A new change from the Federal Housing Finance Agency will have well-qualified borrowers charged more to help lower costs from some borrowers with less-than-spectacular credit scores.
Yesterday, the Federal Housing Finance Agency directed lenders Fannie Mae and Freddie Mac to adjust their loan pricing to raise costs for well qualified borrowers and lower costs for some less qualified borrowers. FOX 5 real estate expert John Adams joined Good Day to unpack all the changes.
The Biden Administration wants to make it easier for borrowers with less than spectacular credit scores to get approved for a loan. That aspiration is well and good, and Adams agree that we should try to make homeownership more affordable.
The problem is that, by making “subprime” loans less expensive, Fannie & Freddie will lose income, and they’ve got to make it up somewhere. So the government’s suggestion is to charge well-qualified borrowers a little more.
It’s not a big increase. It’s about $10 per month more per $100,000 borrowed, so the average well-qualified borrower will end up paying about $20 to $30 more per month.
So why are so many people crying foul?
1. Subprime loans of 2008
This policy is suspiciously similar to the programs that provided “subprime” mortgages in 2008, which caused loans to be approved for high risk borrowers, brought about the collapse of housing prices, and led directly to the Great Recession. Some economists claim this cost shifting policy ignores the realities of creditworthiness.
2. Ignores risk-based pricing model
After the Great Recession, lenders were required to tailor financial products to the credit risk profile of borrowers. One of those changes was a greater reliance on credit scores as a “racially blind” measurement of risk. Any behavior that is rewarded will only cause more of that behavior. Having a low credit score is evidence of poor credit behavior.
3. Seem un-American
It is a reality that many Americans of all races and ethnicities have worked hard to build their credit profile over the years. They deserve to be rewarded with more affordable credit products simply because they, in fact, present less risk to the lender. That’s just common sense. In addition, our housing system rests on the bedrock principle that individual financial responsibility should be rewarded.
The bottom line is Adams believe that the government and the lenders aren’t doing any borrower a favor by qualifying higher-risk borrowers for a loan that they may not be able to afford. This policy conflates credit scores with wealth, and unfairly maligns hard-working Americans in the lower-income bracket. Financial education is the key to this issue.
John Adams is a real estate expert with Columbia Asset Management, LLC and contributor to Good Day Atlanta.
It turns out defaulting on the mortgage isn’t as bad as some made it out, per a study from credit bureau TransUnion.
The company noted that mortgage-only defaulters, those who stay current on other lines of credit while letting the mortgage slip away, perform better on new loans versus those with multiple delinquencies.
In other words, those who are late on all types of loans continue to exhibit high rates of delinquency, whereas those who only skip their mortgage payments tend to keep other bills in check.
For example:
60+ days delinquency levels on a new auto loan: – 5.8 percent — mortgage-only delinquency – 13.1 percent — multiple delinquencies
60+ days delinquency levels on a new credit card: – 11.4 percent — mortgage-only delinquency – 27.1 percent — multiple delinquencies
So basically those who were late on everything from credit cards to auto loans and leases continue to make missteps, while those who simply can’t handle their mortgages stay on top of other bills.
Perhaps these were the folks who thought they could afford a house during the peak years, while relying on interest-only home loans, option arms, and other payment-deferring home loan programs.
The study also debunked, or at least did not find strong support for, the “excess liquidity theory,” which suggests consumers who stopped paying their mortgage have increased cash flow to use for other debts.
“This recession was unique in that certain consumers who defaulted on mortgages would otherwise be good credit risks,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit, in a release.
“It appears their actions were driven more by difficult economic circumstances than by any inherent inability to manage debt.”
Good luck trying to explain this to their subsequent mortgage lender or loan underwriter…
No it’s not déjà vu, or Groundhog Day. Guaranteed Rate has launched yet another 1% down payment mortgage in the span of about a month.
However, their new “Double Match” loan program is quite a bit different than their previously announced 1% down mortgage that relied on a grant from the City of Chicago and Chicago Infrastructure Trust (CIT).
Guaranteed Rate Double Match Mortgage Available Nationwide
This is yet another 1% down home loan
That relies upon a 2% grant from the mortgage lender
The result is a 97% LTV mortgage (3% down)
That fits the agency guidelines of Fannie Mae and Freddie Mac
For one, the Double Match program is available to home buyers nationwide, not just in the city of Chicago.
One thing that is the same is the down payment requirement, which is set at a low, low 1%. That’s right, you just need 1% of the purchase price to get into the home.
It’s a 97% LTV mortgage, meaning it qualifies for backing from Fannie Mae and Freddie Mac, but you only have to come up with 1% of the total 3% down payment.
