Do you want to buy your own house for your family? Do you want to buy some property in order to start a business? Before you think about doing that, you need to understand what mortgages are first. Welcome to your online classroom and get ready to learn all about mortgages with your host, Merrill Chandler. Learn the step-by-step process on what requirements you need in order to get a mortgage. Learn the differences between The Federal Housing Administration and Fannie Mae, learn how to balance your credit score, and learn some tips and strategies on how to get a mortgage.
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It dawned on me after 130 episodes. I have never gone through the structure of what is required to qualify for a mortgage. What types of mortgages are out there, who sponsors the mortgage, credit scores, minimums, debt-to-income ratios, the whole nine yards? We are going to knock it out of the park and we’re going to give you not just the bird’s-eye view but the boots-on-the-ground review of what is required to qualify for a mortgage and how your fundability can make it happen. Take a look at the things that have been going on. If you recall, last summer of 2020, there was this rush that certain regulatory agencies were adding an extra fee because the mortgage rates were so low.
They were adding an extra fee because the rates were so low. They wanted to pay back some of the losses that Fannie Mae and Freddie Mac, the government-backed mortgage systems. They had needed to bail out since the 2008 mortgage crisis. This fee was being charged. Since then, that was repealed because there was an outrageous uprising among mortgage buyers saying, “Why should we be penalized with a tax that we didn’t vote for or that didn’t come through the legislature.” Huge brouhaha on that end, then over the last 2 to 3 months, mortgage rates are plummeting and there are huge opportunities for refinance rates under 2%.
It recently crawled up a little bit, but these are outrageously low rates. I wanted to weigh in and give the thousand-foot view and some specific ideas. If we don’t implement these, there will be tragedies. We want to implement specific strategies that are going to allow you to refinance or obtain your first or a new mortgage. Let’s go over what the requirements are for a mortgage. Depending on how you break these down, there are 5 to 6 areas that are counted in whether or not someone will approve you for a mortgage.
There’s a credit score, your down payment, and your income and employment history, which is the amount of money you make and how long you’ve been making it. There are savings like liquid cash that’s available, not necessarily money that’s in the stock markets, real estate developments, or equity, but liquid cash savings. How much is your debt load? Meaning how much of your debt-to-income ratio or how much of your gross monthly dollars are being spent to service or pay for your debt, including the interest. Separately, how much total debt you have in loans and unsecured like credit cards and things. The last factor, which is why it makes it 5 or 6, is the loan amount itself. Those are the six areas that we need to focus on.
Let’s take a look at scores first. When somebody calls it a conventional loan, that’s a term that’s thrown around a lot. Conventional means that one of the governments backed agencies that are going to buy the loan from the lender that you go with. That’s someone who pays to put the loan on the house that you’re buying. Those loans are then bought back by Fannie Mae and Freddie Mac. Fannie Mae is for single-family homes up to duplexes and Freddie Mac covers multifamily properties. These two agencies require a minimum of 620 to be approved at all.
When I say that, I’m saying there’s a range. The top tier credit score to get the best rates, what’s known in the industry as A Paper meaning its top paper, is a 740 FICO score, which is the middle score. If you have 750, 710, and 740, that 740 is the middle score. It’s not an average score, it’s a middle score. They’re choosing whatever the middle score is. It is a minimum of 620 to even get a Fannie or Freddie-backed loan. Those conventional go up to hundreds of thousand dollars, including millions of dollars for what are called Jumbo Loans.
You want to check with your local mortgage broker and find out the cut-off because FHA loans may vary by your geography and the value of the homes in your area. You’ve got to check out conventional loans, and when does a conventional loan hit the level with it’s called a jumbo loan that varies by geography. Let’s take a look at the Federal Housing Administration, which is another government back. It’s another government-backed loan and it’s offered by most mortgage brokers out there. An FHA loan can vary anywhere between 356,000 all the way up to 822,000 by geography. Those are the ranges. It doesn’t go lower and it doesn’t go higher to qualify for an FHA. You can have as low as a 580 FHA.
