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 | FHA Loans |
| Housing
Expenses = 29% gross monthly income |
| Housing
Expenses plus Long-Term Debt = 41% gross monthly income |
Lenders usually define
long-term debt as monthly expenses extending more than 10 months into the
future. These expenses should not exceed 33 percent to 36 percent of the
homeowner's gross monthly income. FHA-insured mortgage lenders define long-term
debt as monthly expenses extending 12 months or more into the future, and look
for these expenses plus housing expenses not to exceed 41 percent of the
homeowner's gross monthly income.
Before extending credit,
lenders will want to examine the risk of not getting the money back. To do this,
lenders will look at four crucial aspects of your credit history when you apply
for a mortgage:
| History of past credit -
what were the size and terms of past loans? |
| Type of Credit - have you
obtained real estate, auto, personal or other installment loans in the past?
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| Attitude toward credit -
are active accounts current, and is there any recent bankruptcy or judgment?
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| Lapses in employment or debt repayment
- how many unexplained lapses are there, and for how long? |
From the information
uncovered by these four questions, lenders can develop a fair idea of just how
you will handle your responsibilities once you have signed the contract for
repaying the loan. However, lenders cannot examine everything when putting
together a credit history. They have two extremely important limitations on
credit information gathering.
The first limitation is the
Fair Credit Reporting Act, which was designed to ensure fair and accurate
consumer credit reporting. The Fair Credit Reporting Act stipulates that lenders
must certify the purpose for which the information is sought and use it for no
other purpose. The Act also prohibits reports based on subjective information
from neighbors and others concerning character, general reputation and other
personal aspects. Certain other credit information, such as bankruptcy more than
seven years before, is also prohibited unless the principal involved in the
action was $50,000 or more.
The second consumer
safeguard limiting the credit information lenders can use to make a mortgage
decision is the Equal Credit Opportunity Act (ECOA). ECOA prohibits
discrimination in lending based on race, color, national origin, sex, marital
status, age (provided the applicant may legally contract), and the fact that all
or part of the applicant's income comes from a public assistance program.
Lenders are also prohibited
by law from asking:
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| Questions concerning the applicant's spouse, unless
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| the
spouse will be contractually liable, |
| the
spouse's income will be used to qualify, |
| the
applicants live in a community property state, or |
| the
applicant will use child support, alimony or separate maintenance payments
from a spouse or former spouse to qualify. |
questions
concerning future parenting plans (although the lender may ask the ages and current number of
children the applicant has).
Lenders expect homebuyers to
have enough money available to make the down payment of between 10 and 20
percent of the asking price for the house-though FHA and VA loans require
smaller down payment (0 to 5 percent) and to pay their share of the closing
costs (3 percent to 6 percent of the loan amount). If, however, you cannot come
up with a 20 percent down payment, a lender can make you a loan for as little as
5 percent down. He will, however, require you to carry private mortgage
insurance for conventional (not FHA or VA loans), for which you will pay a
premium for the first year and an additional monthly fee in subsequent years.
Sources on which prospective
homebuyers may draw for the down payment and the closing costs include savings,
stocks/bonds, Individual Retirement Accounts (IRAs), pension funds, real state
holdings, life insurance policies, mutual funds or employee savings plans.
Homebuyers may also rely on
another source of funding for the down payment-a gift, or money given by a
parent or other relative that need not be repaid. a person may give another
person up to $10,000 per year without either party being taxed. A married
couple, therefore, could give a child or spouse as much as $40,000 for a down
payment tax-free. Remember, however, that if you use gift money for a down
payment, you will need to present a letter so stating and signed by both the
giver(s) and the receiver(s) to your lender.
Mortgage lenders send a form
to the homebuyer's savings institution(s) to verify the amount available for
purchasing the house, as well as the amount of outstanding loans with that
institution.
Mortgage lenders also
examine the real estate being purchased to make sure that, in case of
foreclosure; the lender has a salable property. The property's acceptability is
established by an independent appraisal.
The appraiser looks not only
at what the home is worth today, but how the neighborhood's dynamics will affect
the property value in the future. The three main points the appraiser checks
are:
| Physical security of the property.
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| age,
structural soundness, landscaping, etc. |
Location.
| The
kind of neighborhood, surrounding houses, access to transportation,
commercial development nearby, etc. |
Local
government's plans for the area.
| how zoning and taxes will affect the property in the years to come. |
Your lender has made all the
checks. Your income, credit, assets, property and all necessary documentation
have been scrutinized. Now comes the big decision.
If the lender's decision is
to extend the credit, you will be notified, usually through a commitment letter.
The mortgage lender can approve the homebuyer for the entire amount asked for,
or a lesser amount based on the borrower's qualifications. The commitment terms
relating to interest rate and/or discount points may be firm at the time of
commitment or conditioned on the market rate at the time of closing. If the
decision is not to extend the credit, the lender has 30 days from the acceptance
of the completed application to notify the prospective homebuyer. This
notification must also include the reason(s) for the rejection.
If the loan is eligible for
government insurance or guaranty, written agreements stating so are issued.
These can be either an FHA or Firm Commitment or VA Certificate of Commitment.
Conventional loans (not FHA or VA) receive an application for private mortgage
insurance if the down payment is less than 20 percent of the purchase price.
By now you should feel a bit
more at ease about what happens after you apply for a mortgage. If you have a
good credit rating, it will speak for itself. Also, it is up to the lender to
prevent homebuyers from over-extending themselves to the point of losing their
homes. Prudent underwriters should prevent this from occurring.
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Send
mail to randy@randydurham.com
with questions, comments or requests for info. Copyright © 1999-2008 Randy Durham ,LLC
Licensed in TN & GA (423) 664-1900
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