The other 2% is a “completely forgivable” grant that doesn’t need to be paid back, even if the buyer moves or refinances their mortgage. They claim this is unlike other down payment assistance programs.
I asked Guaranteed Rate for specifics regarding the grant and was told the following via their communications department:
Guaranteed Rate is providing the grant
There is no waiting period to get it
And no penalty if borrowers sell or refinance
This seems to mirror a similar loan program recently launched by United Wholesale Mortgage via the broker channel that gifts 2% of the home purchase price.
It also seems to be a trend in the mortgage world – despite max LTVs capping out at 97%, many lenders are getting creative to stretch it to an effective 99% LTV, which clearly isn’t far from the days of zero down financing.
[Check your local credit union for 100% LTV mortgages.]
Double Match Mortgage Guidelines
The biggie here is a minimum 680 FICO score
Which is significantly higher than the 620 score required
For the 3% down loan program offered by Fannie and Freddie
The maximum loan amount is also set at the conforming limit
And while property types can vary, it must be owner-occupied and likely a single unit
As mentioned, the loan program appears to run on the back of the Fannie or Freddie loan programs, such as the Home Possible Advantage.
However, there are some lender overlays specific to Guaranteed Rate, such as a minimum FICO score requirement of 680, which is significantly higher than the 620 required by Fannie/Freddie.
Of course, 99% LTV presents more risk to lenders, so requiring a good credit score (not great or excellent by any means) is probably a prudent measure.
The maximum loan amount is also set at the conforming limit of $453,100, and there are income limits depending on where the subject property is located.
Allowable property types include single-family homes, condos, and townhomes, and all must be owner-occupied. I’m assuming they all must be one-unit as well.
The Double Match program can also work in conjunction with a Mortgage Credit Certificate if you want to save even more money on mortgage interest.
Speaking of mortgage interest, I have no idea what the mortgage rates are like on this program, or if mortgage insurance is paid separately or built into the rate. My assumption is that rates will be higher than 97% LTV mortgages to account for risk.
If you’re interested, reach out to Guaranteed Rate to get more details. They originate mortgages in all 50 states and have local offices all over the place.
For the record, Guaranteed Rate is now the eight largest retail mortgage lender in the country.
A new survey from real estate listing service Trulia revealed that 59 percent of renters aspire to be homeowners, but there are six core issues holding them back.
Let’s take a closer look at what they are, and what you can do to overcome them if you want to make the transition from renter to homeowner.
Saving Enough for a Down Payment
This is the biggest obstacle for prospective homeowners. It always has been and probably always will be. The dreaded down payment. But what many may not realize is that you can still buy a home for as little as 3.5% down with an FHA loan.
Or if you buy a Homepath property via Fannie Mae, you can come in with as little as 3% down, all while avoiding mortgage insurance. And there’s now an even broader 3% down option offered by both Fannie Mae and Freddie Mac that allows just about any home to be purchased with that small a down payment.
So there are certainly plenty of options if you don’t have a ton of assets. There are even no money down options in some “rural” parts of the country thanks to USDA home loans, and of course VA loans that require nothing down for veterans and their families.
If you don’t qualify for those programs, all is not lost. You may be able to borrow the money from a family member to meet the minimum down payment requirement. This is known as a gift and will allow you to circumvent the issue as long as someone is willing to help you out.
Qualifying for a Mortgage
The second biggest roadblock is actually qualifying for a mortgage. This is why I stress preparation so much on this blog. You can never be too prepared, and it can takes months or even years to get all your ducks in a row.
This means getting your income, assets, and employment information together long before applying for a loan.
In other words, holding a steady job for two years or longer, seasoning the assets you plan to use in your bank account (not your mattress) for several months, and getting pre-approved for a mortgage so you know what mortgage amount you can actually obtain.
And finally, making sure your credit scores are all in great shape.
A Good Credit Score
Along these same lines, you need pristine credit to ensure you qualify for a mortgage at the lowest interest rate. In fact, without a great credit score, your inflated mortgage rate alone could make you ineligible for financing.
While there are mortgage options for those with low credit scores, you’ll be much better off it you apply for a mortgage with an excellent credit score.
Not only will you have a much easier time qualifying, you’ll also save a ton of money in interest over the years. There’s no reason to cut corners unless you absolutely must get a mortgage immediately.
Take the time to fix what’s wrong so you can save money on your mortgage year in and year out.
[Credit score needed for a mortgage.]