Just so you know, with the conventional or the Fannie Freddie loans, 580 is the minimum and it requires a 3.5% down payment if you’re above that 580. Sometimes, you can get approved based on these other factors that we’re discussing. Sometimes, you can get approved for a mortgage for less than 580 but you have to put a minimum of 10% down on that property. I know you were in the flow of the show. I’m in the middle of post-production here, reviewing what I said, and it sounds very confusing. Let me draw some straight lines here, so we know exactly what we’re talking about. I was talking about the FHA loans versus Fannie Mae loans. Let’s define our terms. The actual functions of the government are to provide certain mortgages. That’s FHA. Those government agency loans have different underwriting criteria. The rest of everything is spot on.A FICO score is one way to determine that someone is honorably paying their debt. Click To Tweet
When I said government-sponsored or government-backed, the formal term is Fannie Mae and Freddie Mac. I wanted to make sure that we’re clear on the terms, which means they’re separate corporations but they are backed by the government. When Fannie Mae and Freddie Mac buy loans from your mortgage broker or banks and they fail, the government backs those loans through Fannie Mae and Freddie Mac. Fannie and Freddie are not government agencies like the Federal Housing Administration, FHA, and the VA loans. Fannie Mae and Freddie Mac are government-sponsored. Backing is financial if the loans fail.
Those scores are the baseline, which means that you have to have all the other factors we talked about like down payment, income, longevity at work savings, debt load, etc. All have to be much better. The USDA Rural Housing Loans requires 640 minimum. Of course, the higher the score, the better, and jumbo loans have to be a minimum of 680. Whatever definition in your geography, in your state or locale, the jumbo loan amount has to be a minimum of 680. We want it to be far more than the minimums. Think of score, down payment, income, employment longevity, savings, debt load, and the loan amount as silos. You’ve got six silos. Let’s say they’re worth ten points each. In order to have an absolutely perfect loan package to deliver to your mortgage broker, you need ten points from each one of those for a total of 60 points. These are made-up numbers, but I’m trying to weave the process of mortgage approvals with you.
That’s a total of 60 points, but let’s say you only need 40 points to be approved. The higher quality and fundability of your credit profile, the higher your score then requires less down or you are going to have higher debt load or your existing debts can be higher and your loan amount can be higher. It’s just making sure that we hit that 40 number and given certain minimums. The FHA, Fannie, Freddie, etc. don’t care where the points come from in this underwriting process. The underwriting process requires you to hit 40, again, made-up numbers, but there’s a total of 60 available. Whatever we can do to improve our credit that we have the best fundable profile possible, we can have worst conditions of everything else. Less time at employment, less income, less savings, and more debt. Each one of those things come into play.
Let’s talk about debt and income because as I said, debt load matters. The familiar term is DTI or Debt-to-Income ratio. That means before taxes, what percentage of my gross income gets used in paying for my debts. Debt-to-Income ratios include how much I am paying. It’s debt service or housing costs against my income. In the last few years, normally, conventional laws, the Fannie and Freddie, come in at 43% that income ratio is allowable. Anything above that, they say no. FHA and USDA loans are also 43% and VA loans are 41%. I coach my tribe to stay anything near 35%, so you’re in the sweet spot and you’re fundable like a mad person. Over the last few years, a situation has risen where some calculations of DTI are off. They’re not dependable calculations. There’s been a thing called a GSE patch, which allows the debt-to-income ratio to be lowered in the calculations.
Here’s what’s crazy. According to the reports, there have been over 3.3 million additional people become homeowners because of this patch. Think of a software patch where you’re making something work because the system is broken. The Debt-to-Income ratio has not been as important of a consideration. In fact, in a study, it was found that Urban Institute says that debt-to-Income ratios have not been typically calculated fairly and they’re asking the Congress to remove the Debt-to-Income ratios as part of the calculations for approval of a Fannie, Freddie, FHA, or VA loan mortgage. That would allow millions of more people to have home ownership. To quote them, “FICO scores are often better predictors of a borrower’s ability to pay than the DTI is.”
That’s why there’s a brouhaha brewing of wanting to get rid of the DTI from the mortgage approval mix at all. I happen to agree, from my experience, both working with clients and students in helping them qualify for mortgages. Everybody wants to keep their home. Usually, their mortgage payment is the last bastion if there’s unemployment or COVID wiped them out. They want to do whatever it takes to keep making their mortgage payments. It is the last bastion of protecting their financial future. I applaud getting rid of the DTI as one of the factors for approvals because in Debt-to-Income ratio, you can carry higher debt, including what you’re paying for your mortgage. FICO scores are way better predictors. From my vast experience, FICO scores are way better predictors of the ability to determine someone paying their debt off and keeping out of default.
