New Years’ Resolutions 2015 – Home Ownership
We've all made them, New Year’s Resolutions. One of them might be buying a foreclosed home. I wanted to speak to hopes you might have about 2015 and information to help with first time home buying.
Amazing, isn’t it? How quickly the years come and go and if you haven’t noticed, the older you get the faster it goes. 2014 was almost a flash in the pan, but too, time goes by quickly when you’re busy and especially if you’re having fun. We promised we’d set aside more money, we’d work on our credit, be practical and diligent with our financial practices so we could buy a home, right?
I get to talk to a lot of people on a regular basis; buyers and sellers and also a lot of agents on our team. Collectively, they’ve offered quite a mass of useful and interesting scenarios, insights and professional lessons. The bulk of them seem to revolve around credit and “how much money do I need to buy a home?”
Yes, that’s right. Credit yourself because you’re reading this post. That says you’re on the right track, doing some investigating, perhaps have been looking at homes for a while, maybe even have pulled your own credit score. So, Kudo’s to you, you’re on the right path. You should also understand, buying a foreclosed home or HUD home isn't necessarily going to give you the best deal. The best advice I could offer is to seek a home you'll love, can afford and purchase without regret. You just never know what type of home will be the best deal.
Buying a Home 2015 – Change your thinking about credit scores.
There are several things that affect a person’s ability to finance a home purchase beyond the credit score. In fact, the score is only one item under review when pursuing a pre-approval. Let’s get the score out of the way first.
I worked for a bank years ago before becoming a Realtor, and in both careers have worked with a lot of people going through credit ups and down, and have also investigated many “credit repair” and “credit counseling” companies. Many don’t know it, but using a credit counseling company and undergoing debt consolidation shows up on your credit report negatively, demonstrating you’re a poor manager of money, (that’s how lenders view it) even if you were simple a victim of bad circumstances. Don’t get me wrong, it’s very helpful to many in that situation, but you may have to hold off on buying a home for a while.
Buying a Foreclosed Home (or other type)? Get Credit Smart.
Credit cards are one of the biggest factors that contribute or detract from your score. There are two things a future home buyer should monitor; balance-to-limit ratio and the credit limit.
First of all, consider the balance ratio; very important for improving credit. Interestingly, the lower the percentage of balance to limit the better; but don’t pay them off if you don’t want to see a major dip in your score.
The thresholds to consider are 10%, 20%, 30%, 40%, and 50%. With each of these balance tiers, credit card users will experience a significant rise or drop in their credit score. Going over 50% of your limit is an absolute no-no if you’re seeking pre-approval from a lender.
For the best score, try to stay within 10% to under 30% of your credit card limit.
Real Credit Karma
One situation I’ve seen play out over and over is a buyer who barely qualifies (within 10-30 points) but with pre-approval in hand, lands a successful offer and then celebrates with a new riding mower, new car or applies for another line of credit, perhaps at Home Depot in anticipation of personalizing or upgrading the new home. Days before closing, the Realtor then gets a call from the lender stating he or she is now unable to do the loan as the credit score has dropped below the minimum and the would-be-buyer’s dream of home-ownership is dashed.
Protect your credit, especially after you have an accepted offer, resist those shopping urges. I actually advise my clients to lock their cards up and reduce the temptation to use them. You might also like to know credit scores generally improve in the years following a home purchase not just for timely mortgage payments but for owning a home. Home owners can also get better insurance rates than non-home owners in a variety of situations.
Good credit scores don't necessarily cut it.
Simply having a decent credit score isn’t enough; buyers have to consider their debt to income ratio, heavily scrutinized by lenders. The amount of debt you carry in relationship to your income has regulated requirements for various loan products.
One of the most useful loan products for buyers in general is an FHA 203k. Very useful in particular as when a home purchase, buyers aren’t allowed to do the repairs themselves and the cost of repairs are structured into the loan. Of course, buyers get choices like color, carpet, appliances etc. but if Uncle Sam is going to back the loan, they want to make sure the home is indeed restored to good living condition.
Many lenders can do FHA loans with lower credit scores, some even down to the mid 500’s, granted there will be more hoops for the buyer to jump through but often doable when other forms of financing won’t work. You’ll see below the minimum credit score stands at 580.
With any home loan, the debt to income ratio is going to be scrutinized, however, FHA and FHA 203k loans can be more favorable with these important ratios.
- HUD (Housing and Urban Development) can be a bit more forgiving with debt to income ratios depending on compensating factors, but let’s take a look at the new guidelines for 2015.
- FHA loan requirements and standards for 2015, an Overview:
- Not just for first time buyers; this program is open to all borrowers who meet the minimum eligibility requirements below.
- FHA borrowers are required to make a minimum down payment of at least 3.5% of the sale price or the appraised value (whichever is less, also in your favor).
- To qualify for the 3.5% down-payment option mentioned above, a credit score of 580 or greater is required.
- Those with credit scores between 500 and 579 must put at least 10% down, if they can get approved at all, but does leave some room for hope.
- There are debt requirements as well, but these are a bit more lax when compared to the credit scores above. Generally speaking, a borrower’s total monthly debt load should account for no more than 43% of his or her monthly income.
- HUD allows borrowers to have higher debt-to-income ratios if the lender can identify and document “significant compensating factors.” Such factors might include a long history of timely mortgage payments, excellent credit, or significant cash reserves.
- Borrowers with credit scores below 620, and total debt-to-income (DTI) ratios above 43%, may encounter additional scrutiny during the application and approval process. Borrowers in this bracket may have to undergo manual underwriting. The underwriter will be looking for compensating factors to make up for the low-score / high-debt situation.
- Lenders can impose their own guidelines on top of those promulgated by HUD. This is known as an “overlay.” So it’s possible for a borrower to be turned down due to a low credit score (for instance), even though a score meets HUD’s minimum cut-off. Keep in mind there are essentially two sets of requirements — the lender’s, and the government’s.
Learn more about 2015 changes, requirements and rate forecasts.
Our Home Loan Services connects buyers interested in Ohio real estate and Northern KY real estate with Berkshire Hathaway HomeServices Professional Realty's preferred and trusted lenders. We can match you with lenders with loan products best suited to your situation and offer competitive rates.
Buying a Foreclosed Home - Additional Costs
In addition to the down payment, you'll need money for closing costs and misc. items such as inspections. For the average Ohio buyer, plan on $2500-$3000 for closing costs; though a good Ohio Realtor such as the ones on my team are adept at negotiating to get some or all of your closing costs covered. I only recommend inspections on a home you actually have an accepted offer for, and a good Realtor will make the offer contingent on "satisfactory" inspections. Plan on $300-$500 for inspections, your Realtor can guide you on what is appropriate.
Buying a Foreclosed Home - Don't Cheat Yourself
Again, don't focus so much on buying a foreclosed home, but rather, focus on your credit profile, score and debt to income ratio and be open to all types of homes. Preforeclosures are a waste of time by the way. It can be months to well over a year before a pre-foreclosure is actually listed for sale, and are often in major disrepair. If you're financing, you can't do the repairs yourself anyhow, so you may as well look at everything. Many buyers mistakenly believe they can somehow purchase a pre-foreclosure before it's listed. Good luck with that, no bank's asset manager will speak to you about what's on their books and simply have to wait until their designated REO agent lists the home.
If you're considering a home purchase in southwestern Ohio from Dayton to Cincinnati, I'm happy to refer you to my business partner Marty Snyder. If you Google "Marty Snyder Realtor" you'll find him all over the internet with excellent reviews, and together we help clients buy and sell dozens of homes annually.