This table shows the risk level to lenders based on the loan balance compared to your homes value. For example if you apply for a 50k loan and the home is worth 100k the loan to value ratio would be 50% and would be considered extremely low risk.
The credit score risk table shows the risk level to the lender based on your credit score.
By Kenneth R. Harney August 26
If you’ve got a low FICO credit score but believe you can handle monthly mortgage payments instead of rent, here’s some potentially good news: The government is willing to give you a better shot at obtaining a low-down-payment home loan from the Federal Housing Administration.
Under a key policy change that took effect last week, lenders nationwide have more leeway to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines but may have below-par FICO scores. Some analysts say the revised approach could create a pathway for as many as 75,000 to 100,000 new loans a year to borrowers who are now frozen out of consideration.
FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. Though FHA for years has accepted applicants who have FICO scores in the 500s, the practical reality has been that most lenders ignore borrowers whose scores are under 620 or even 640. Lenders have avoided low-FICO borrowers in large part because FHA itself has employed a statistical evaluation system that scrutinizes — and sometimes severely penalizes — banks and mortgage companies that make what FHA considers too many “high-risk” loans compared with other lenders active within the same geographic area.
Under the revised policy, lenders will be judged under a fairer metric. This will allow companies located in communities with large concentrations of people with below-average FICO scores — these people tend to include young, first-time buyers, minority households and moderate-income working families — to make loans without fear of being penalized solely because of their business focus.
[Ken Harney: Already full of complications, closings may soon grow even more worrisome]
“This is going to really open the doors — I think it’s a huge step in the right direction,” says Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif. “There are a lot of people out there who have good credit but low FICO scores simply because they lost their jobs during the recession” and got behind on paying bills. “They are working two jobs. They’ve been slowly rebuilding their credit and have been saving money for a down payment. They are good risks” — they’re not going to mess up on mortgage payments. Equally important, Ziroli told me, they are eager “to build wealth by owning a home” rather than paying rent to a landlord. Ziroli’s company originates roughly 7,000 FHA-insured loans a year, many to Latino and African American first-time buyers.
David H. Stevens, president and chief executive of the Mortgage Bankers Association and a former head of the FHA, says the revised policy should help some borrowers whose FICO scores in the low 600s and upper 500s have barred them from obtaining any type of mortgage, FHA or otherwise. But those who fully qualify under FHA’s regular underwriting standards — reliable income, acceptable debt-to-income ratios, solid ability to repay — “will now be more likely to find some lenders who will do their mortgages.”
That’s significant, he said. Even so, many lenders will not rush in and immediately start doing more low-FICO loans. They’re going to wait and watch how FHA treats lenders that do increased volumes of these mortgages.
[Ken Harney: Saying yes to a new car can make a mortgage lender more likely to say no]
“So this emphasizes the importance of shopping,” Stevens said in an interview. If the first couple of lenders say no, mortgage applicants should keep shopping until they locate a lender that — encouraged by the new flexibility from FHA — says yes.
Why is the government opening FHA’s doors wider for buyers who previously would have been rejected? In large part it’s because just about everybody — including Federal Reserve Chair Janet Yellen, prominent economists and financial experts — agrees that credit standards have gotten too strict in the years since the bust, especially given the recent payment performances of borrowers.
Brian Chappelle, a principal at the housing consulting firm Potomac Partners and a nationally known expert on FHA, told me via e-mail that mortgages with low FICO scores originated during the past two years “are performing better than the total mix of FHA business [including loans with much higher scores] from 1999 through 2011.” Serious delinquencies of 90 days or more where applicants had FICOs below 640 were at just 1.82 percent as of June 30.
The takeaway here: Just because your credit reports and scores continue to bear the wounds of the recession and financial crisis, don’t assume you can’t buy a house. Shop aggressively among FHA lenders in the coming weeks and months, and you’re likely to find a better reception than you might have feared.
Freddie Mac and Fannie Mae have an ongoing effort in place to enhance accuracy and quality of loan data. One piece of this effort is to standardize the way properties are characterized during an appraisal. The categories below outline the new standards for documenting the condition of a dwelling during the appraisal process.
Appraisers must now provide one rating and at least one, but no more than two view factors to describe the overall effect on value and marketability of the view associated with the property.
Appraisers must enter the total number of full baths and partial baths above grade by separating the full bath count from the half bath count with a period (.). ie. 3.2 = 3 full baths and 2 half baths above grade.
Appraiser must select one rating that best describes the overall condition of the subject property and each comparable property. In addition, the appraiser must indicate if there has been any material work done to the kitchen or bathrooms in the prior 15 years. Overall condition ratings are summarized below:
|C1||The improvements have been very recently constructed and have not previously been occupied. The entire structure and all components are new.|
|C2||The improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. Virtually all building components are new or have been recently repaired, refinished or rehabilitated. All outdated components and finishes have been updated and/or replaced with components that meet current standards. Dwellings in this category either are almost new or have been recently renovated and are similar in condition to new construction.|
|C3||The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated. The structure has been well maintained.|
|C4||The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate.|
|C5||The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs, rehabilitation or updating. The functional utility and overall livability is somewhat diminished due to condition, but the dwelling remains usable and functional as a residence.|
|C6||The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many or most major components.|
Kitchen and bathroom ratings must also be rated with Not Updated, Updated or Remodeled along with a timeframe in which work was completed.
