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Mortgages are About to Get a Little Easier

A change in FICO score reporting and loosening of lender qualifying standards are about to open for many hopeful home buyers.

It’s no secret that a low credit score can keep a would-be borrower from qualifying for a home loan. Lenders look first to that critical three-digit number to decide whether to approve a loan for an applicant. If it falls below a certain threshold, they’ll deny the application.

Although many still believe that banks are approving loans only for the highest-score borrowers. Mortgage standards are quite lenient: a borrower with a 620 score is still eligible for a conventional loan. For government-insured FHA loans, 580 is the minimum to get the maximum loan of 96.5%.

 

The FICO score was developed by Fair, Isaacs, and Company in 1989. As a way for lenders to analyze the risk presented by prospective borrowers. The mathematical model, which is proprietary, considers factors such as:

  • credit card balances
  • number and age of accounts
  • and derogatory entries

Among the “derogs” may be a history of late payments, collection accounts and public record items, such as civil judgments and tax liens.

A borrower scoring at the lower end of the FICO range will typically have some combination of these negative items on their credit report. But for many borrowers, a change in the FICO calculation is giving them a welcome increase in their score.

Starting on July 1, 2017, FICO will no longer consider recorded tax liens or civil judgments when it comes up with that all-important three-digit number.This means that a borrower who lost a Small Claims Court action, or who has one or more tax liens on his report may see a higher credit score soon. Someone who has been struggling to get their scores into qualifying range for a conventional loan (620 or higher) may suddenly discover that they can now qualify.

This good news does not come without some qualifiers, however. Just because the credit score is higher does not mean that the lender will disregard certain negative items on an applicant’s credit report. Tax liens and judgments will still show up and will have to be dealt with, but now they won’t lower the credit score.

Lenders use the credit score for more than deciding whether to approve a loan. They also set the borrower’s rate based on a combination of the credit score and loan-to-value ratio, or LTV. This is called, “risk-based pricing” in financial lingo. A borrower with a 620 score will pay about .75% more in rate for an 80% loan than a similar borrower with a 740 score. To put this into perspective, the lower-scored borrower would pay about 8% more per month than his 740 counterparts.

There will be benefits for some borrowers in the middle of the credit range, as well: a 20-point improvement, from 660 to 680, could improve a borrower’s interest rate by .25%.

 

The mortgage door is about to be opened a bit wider on July 29, as well.  When mortgage giant Fannie Mae rolls out its latest version of Desktop Underwriter (DU), its automated loan approval software.

Lenders calculate a value called “debt-to-income ratio” (DTI) when evaluating a prospective borrower. They arrive at this number by adding the total house payment (including principal, interest, taxes, insurance and mortgage insurance, if any) and all debt payments with 10 months or more remaining. They divide that total by the borrower’s gross monthly income to arrive at the DTI. A buyer with $6,000 in monthly income, a $2,000 house payment and a $400 car payment would have a DTI of 40% (2,400 / 6,000 = 40%).

Fannie Mae’s system will approve a loan at a DTI no higher than 45%. After July 29, however, a borrower will see his purchasing power increase by nearly 15% because Fannie Mae has decided to purchase loans with a higher DTI—50%.

This is not to suggest that every home buyer should plan on spending half their monthly income on their house payment. Each consumer should set their budget personally. A lender may allow a house payment of $2,600, but common sense may suggest that a lower number than the lender’s maximum is more appropriate for one’s personal comfort and peace of mind.

Still, the changes are welcome news for many borrowers whose dreams of home ownership just moved a little closer.

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PHONE: (303) 649-1245

FAX: (888) 752-8254

ADDRESS: 10700 E Geddes Ave, Suite 155 Englewood, CO 80112

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Terms and Conditions Apply. HOUZ MORTGAGE RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet Houz Mortgage’s and/or investor underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Rates and Terms are subject to change at any time without notice and are subject to state restrictions. Licensed by the Colorado Division of Real Estate. Houz Mortgage loans are originated by Colorado Homesmartz, LLC DBA Houz Mortgage, NMLS # 1578407. (www.nmlsconsumeraccess.org)

Lowest rates are reserved for most creditworthy applicants; not all who apply will qualify for the top tiers. Rates and APRs are subject to change and may not be available at the time of lock or loan commitment. Interest rates are subject to potential increases over the life of the loan, once the initial fixed-rate period expires. APR for adjustable rate mortgages are subject to increase after fixed rate period and does not include 3rd party costs or prepaid interest. Please contact one of our Licensed Mortgage Loan Originators at (303) 649-1245 for a customized rate and payment quote.


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COVID-19 Update

March 12: Today, we closed Houz's Englewood office and asked everyone based there to work from home as a precaution due to COVID-19. Houz was prepared for this and is fully functioning during this time. Please do not bring any paperwork to the office and make alternative arrangements by calling (303) 649-1245 or by contacting your personal loan team until further notice.