Friday, April 11, 2014

401K - Utilizing it for down payment or to lower debt to income ratios

A "tool" in the "tool box" that people often forget about...

Borrowers often forget about utilizing their own nest egg to help themselves today. I recently had a borrower who wanted an USDA loan, however they wanted to buy a home in a "City." I looked at her financial picture and had her look into her 401k loan as an option. She was able to take a 401K loan out and put 5% down. She purchased the home with a conventional mortgage. The great thing about borrowing from your 401K is, you pay yourself back the loan and pay interest to your own account. It can also help qualify or lower ratios by taking money out of it to pay off high interest debt. Our underwriters do not debt the borrower for the payment associated with the 401K loan.

Loans from 401(k) plans. Some 401(k) plans permit participants to borrow from the plan. The plan document must specify if loans are permitted. A loan from the 401(k) plan is not taxable if it meets the criteria below.

Generally, if permitted by the plan, a participant may borrow up to 50% of his or her vested account balance up to a maximum of $50,000. The loan must be repaid within 5 years, unless the loan is used to buy the participant’s main home. The loan repayments must be made in substantially level payments, at least quarterly, over the life of the loan. The rate is typically 1-2 points above prime (4.25-5.25%) , this would be yuor rate of return on the money borrowed.

The participant must reduce the $50,000 amount, above, if he or she already had an outstanding loan from the plan (or any other plan of the employer or related employer) during the 1-year period ending the day before the loan. The amount of the reduction is the participant’s highest outstanding loan balance during that period minus the outstanding balance on the date of the new loan.





Thursday, March 20, 2014

Getting a Mortgage after a Divorce

You and your ex spouse most likely have a combined financial history that probably includes; a mortgage or 2, car loans, student loans and credit cards.  Buying a home after a divorce with common debt that survives the divorce can make it tricky getting a mortgage.   It can also leave your credit exposed if old loans/mortgages are not refinanced out of your name.  Also,  being “quick claimed” off a deed does not exclude you from being marked late down the road.

There are several factors that your mortgage officer will need to know when considering you for a mortgage. 

If the ex spouse is keeping the house and responsible for making the mortgage payments on a mortgage that you are also obligated to pay.   

You will need to provide the lender with a court approved Divorce Decree that awards the property to your ex spouse and provide 12 months of cancelled checks showing that they have made the mortgage payments from their own account, not your joint account.  The mortgage payments will have to have been made on time during this period as well.  You will also want to explore the option of having your ex refinance you off of the mortgage obligation. 

Child Support and Alimony.   

This income can be used to qualify you for a new mortgage as long as it is spelled out in the Divorce Decree.    You will need to show proof that the income has been received for at least the past 6 months and it is going to continue for at least 3 years from the date of the new mortgage.   Conversely, you are required to disclose any child support or alimony obligations you may have which could affect your qualification ratios. 

If you have other joint obligations such as car loans, student loans and credit cards. 

Unless it can be documented in the Divorce Decree that the other party is responsible to pay the obligation, and supported by 12 months checks showing that they make the payments, those liabilities will be factored into your ability to qualify for a new mortgage.

If you are not yet divorced and are planning your future, you will want to create some sort of marital separation agreement.   This will help your loan officer in determining your loan options.  It is also a good idea to separate your finances which means getting your own bank accounts and paying your financial obligations from separate accounts. 

Wednesday, March 12, 2014

No Credit ? Low Scores? - HELP !

I have NO CREDIT Scores, what should I do ?

Step 1:

You should go to your bank and give them $1,000 (if possible, if not whatever you can or even more if possible) and ask them for two “secured” credit cards.  They should give you a “Visa” and a “Mastercard” against the funds that you gave them.  Use these cards monthly for gas or something nominal and pay it off in full each month.  This will build a credit history for you.  Within 6-12 months you will have established credit scores.  Once you have established credit you can ask for your secured funds (deposit) back.

Step 2:

If possible have a family member or great friend add you to one or more of their accounts as an “authorized user.”  You will gain all of their past history so if they have had a card for several years or more that is most effective.  You obviously want to make sure they had a good  credit history with these accounts.

