Arizona Homebuyer Re-Education 101

One of the major fallouts from last years mortgage market meltdown is we are having to re-educate everyone on the kinds of loans we can do and the level of documentation required to write such mortgages. I think when I tell people I can not do this or that type of loan, they think I’m the only one who can’t and think surely another lender can. Oftentimes that is not the case. There are certain programs and features which NO ONE in the industry can do. These things simply vanished last year. Gone. No one does them anymore.

Take for example a question I received this morning:

What if we did an 80/20 loan? We shouldn’t have to put anything down correct?

Arizona HomebuyerBorrowers have long memories because I don’t even think of 80/20’s anymore when I do a pre-qualification. This is because 80/20 loans are no longer available. And it’s not just here at CTX Mortgage either but everywhere in the industry. In fact 80/20 loans have been gone for a while now and will likely never come back again (I’ve even already updated my spreadsheet analysis I give to borrowers – it no longer has any trace of 80/20 type financing). For a while FannieMae’s MyCommunity and Flex mortgages filled the gap left by 80/20 loans. But now that mortgage insurance providers will not insure greater than 95% in declining markets, these loans are no longer an option!

The only 100% loans available these days is FHA or VA. And in realty FHA is not a 100% program. They only lend up to 97% and expect you to come up with 3%. They are lenient on where you come up with this 3% and even allow you to obtain it from non-profits such as AmeriDream, Nehemiah and others. The catch of course is that the seller has to agree to participate in this arrangement and a sellers participation is not always guaranteed. Also, don’t forget that FHA has a loan limit of $346,250 in Maricopa and Pinal county.

Additionally, if you were planning on having the seller pay for closing costs that means you’ll be asking for more from them and costs can quickly add up. While in today’s buyers market you maybe able to find sellers willing to accommodate you, it is still something that needs to be understood as you make a purchase offer. This is especially true if you’re looking at bank owned homes.

So, unless you are willing to purchase under the FHA loan limit, only work with sellers willing to contribute towards your purchase or, you are a military veteran then you will be required to put money down. Remember if you are a first time home buyer or are willing to purchase within a certain restricted/targeted area than you can use the Home in Five bond program for the down payment.

Bottom line: things are different than a few months ago. So, do not assume anything and ask lots of questions. By the way, yes, if the lender gets irritated with all your questions then go on to the next one! Things truly are not the same and you have every right to ask as many questions as you like.

Does a Higher Down Payment Compensate For a Low Credit Score?

A reader reacts to my post titled “Why Lenders Care About Credit Scores” and sends this excellent question:

How much more of a positive effect does putting a greater percentage down on the home purchase vs. a low credit score.

For example, if I have a credit score of 620, but put down 20% down, how much more “pleasing” is this to a lender vs. if I have a credit score of 750, but put 0% down (or only 5%).

Again, this is an excellent question.

In a regular conventional loan, a higher down payment significantly improves your chances of obtaining an approval. So, if you had a 640 score and put 20% down, you’re more likely to get an approval than with only 5% down. So, in that sense a higher down payment is more “pleasing” to the lender. In the case where the credit score is already very high, then the down payment doesn’t play as much of a role. Meaning, whether you put 5% down or 20% down you will most likely get an approval in either case.

Going back to your question, when you have a score as low as 620, putting a higher down payment will help; but it’s still harder to get an approval compared to putting 5% down with a 740+ score. While the down payment helps, it still does not completely mitigate the possibility that the borrower has had serious credit issues in the past. Having said that putting more than 35% down changes everything. Lenders will most likely lend at any reasonable score with so much down as long as other factors are acceptable.

In terms of loan interest rate the new guidelines stipulate rates based solely on the borrowers credit score. So, whether you put 5% down or 20% down your interest rates will be higher if you have a score less than 680.

Bear in mind these rules apply to conventional loans. If you do the FHA program then these rules have no bearing. The FHA program is not credit score driven and hence will not factor in your score to the same extent as conventional. Also, FHA assumes you will not put any money down (it’s a 97% program and 3% to come from gifts). The approval is based on an overall picture involving your income/employment, liquid cash reserves, borrower credit and property type.

This site is for informational purposes only. It is not sponsored or in any way affiliated with the government. If you are in need of a mortgage loan, consult with a licensed mortgage professional. All fair housing and equal housing opportunity laws apply when applying for a mortgage or buying a home. Copyright 2012.