Are you thinking about buying a home in Petaluma or Sonoma County and need a home loan, but think you need an 800 credit score and 20% down? What say we dispel this myth?
I see news reports constantly in the media stating that only borrowers with the highest credit credentials and a huge bank account can qualify for a mortgage, and all I can do is shake my head. There are many options for those that wish to be home owners, from 5% down conventional loans to FHA mortgages with 3.5% down. Now if you come in with 20% down and an 800 credit score, you're definitely an easy candidate--you're also in the minority. Here are a few other options:
These are non-government backed loans underwritten to either Fannie Mae or Freddie Mac standards. They require a minimum 5% down payment and a 620 credit score. Your interest rate will be determined by both of those factors--the more you put down, the better the rate. The better your credit score, the better the rate. The 5% down option is available up to the conforming loan limit of $417,000. If you need to go higher, you have the conforming high balance option which varies by county. The high-balance limit for Sonoma County for 2014 is $520,950 for a one unit residence. Here's the HUD link for all counties: HUD County Mortgage Limits. The down payment option, however, rises to 10% for the high-balance option. Conventional loans with less than 20% do require mortgage insurance. You have the option of either a separate payment, or lender-paid mortgage insurance. The former you can have removed later--the latter is permanent, but often results in a lower monthly payment. You need to speak with a qualified mortgage consultant to determine what's best for you.
The government backed option. It's my opinion that many folks that have been put into FHA loans over the past few years probably would have been better served utilizing the conventional option as stated above. That said, these loans do have certain advantages for certain borrowers. Here's a list:
- Better pricing
- Lower down payment option
- Ability to use a non occupying co borrower / Higher allowable debt to income ratios
- No reserves required
- Lower credit scores allowed
First, FHA pricing is better than conventional--that's the good news. These loans are backed and insured by the Department of housing and Urban Development (HUD) which makes them much less risky to the lender that is underwriting the loan, hence a lower interest rate. The bad news is the monthly mortgage insurance is more expensive--in many cases, double that of private mortgage insurance. These two counterbalancing characteristics must be weighed when looking at this option.
Next, the down payment relative to a conventional loan is 1.5% less. For some borrowers, they have 3.5% and that's it. They can choose to wait and save more for a conventional loan, obtain a gift from a relative or go for the FHA loan now.
The next advantage is that FHA allows a non-occupying co borrower to co sign the loan and help the borrower meet the minimum debt to income ratios (DTI). The DTI requirement for FHA is far more relaxed than conventional. Conventional typically will allow a 45 DTI--going up to 50 in some cases for borrowers with compensating factors such as significant cash reserves and outstanding credit. FHA will allow a maximum DTI of 56.99. That's total housing expense (principal, interest, hazard insurance, property taxes and mortgage insurance) plus other debt (car loans, student loans, credit cards etc) to total income. By utilizing a willing relative to co sign, a borrower that's close to the required ratios, but not quite there, can get over the "bar." This really should only be considered by someone who's close to the DTI cap and anticipates greater income in the near future, otherwise they may be making a colossal financial mistake. As always, you need to consult with a qualified mortgage professional to help with this decision.
There are no liquid reserve requirements for obtaining an FHA loan. conventional loans typically require the borrower to have a minimum of two months of total mortgage payments on hand--FHA does not. For someone with limited cash resources, this may, indeed, be their only option.
Last, Credit scores for FHA loans can be lower than for conventional financing. You can still get the 3.5% down option all the way down to a 580 credit score--the conventional cutoff is 620. The debt to income ratio is reduced to a 43% maximum for sub 620 FICO FHA loans--it's very important to keep this in mind if you are in this category. Also, with an increased down payment to 10%, FHA will allow even lower credit scores--all the way to 500. I usually prefer to try and help someone improve their credit though if they are sub 600--it's better for the consumer in the long run.
In closing, as you can see, what we hear in the media is often just flat out wrong--you do not need Donald Trump's checking account or credit profile to obtain a home loan in Petaluma or Sonoma County. Lenders are, indeed, offering financing, and at favorable terms for a consumer with a 3.5% down payment and ok credit. If you have any questions that were not covered or would like a phone or in-person consultation, please give me a call:
America's Home Loans
6 Petaluma Blvd N
Petaluma Ca 94952