Now that we have the rules of the game, the last thing that I wanted to cover here is, what does a lender measure? A credit score, down payment, income, and employment history. How much money did you make, how long have you been making it, how much liquid savings, existing debt load, and the loan amount? Once we have those areas and the minimum scores, then we need strategies to help us build our profiles and establish not just higher credit score but to make improvements in our overall ability to receive a mortgage. I started this whole thing as many of us are looking to refinance. These things are not in order, but here are some strategies for you to ensure success in getting a refi or getting a new mortgage. Number one, if you’re refinancing, make sure that your highest priority is to pay your current mortgage on time.
Remember in my bootcamp, I talk about the 24-month look-back period in 3, 6, 12, and 24-month increments. The longer you’re paying on your mortgage, the better you look to anybody who wants to refinance you. Number one, pay your current mortgage perfectly on the due date. The second thing is you want to maintain low on revolving account balances. That proves that you don’t need money out there even if it’s not true and you need money but you want to make sure that the message you’re sending with your borrower behaviors is that you can maintain low to zero balances for as long as possible. Again, over that 24 months look-back period, 3, 6, 12, and 24 months makes you more valuable as a perfect mortgage borrower and the likelihood of you being approved is going to go up, so maintain lower balances. If you have to carry a balance or you can do it, 10% is better than 20%, 20% is better than 30%, or 30% is better than 40%. Whatever you can do to get those down, do so.Always make above the minimum payment. Never make a minimum payment. Click To Tweet
If you have any unpaid charge-offs or collections, use the process called Pay-for-Delete to remove those collections or charge off. The less bad debt that you have, things that you’ve got laid on, or that’s been charged off or collections, those accounts are significantly against you. The best strategy is not to pay them off but to contact the collector or contact the creditor and say, “If it’s worth it to you to delete this, it’s worth it to me to pay it. Will you delete this negative notation and derogatory account from my credit report upon payment?” Then, negotiate the payment.
If you get a yes from it, two things happen. Number one, you get a credit score boost because they delete that account from your credit report. Number two, you don’t have any old debt following you later on down the lane because it’s been paid and your fundability increases, not just your credit score, because you have made right with other creditors. Every creditor wants to see that you are the type of person that, in your integrity, you are willing to make it right. That has high value when it comes to underwriting or approving your mortgage. If you have to carry a balance on any of your revolving accounts, then always make above the minimum payment.
Never make a minimum payment because the automatic underwriting systems are tracking what you owe, the day you pay, and the amount you pay. If the minimum payment required is all you’re paying, that sends a message, “I haven’t got anything else.” Whether it’s true or not, we want to make sure that the system knows you’re doing your best. Always make $5, $2, or $7 more. Never make the minimum payment. Always make more than the minimum payment. I keep going back to it but all FICO 40 borrower behaviors rely on the 3, 6, 12, and 24 months of good borrower behaviors. The longer we can do it, the better off we are.
If you’re looking to get refinanced in three months, do these behaviors for three months. If you’re casting forward a little bit further, you’re looking to buy a new home out in the future, then now is the time to change your behaviors so that lender out there looks at you and says, “This is a great borrower and I want to lend the money.” If we have improved our borrower profile or our credit profile by using these simple strategies, then we may be able to have a higher credit score and lower down payment. Our income doesn’t have to be as much to get approved.
We can have fewer savings and still get approved. We may have higher debt and still get approved. We may qualify for a higher loan amount. You see how this works. If we do the right things to improve our profile and borrower behaviors, then we can have the best chances of getting approved for a mortgage. Of course, stay way above the credit score minimums required for approval. Thank you for joining me on this edition of the Get Fundable Podcast and here’s to you and qualify for either a refi or a brand-new mortgage.
- Federal Housing Administration
- USDA Rural Housing Loans
- How Debt Burden Affects FHA Mortgage Repayment, in Six Charts – Urban Institute study
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