These 2 simple steps can spring board you forward and you should have some great scores within a couple months.

Some quick facts for you to keep your scores high:

  • Don’t close out credit cards your scores are generally kept higher when you have the ability to use credit, but choose not to.  
  • Try to keep your credit card debts below 40% of the maximum allowed
  • Keep inquires down.  New credit applications or credit checks.  This affects your scores because the bureaus do not know if you have taken on “new debt” so they lower your scores a bit in the short term to wait and see if you went on a “new “ shopping spree and don't yet have a history to show the ability to repay those newly incurred debts. Makes sense, right?
  • If you were late contact your lender and ask for a “one time forgiveness.”  Most lenders/creditors have a policy were they will remove it – “once."
  • Paying off an old collection could hurt you.  This makes no sense to you and me, but the credit report has washed it down the road and “forgot” about it  and has penalized you less and less each month as that “bad debt” has gone by in the rear view mirror;  however, if you pay it off today it updates that collection to today’s date and now it shows as a “paid” collections and your credit scores have likely dropped due to that update.  We recommend that you consult us first so we can review it and determine what is best.
  • Credit Counseling, I have never seen this as a “good” thing.  Many of them tell you to stop paying your debts so they can then negotiate them.  I would use caution when entering into any agreement and consult us at the same time

Below is  a pie chart and further explanation of credit scores:

What is a credit score? What do the numbers mean and how does this affect your ability to borrow money and at what rate? To answer these questions one must first decipher what a credit score is.  A credit score is a three-digit number ranging from a 300 to an 850 that is generated by mathematical algorithms of the information contained in your credit report. Your credit score indicates whether you have bad (a lower credit score) or good (a higher credit score). The FICO is probably the most well-known credit scoring module. It is a branded name so to say like Band-Aid or Q-Tip and is almost synonymous with the term “credit score”. FICO was developed by a company called Fair Isaac and has become the global standard for measuring risk in the mortgage, banking, credit card, auto and retail industry. The credit history or credit report is a record of an individual’s past borrowing and repaying history. Lenders like to see that a consumer’s debts are paid regularly and on time.
Credit scores are designed to predict risk or the likelihood that you will become delinquent on your accounts over a 24 month period. The higher the credit score or FICO is the lower the risk you are from a lender’s standpoint. Credit is extremely important because 90% of all financial institutions use the credit score in their decision making process. Not only is your credit score important in determining whether you will be approved for a car loan, a credit card, a mortgage…ect., but it also determines what rate is given. Those with a lower credit score will pay a higher rate than those with a higher FICO score because they are considered more of a risk and therefore pay a higher premium. 
There are three FICO scores given to a consumer, one for each credit bureau, which are Equifax, Experian and TransUnion. These are the three major credit bureaus in the U.S. These are all publically traded companies which are not owned by the government; however, the government does have legislation over these agencies as to how they should operate according to the Fair Credit Reporting Act. These agencies collect and maintain credit information in an individual’s credit report and sell this information to lenders, creditors and consumers.
Each of the three credit bureaus uses a different model for calculating your credit score. These credit bureaus collect data independently of one another and do not share this information. In addition to this, creditors may only report data to one or two of the agencies as opposed to all three. You may have a collection account that was reported to Experian but not TransUnion and thus your Experian score will be lower than your TransUnion and vice versa.

Data from your credit report goes into five categories that comprise your FICO score. These are:

Payment History (35%) This includes any delinquencies and public records . A record of negative information can result in a lowering of a credit score. Risk scoring systems look for the following negative events: collections, late payments, charge-offs, repossessions, foreclosures, bankruptcies, liens and judgments. Within these items the FICO determines the severity of the negative item, the age or when the negative event occurred and the numbers of these negative events that occurred. Multiple negative items as well as newer negative items have more of an impact on the FICO than less severe and older items. You may have a recent late on your car payment which will have more of an impact that a late which occurred eight months ago.

Amounts Owed (30%) This is how much you owe on each of your accounts. The amount of available credit on revolving (credit cards) accounts compared to what you owe has a large significance in the scoring. This is termed “Revolving Utilization” or “open to buy” This is calculated by taking the aggregate credit card limits and multiplying the results by 100. The higher the percentage is the more of a negative impact this has on the score. A general rule of thumb is this percentage should not be more than 30%.