Existing Debt
Another mortgage killer is existing debt. If you’ve got a ton of credit card debt, car loans or leases, and who knows what else, it’ll work against you when applying for a mortgage.
Mortgage lenders use a measure called the debt-to-income ratio to determine how large of a housing payment you can handle.
Put simply, the more existing debt you have, the less you’ll be able to borrow for your mortgage. So pay down/off what you can before applying for a mortgage without exhausting your assets.
Two prospective borrowers making the same exact salary could qualify for totally different maximum loan amounts based on the outstanding debt they have.
This should also give your credit scores a boost, so you actually get two benefits for the price of one!
In short, the less debt you’ve already got, the more you can take on, which translates to being able to afford more house.
A Stable Job
As mentioned earlier, a stable job is very important for mortgage qualification purposes, and also plain confidence in knowing you’ll be able to keep making your mortgage payments for the next 30-some odd years.
Without a job you can count on, it’d be a foolish decision to purchase a home. After all, you certainly don’t want a foreclosure on your record.
The general requirement is at least two years of steady employment, meaning no gaps during that time. Also, you’ll want to ensure any position changes are in the same industry, or at least make sense.
If you go from being a doctor to a real estate agent, the underwriter likely won’t feel confident in your ability to make a steady income unless you’ve been at it a couple years.
Any major changes in employment will be scrutinized and may also require a letter of explanation, depending on what transpired.
Falling Home Prices
Lastly, there’s the issue of declining home prices. Yeah, it can be pretty scary to see your main “investment” lose value. But when it comes down to it, a home is a home first, and an investment second.
Is it a good time to buy right now? That’s debatable. Mortgage rates are certainly at their lowest levels in history, which makes it attractive to carry a mortgage.
But do home prices still have some more downward pressure? Absolutely. I wouldn’t be surprised if they fell more.
Interestingly, home prices don’t necessarily go down when interest rates rise. In the past, rates and prices have risen together. So now might be a decent time to get a low rate and a home for a discount.
All that being said, I wouldn’t say there is a rush to buy a home, but now could be the perfect time to get your finances in order for a possible purchase next year.
Interest rates should remain low for a fair period of time, and if home values slip a bit lower, it could be an ideal time to become a first-time homeowner.
Last Updated on February 24, 2022 by Mark Ferguson
Getting a loan on one or two rentals is not difficult if you have good credit and a decent job. However, many banks will tell you it is impossible to get more than four loans. The fact is there are many ways to get loans on multiple rentals, but the big banks don’t like to do it. There are ways to get loans on 10, 20, or even 100 properties. There are traditional banks that will finance more than four properties and portfolio lenders that will lend on multiple properties if you know where to look. There are even national lenders that specialize in rental property loans who prefer to lend on huge packages of rentals. When you hear a bank tell you it is impossible to get a loan on more than four properties, they are only talking about their bank. Don’t give up hope!
What is a portfolio lender?
Local lenders who offer portfolio financing are another option (my favorite) for investors. It can take some research, time and networking to find a portfolio lender, but they have much looser lending guidelines. Portfolio lending means the bank is using their own money to fund deals, and they don’t have to use Fannie Mae guidelines. My portfolio lender has no limits on how many loans they will give to investors as long as they have the cash reserves and income to support the mortgages. They allow 20% down on those properties and don’t require your life’s history to give you the loan.
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There are some drawbacks with a portfolio lender. My local bank does not offer a 30 year fixed mortgage. They offer a 15 year fixed, a 5/30, or a 7/30 ARM (adjustable-rate mortgage). I prefer to use ARMs with a 30-year mortgage instead of 15-year mortgages because the payments are much lower, which gives me much more cash flow. I can save that cash flow and keep buying more and more rentals that make much more money than the 4% or 5% interest rates on the loans. It does not hurt me to get an ARM and it is so much easier working with a local bank than it is working with the big banks.
Every local bank will have different terms and rates when they lend money. Some will not offer 30-year loans, some will have balloon payments, and some will not want to lend on rentals at all. It can take some time and work to find great investor-friendly banks.
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Why don’t big banks like to lend on rentals?
I think long-term rental properties are one of the best investments. Part of my retirement strategy is buying as many long-term rental properties as I can. The problem with buying many properties is most lenders don’t like lending to an investor who already has four mortgages. Most big banks will tell you it is impossible for them to give the fifth mortgage to anyone. The big banks have strict policies about loaning to investors because their primary business is lending to owner-occupied buyers. There is no law that says they cannot give investors more loans, it is simply the bank’s policies.
Most big banks will sell their loans off to other banks or as mortgage-backed securities. Because they sell their loans and do not keep them in-house as a portfolio lender does, the big banks have much stricter guidelines.
