Tips For Borrowers

In today’s volatile market, borrowers need to be aware of what is considered when they shop for a mortgage loan.  Information can change from one day to the next, but here are a few tips:

Mortgage Interest Deduction

There has been some controversy over the mortgage interest deduction (MID) that can currently be taken on homeowner income tax returns.  Recently, the National Commission on Fiscal Responsibility and Reform recommended changes that would have drastically reduced the size of these deductions.  However, while other parts of the this proposed reform will likely be adopted, luckily for borrowers, this part wasn’t.  For now, housing recovery is crucial to the economy so it is unlikely that Congress will reform MID because that would only serve to weaken the already struggling housing market.

FICO Score

FICO stands for Fair Isaac Corporation, a public company that provides analytics and decision making services including credit scoring.  Your credit bureau (FICO) score is very important to lenders when you apply for a loan because it reflects numerous aspects of your credit history such as how established your credit is (i.e. how long your credit history is), how timely you pay your debts, and what your debt ratio is (this tells lenders how strong your ability is to pay your debts with your current income).  The higher your credit score the better.  Typically lenders want to see a credit score of 620 or above.  Very recently however, two of the largest FHA lenders in the nation announced they are lowering the minimum required score to 580.  Wells Fargo for example, may go as low as 500.  However, as with any increased risk, there has to be balanced security.  So with a lower credit score, the lender will want more of a down payment (up to 5 – 10% of the purchase price as opposed to the standard 3.5%) because with a higher down payment there is less risk of default.  Wells Fargo is requiring 10% down for FICO scores between 500 – 579.  But at least with these changes, there is an opportunity for borrowers who have struggled in the current economy to get lending without having to wait years to reestablish their credit.

Unemployment

Lenders will typically want to see a strong employment history to lend.  In the current economy, a lot of people are out of work and believe that this automatically prevents them from lending opportunities.  In fact, in the past you could not get lending until you had recovered from an economic hardship (for example, became gainfully employed).  Now however, the U.S. Treasury Department has established a Hardest Hit Fund in which they’ve allocated $7.6 billion to specific states such as Arizona for unemployed homeowners.  These funds offer up to $3,000.00 per month for up to 36 months in mortgage payment assistance to help unemployed homeowners avoid foreclosure.

Loan Guidelines

Many are under the impression that loan guidelines will become less stringent over time.  However, the U.S. Treasury Department recently recommended that Fannie Mae and Freddie Mac, the two major mortgage investors of our nation, be eliminated.  What this would mean for you and me is that loans will become harder to attain and cost more.  If this change occurs, it isn’t likely to happen for 5 – 7 years so the truth is, now is actually the time to get funding to lower payments or buy a home.

Equity

Typically in the past homeowners needed to have equity to get financing.  However, this is no longer the case.  Fannie Mae and Freddie Mac for instance, will refinance up to 125% of a home’s current loan value with all other qualifications being met.  In light of this, if your current home value is not too far below the amount owed (or too far “upside down”), you may be able to refinance.  For loans not owned by Fannie Mae or Freddie Mac, there is the FHA “Short Refi” program.  Under this program homeowners who are current on their mortgages can refinance for up to 115% of their home’s value.  So if you owe $115,000.00 on your home, you can refinance with an FHA Short Refi even if your home’s value is as low as $100,000.00.  The time to do this is now, because so few people have taken advantage that Congress is considering diverting the funds for this elsewhere.

If you’re considering buying a home or refinancing your current loan, be sure to educate yourself on what is going on in the market today.  There have been  lot of changes recently and we continue to see them everyday.  The best investment decisions will be made by those who keep up with the ever-changing market!

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2. Renting Costs More Than You Think!
3. Saving Money on Your Homeowners Insurance in Arizona
4. Short Sale Q&A
5. Home Buyer – Common Mortgage Types