Buyer’s Home Guide

Whether you are a first time home buyer or seasoned buyer, the process can sometimes become confusing. This guide is designed to help you focus on the most important aspects you want in your new home.

Financing guidelines make it easy for you to understand what lenders currently look for when evaluating a buyers purchasing power. As many buyers are confused about the different costs involved beyond the down payment, there is a section outlining all the costs associated with buying a home. Some of the costs are a one-time fixed payment, while others represent an ongoing monthly or yearly commitment.

Buying a home is exciting and knowing the basic process up front will help to make this process a smooth transition for you and your family.


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How Much Will My Credit Score Drop with A Short Sale on My Home

How Will My Credit Be Affected After A Short Sale

A FICO score is a how our credit worthiness is measured. The FICO score takes into account the amount of debt one carries as any time, how long a person has been using credit to make purchases, and payment history. The FICO score is used by banks to determine if we will be granted credit. The most stringent of all forms of credit are mortgage loans and while the credit score look good overall the banks will look at payment history to determine if they will lend money. And again mortgage defaults and late payments are not good.

FICO scores range between 350 and 850 and according to Fair Isaac Corporation a score of “650″ is considered fair and “750″ or higher is considered excellent. It is not necessarily whether you have a foreclosure or short sale on your credit that is harmful, it is the late payments that will bring your score down.

Fair Isaac released a report that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Here is a breakdown of how your FICO score is affected by late payments:

  • 30 days late: 40 to 110 points
  • 90 days late: 70 to 135 points
  • Foreclosure, short sale or deed-in-lieu: 85 to 160
  • Bankruptcy: 130 to 240
  • Foreclosure or Deed-in-Lieu of Foreclosure
    Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 380.
  • Short Sale
    The effect of a short sale (providing the sellers are more than 59 days late) on a seller’s credit report is identical to that of a foreclosure and can result in a loss of 200 to 300 points. If your score prior to a Short Sale was 780, your credit could drop to 480. Getting that score back up requires making payments on time, and not over extending your credit limit-not maxing out your credit cards. Only using a portion of credit available to you is apparently a key factor.

The range of points is based on Fair Isaac’s proprietary scoring algorithm.

Some people that I work with told me that their scores dropped to the high 500′s after a short sale, but then within months was back up to the high 600′s and low 700′s.

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Are Adjustable Rate Mortgages (ARM’s) Becoming Popular Again?

Adjustable Rate MortgagesAdjustable Rate Mortgages are Gaining Momentum Once Again

Adjustable rate mortgages make sense for anyone who believes they will not be staying in their home for the long term. What got so many people in trouble over the past few years is buyers eager to buy a home assumed that by the time the rate adjusted, there would be enough equity in the property to refinance to a fixed rate mortgage. WRONG – it didn’t happen that way. Many of these borrowers were on a 3 and 5 year adjustable rate mortgage and really got hurt when the market took a dive.

If you are almost certain you will only be in your home for 5 to 7 years then the new ARM’s might make sense as there can be a significant savings with an ARM versus a 30 year fixed rate.  Generally ARMs are  one to one and a half percentage points below those of 30-year fixed-rate loans.

The most popular ARMs are the “5/1″ and “7/1″ – interest rates are fixed for the first 5 or 7 years, then adjusted annually at a capped rate. It is important when evaluating these types of loans to understand what the “cap” is what index the rate is tied to.

The FHA 5/1/1 ARM is appealing to many borrowers. Essentially the rate is fixed for the first five years, then will adjust 1% each year for up to 5 years. So if you started out at 3.5% the highest the rate can ever go is 8.5%.

Lenders are much more conservative in qualifying borrowers for ARM’s. In many situations they are using the adjusted rates to qualify the borrowers to ensure that when at the end of 5 years and beyond using the worst case scenario for the rate adjustment that the buyer will  be able to handle the payments.

If you are someone who plans to stay in your home for more than the term of these adjustable mortgages, then a 30 year fixed rate is for you. Based on history, speculation that the market will appreciate enough for you to refinance has not been a good ally.

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Why Morgage Loan PreApprovals May Not Be A Sure Thing

At our office meeting today, one of the agents sold his listing, got bank approvals but then announced he was looking for back-up because he did not feel the buyer was going to perform. So my questions – if the buyer was pre-approved prior to making the offer – why back out now. The key component is that maybe the buyer was not pre-approved. There is a difference between pre-approval and pre-qualify, and neither one is a sure thing until final approval by the underwriter.

Pre-qualifying a buyer is taking their word as to income, expenses and possibly credit ratings. Pre-approval is verifying what the buyer claims about their ability to purchase a home is indeed fact. Two different things.

A preapproval letter may be expressed in terms of a maximum monthly mortgage payment, a maximum loan amount, and/or a maximum ratio of loan to value. If a mortgage payment is shown, the interest rate used to calculate it may be shown, but the rate used is not guaranteed and won’t be until the borrower submits a complete application and the rate is locked.

If a maximum loan is specified, it will be contingent upon an appraisal of some minimum amount. The preapproval also will be dependent upon verification of information provided by the borrower and underwriting approval of the transaction. Check the date on the pre-approval letter.  If interest rates have increased the buyer may no longer qualify for the higher mortgage payment.

A mortgage preapproval is stronger than a prequalification because preapproval includes an assessment of the borrower’s credit, but prequalification does not. A preapproval is weaker than an approval, however, because the property value is preliminary and the mortgage rate is not known.

In addition, lenders may not take the same care in verifying the borrower’s income or assets for a pre-approval as they would for an approval. Also, pre-approvals do not take into consideration the any conditions the underwriter may impose on the borrower. While some loans look good on the surface and the buyer is strong, I have seen many a buyer not get final loan approval.

Lenders are never obligated to make a loan that does not meet their conditions. Conditions have become much tougher than they had been, and especially so for self-employed borrowers, who now must run a gauntlet of rules and checks.

The bottom line for home sellers is that the reliability of preapprovals is not what they once were, especially for self-employed borrowers. While I always have my clients get preapproved prior to making an offer, we never know the final outcome until the buyer is in for final approval.

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Buyers With Credit Scores of 500 Are Eligible for A FHA Loan

Wells Fargo is willing to work with buyers who have credit scores as low as 500. These are FHA loans. The criteria is a 10 percent down payment rather than the usual 3.5 percent for those with credit scores above 600.

Also, the funds buyers use as down payments cannot come from any form of assistance program (Grant Money) or be a gift. 3 percent seller contributions are still allowed. For credit scores below 600 you will need to have two months of reserves in the bank for PITI (principal, interest, tax and insurance).

  • 10% down payment for home buyers with credit scores of 500 to 579
  • 5% down payment for home buyers with credit scores of 580 to 599
  • 3.5% down payment for home buyers with credit scores above 600

For individuals who have faced some hardships over the past couple of years and are now back on their feet financially, this is an encouraging sign that mortgage financing may be easing a bit to help the housing recovery.

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