When are big banks a good option?
I used a conventional loan to finance my first rental that was from Bank of America. The loan was not easy to get, but I got it. I am a real estate agent and it is tougher for self-employed people to get loans, especially right after the housing crash (2010)! It was a 30 year fixed rate loan with an interest rate of right around 4 percent and I had to put 20 percent down. It was a great loan and I wish I could have continued to get loans like that, but Bank of America would not lend to me after I had four loans in my name. When starting out with less than 4 mortgages a big bank may be a good option.
How to get started investing in rentals.
Can you get a conventional loan on more than four properties?
It is possible to finance more than four properties with a traditional bank. Technically Fannie Mae guidelines say investors should be able to get a loan for up to 10 properties. Even with these guidelines in place, many lenders still won’t finance more than four properties because it is too risky for their investors. If you are diligent and make enough calls you should be able to find a lender who will loan up to ten properties. If you want to try an easier route, call a mortgage broker who can help you find a lender who can get it done. These are the requirements for most lenders that will finance from four to ten properties.
Own between 5-10 residential properties with financing attached
Make a 25 percent down payment on the property; 30 percent for 2-4 unit
Minimum credit score of 720
No mortgage late payments within the last 12 months on any mortgage
No bankruptcies or foreclosures in the last 7 years
2 years of tax returns showing rental income from all rental properties
6 months of PITI reserves on each of the financed properties
These guidelines are much stricter than when you are getting a loan and have fewer than four mortgages.
Refinancing rentals
If you want to refinance any of your properties and you already have four mortgages, most banks will only allow a 70% loan to value ratio and probably won’t allow you to take any cash out. One of the keys to my rental strategy is being able to take cash out when refinancing my rentals. I then take that cash out money and invest in more rental properties. Lenders will say it is too risky to do a cash-out refinance for investors with more than four mortgages. In my opinion, if an investor has the cash to put 20% down and has the cash reserves needed, they are less risky than the first-time home buyer putting 3.5% or less down.
Just because the big banks will not do it, does not mean it is impossible to do! I have been able to complete many cash-out refinances with a 75% loan to value ratio with local banks. I have done this on residential and commercial rental properties.
How to find a great lender
In order to find a portfolio lender, it takes some work. The first step is to ask everyone you know in the real estate industry. Ask Realtors, lenders, title companies, property managers, and other investors. Local real estate investor clubs may be able to provide information on portfolio lenders as well. If you can’t find a portfolio lender through word of mouth, try calling local banks. Ask banks if they loan their own money, what their policies are for investors, and if they don’t offer the right terms ask them who might.
National lenders
There are some new programs available from national rental property lenders that are built for investors to get loans on their rental properties. The lenders base their loans on the properties, not the investors. They have slightly higher rates than conventional lenders but are a great option for those who cannot find other financing. They often are much easier to work with if you have a high debt to income ratio, bad credit, or other issues. They usually do not have any limit on the number of loans you can obtain.
If I ever run into a problem finding a local bank to finance my rentals, I would look into using some of the national companies to finance me.
You can see a list of some of the lenders here.
Conclusion
There are ways to finance more than four properties even though many people will tell you it is impossible. Try talking to a mortgage broker who can get you in touch with banks that will finance more than four properties. If you have a big goal like myself like buying 100 properties in the next ten years, then you will need a portfolio lender who will finance more than four, more than 10, and more than 20 properties.
While there are a number of factors that determine what mortgage interest rate you’ll qualify for, assuming you can indeed qualify for a mortgage, perhaps the most important one is credit score.
Why? Well, for one, a credit score can make or break you entirely. If your score isn’t at a certain level, you may be barred from home loan financing, regardless of your stellar income, awesome job, and astronomical asset situation.
Credit Score Can Make or Break Any Borrower
It doesn’t matter how rich you are
Or how large your down payment is
Without a solid credit history
You’ll still pay the price or get flat out denied
In other words, even if you have $1 million in the bank and a six-figure salary, a low credit score can completely bar you from certain popular home loan programs.
For example, you need a minimum FICO score of 580 to get an FHA loan with just 3.5% down, and a minimum 620 score to get a loan backed by Fannie Mae or Freddie Mac.
These three entities account for the overwhelming majority of mortgages originated today, so if your score is below those thresholds, you severely narrow your options.
Even if you are able to obtain mortgage financing, you may be limited as far as what you can get your hands on.
In other words, your max loan-to-value ratio may be reduced if your credit score is below average, and you may only qualify for a conforming mortgage versus a jumbo loan.