|Not Updated||Little or no updating or modernization. Description includes, but not limited to new homes. Those over 15 years are also considered not updated if the appliances, fixtures and finishes are predominately dated. An area that is ‘Not Updated’ may still be well maintained and fully functional and does not necessarily imply deterioration.|
|Updated||The area of the home has been modified to meet current market expectations. These modifications are limited in terms of both scope and cost. An updated area of the home should have an improved look and feel or functional utility. Updates do not include significant alterations to the existing structure.|
|Remodeled||Significant finish and/or structural changes have been made that increase utility and appeal through complete replacement and/or expansion. A remodeled area reflects fundamental changes that include multiple alterations for example: replace of cabinets, tile replacement, relocation of plumbing/fixtures/appliances, significant structural alterations (relocating walls and or addition of square footage. This includes complete gutting and rebuild.|
The appraiser must provide one rating and at least one, but not more than two location factors to describe the overall effect on value and marketability of the location factors associated with the property.
Quality of Construction Rating
The appraiser must select one rating that best describes the quality of the property and each comparable property.
|Q1||Dwellings with this rating are usually unique structures that are individually designed by an architect for a specific user. The workmanship, materials and finishes used throughout the dwelling are of exceptionally high quality.|
|Q2||Dwellings with this quality rating are often custom designed for construction on an individual property owner’s site. Dwellings in this rating are also found in high-quality tract developments featuring residences constructed from individual plans or from highly modified or upgraded plans. The workmanship, materials and finishes used throughout the dwelling are generally high or very high quality.|
|Q3||Dwellings in this rating are residences of higher quality built from individual or readily available design plans in above-standard developments or individual property owner’s site. Workmanship exceeds standards and many materials and finishes have been upgraded from “stock” standards.|
|Q4||Dwellings with this rating meet or exceed the requirements of applicable building codes. Standard or modified building plans are utilized. Materials, workmanship, finish and equipment are of stock or builder grade and may feature some upgrades.|
|Q5||Dwellings with this rating feature economy of construction and basic functionality as main considerations. Such dwellings feature a plain design using readily available or basic floor plans. These dwellings meet minimum building codes and are constructed with inexpensive materials with limited refinements and upgrades.|
|Q6||Dwellings with this rating are of basic quality and lower cost; some may not be suitable for year-round occupancy. Such dwellings are often built with simple plans or without plans and utilizing the lowest quality materials. Electrical, plumbing and other mechanical systems and equipment may be minimal or non-existent. Older dwellings may feature one or more standards or non-conforming additions to the original structure.|
An appraisal is an opinion of value at the time the home is reviewed by an appraiser and is typically valid for four months. The condition of the housing market and comparable dwellings that have recently sold can affect how appraisals are rated at any given time.
A Fixed-Rate Mortgage or Fixed Rate Loan applies the same interest rate toward monthly loan payments for the life of the loan. Fixed-Rate Loans are more straightforward and easier to understand than Adjustable Rate Mortgages (ARMs) or ARM mortgages. They are also more secure for the buyer, and are popular with first-time homebuyers looking for home mortgage loans. Since the lender takes a higher risk, fixed-rate mortgages generally have higher interest rates than ARM mortgages. For example, a lender of home mortgage loans can offer a 30-year fixed rate loan to a homebuyer at a 7.0% interest rate. The fixed rate loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. Conversely, if the market interest rate decreases to 5.5% for home mortgage loans, you, as the borrower, will continue to pay the 7% interest rate.
No change in monthly principal and interest payments regardless of fluctuations in interest rates
More stability may give you “peace-of-mind”
Fixed-Rate Loan disadvantages include:
Higher initial monthly payments compared to those of adjustable rate mortgages
An adjustable rate mortgage, which may qualify as a second mortgage loan, does not apply the same interest rate toward monthly payments for the life of the loan. Throughout the life of that loan, the homebuyer’s principal and interest payment for second mortgage loans will adjust periodically based on fluctuations in the interest rate.
For example, a lender of second mortgage loans could offer a 30-year adjustable rate mortgage loan to a homebuyer at an initial 6.5% interest rate. During an adjustment period for the ARM Mortgage loan, the market interest rate could rise to 8.0, resulting in a significantly larger interest payment. Similarly, the market interest rate could decrease to 6.0%, resulting in lower interest payments.
Initial payments lower due to lower beginning interest rate, usually about 2 percentage points below the fixed rate
Ability to qualify for a higher loan amount due to lower initial interest rates
Lower interest payments if the interest rate drops over time
Interest rate caps limit the maximum interest payment allowed for the loan
ARM Mortgage disadvantages include:
Initial lower interest rate and monthly payments are temporary and apply to the first adjustment period. Typically, the interest rate will rise after the initial adjustment period.
Higher interest payments if the interest rate rises over time.
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-Extremely low payments…
-Interest Only loans are typically Adjustable Rates with fixed terms of 1,3, 5, 7, and 10 years in length.
-Usually the adjustable term matches the interest only term. That means after the fixed period the loan simultaneously becomes adjustable and the payment amortizes with principal and interest.
An Interest only mortgage can be an excellent choice for some borrowers. They are designed to offer the lowest payment possible. Although none of the payment goes toward the principal you still receive the appreciation of your homes value. Many savvy homeowners select this option so they may invest the difference of monthly savings.
Because of the lower payment, the interest only loan may mean that you can buy more home than with a fully amortizing mortgage. Of course, you may make additional payments toward your principal balance at any time.
The reduction on monthly bills with the option of reducing your principal owed when the financial means are available is a very powerful option.
*Interest only loans can be risky.