Length of Credit History (15%) This is when you opened the accounts as well as the time since the last activity. The age of the credit is determined by the oldest “account opened” date as well as the average age of the accounts opened in the file.

Types of Credit Used: (10%) This includes a variety of accounts you have such as revolving (credit cards), installment (loans) and mortgages.

New Credit (10%) This includes your pursuit of new credit which includes credit inquiries (companies that pull your credit) as well as the number of recently opened accounts. There are several kinds of inquiries that may or may not affect the credit score. There are “soft inquiries” which remain on the credit report for 6 months, but are not visible to lenders or credit scoring model. These are the following:

Pre-screening inquiry where a credit bureau sells an individual’s contact information to an institution that issues credit cards, loans or insurance.

-A creditor may also periodically check a customer’s credit report.

-A credit counseling agency.

-A consumer can check their own credit.

 - Employment screening.

 - Insurance related inquiries

- Utility related inquiries.

Overall, credit makes the world go around as the expression goes. It affects your ability to borrow money and at what rate. Those with a lower credit score may be paying much more each month in higher interest rate loans than those with higher credit scores or they may be unable to obtain the loan at all if their credit score is too low. A low credit score can result in someone being unable to obtain a new car, boat, mortgage, credit card or loan they may need. Understanding what credit is and how to maintain a strong credit score is becoming more and more important in our society. As a culture it’s imperative to understand the importance of credit. Just as we want to build up our careers, income and net worth all the while maintaining a healthy and active lifestyle, so must we maintain healthy credit. 

Tuesday, March 4, 2014

How long do I have to wait if I had one of the following; Bankruptcy, Foreclosure, Short Sale?

“How long do I have to wait if I had…”
I receive these questions a lot and even more so now that Short Sales (also known as "pre-foreclosure sales") and Foreclosures have been on the rise in recent years.  With programs evolving over time Fannie Mae, Freddie Mac, VA, and HUD have defined wait times for their respective programs.  The issues arise in that these wait times are following with other criteria that the client must meet.  I have created a chart below to help with time frame, with notes below
Chapter 7 or 11 Bankruptcy
2 years
2 years
2 years
3 years
Chapter 13 Bankruptcy
2 years from discharge
2 years from discharge
2 years from discharge
3 years from discharge
Multiple Bankruptcies
3 years from most recent discharge
3 years from most recent discharge
2 years from most recent discharge
3 years from most recent discharge
3 years*
3 years
2 years
3 years
Short Sale
2 years with 20% down
4 years with 10% down
7 years for max financing (95%)**
3 years***
2 years
3 years****

*Minimum of 10% down.  Purchase of owner occupied residence only.  Rate/Term of all occupancy types
**Fannie Mae only.  Freddie Mac requires 4 years regardless of loan to value
***If no late payments for the 12 months preceding short sale then no wait time is required.
****2 years on deed in lieu of foreclosure as long as there were not more than two 30 days lates in the 12 months leading up to it.

Keys to getting financing after one of these events:

Waiting period has been met.

Customer has clean and re-established credit since the event occurred.

Customer receives an automated underwriting approval through the appropriate program’s underwriting engine.

FHA Back To Work:
HUD (the governing body of FHA loans) has recently come out with a program for people that do not meet the specific waiting periods above.  It is the only program currently on the market that allows a client to waive the waiting period, but has very strict qualifications.  Here they are:
Back to Work – Extenuating Circumstances due to an “Economic Event”
An “Economic Event” is when a borrower has experienced an occurrence beyond their control that resulted in a loss of income, loss of employment, or a combination of both.

The “Economic Event” lasted at least 6 months; and
The “Economic Event” resulted in a 20% or more reduction in the borrower’s household income.

 Documented evidence that the delinquencies were due to the “Economic Event” must be provided.

 Borrower must have reestablished a “Satisfactory Credit” history for at least 12 months.

Borrower must have fully recovered from the “Economic Event.” 

If you have a client in this situation, I would be happy to discuss their options with them.