application) that the collateral value is really what the buyer and seller agreed to.
Obviously, if the appraisal doesn’t support the contracted price, it could mean no loan, should you be putting a minimum amount as a down payment.
Freddie Mac rate news
The 30-year fixed rate averaged 6.46%, 3 basis points lower than last week. The 15-year fixed rate averaged 5.62%, 4 basis points lower than last week.
The Mortgage Bankers Association reported a 10.1% mortgage application decrease compared to one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $394 more than this week’s payment of $4,825.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.25%, a 30-year conventional at 5.875%, a 15-year conventional high balance at 5.99% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year-high balance conventional at 6.125% and a jumbo 30-year fixed at 6.5%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.
Eye-catcher loan program of the week: A 30-year fixed rate at 5.5% with at 2 points cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.
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