And even then, you’ll probably be stuck with a mortgage rate that is well above the market average, which surely isn’t good news.
[How to get a mortgage with a low credit score.]
Now let’s take a look at an example of what you might pay for a 30-year fixed-rate mortgage based on credit score, all other things being equal.
How Things Look with a Good Credit Score
Loan amount: $300,000 Credit score: 760 Mortgage rate: 4.25% Monthly mortgage payment: $1475.82 Total interest paid over loan term: $231,295.20
How Things Look with a Mediocre Credit Score
Loan amount: $300,000 Credit score: 650 Mortgage rate: 5.00% Monthly mortgage payment: $1610.46 Total interest paid over loan term: $279,765.60
As you can see, your mortgage payment could be an extra $100 each month if you happen to have a mediocre credit score. Not even a bad credit score, just mediocre folks.
On top of that, you’ll pay an additional $50,000 or so in interest over the life of the loan term, all because you didn’t stay on top of your credit score. Or check it before applying for a mortgage. Oops…
[What mortgage rate can I expect?]
This is why it’s imperative to check your scores and manage your credit wisely before you begin shopping for a mortgage.
Many other mortgage pricing factors may be out of your hands, such as down payment and property type, as they can’t really be manipulated.
But there’s no excuse for a poor credit score. If it’s not in good shape, it’s nobody’s fault but your own.
How to Ensure Your Credit Score Is Tip Top
Pay every bill on time, every month
Keep outstanding credit card and loan balances low
Avoid applying for new credit cards and other loans
Several months before applying for a mortgage
If you plan on applying for a mortgage anytime in the near future, your first step would be to avoid applying for any new credit, as doing so can lower your score. I have proven this myself.
Along with that, it’s advisable to keep existing credit card balances low, and even pay them down some, assuming it won’t affect the assets you have set aside for the mortgage.
Finally, be sure to make all payments on time, each and every month. Doing so will ensure your credit score remains in good health. It’s not really that complicated, it just takes discipline.
And as a rule of thumb, it’s also wise to pull your credit report several months before you apply for a mortgage to ensure your credit scores are where they should be. If they aren’t, it’ll take time to whip them into shape!
Read more: What credit score is needed for a mortgage?
Knowing where you stand before applying for a mortgage is key to negotiating a better interest rate. Yes, you can negotiate your rate!
But if you don’t know what type of risk you present to a bank or lender, how can you be sure you’re getting a good deal?
While it may seem obvious to those in the industry, many prospective and existing homeowners don’t seem to know when they have the easiest approval on their hands, or the trickiest deal in the history of man.
Let’s take a look at some common loan scenarios to help you better understand your position.
Vanilla
This is your full doc
800 FICO score
W2 borrower
With a conforming loan amount
And no obvious red flags
This is the most common mortgage “flavor” you’ll hear about. When someone says the loan is “vanilla,” they’re basically saying it’s a flawless loan scenario.
In other words, the borrower has great credit, good income and assets, and plenty of home equity (or a sizable down payment).
The property is also an owner-occupied, single-family residence, meaning there should be no pricing adjustments whatsoever.
As a result, this type of mortgage presents very little risk to the originating lender, and pricing should be very favorable.
Expect mortgage rates at or below those advertised and fight for the lowest rate out there. Shop your rate with confidence, knowing everyone and their mother should be fighting tooth and nail over your loan.
For the record, the mortgage rates you see advertised assume your loan is premium, imported french vanilla…
Mint Chip
This borrower might have excellent credit
But display one or two nagging issues
Such as limited assets or occupancy concerns
Or perhaps they’re just self-employed
Most people like mint chip, and it’s a pretty common flavor, but it also means something isn’t exactly right, even if seemingly minor.
It could be that the borrower has good credit, but not a lot of money to put down, or very little equity.
Or it could be that the borrower has marginal credit, despite having a great job and tons of assets in the bank.
[What credit score do I need to get a mortgage?]
Perhaps they’ve changed jobs recently or have some other funky income structure (paid seasonally, on commission, self-employed), or their assets aren’t too impressive.
Maybe there are occupancy issues – think the homeowner buying a house down the street, but claiming they’re going to rent out the old property, even though the new house is smaller.
Whatever it is, the issue presents some difficulty, and as a result, some lenders may not want to touch it.
Put simply, the fewer banks willing to do the deal, the less you can shop around. And you may be stuck submitting the loan with a lender that offers less favorable interest rates.
You can still go nuts looking around for the best deal, but you may not have access to every bank out there. There may also be more snags along the way…so working with a reputable lender is more important.
Rocky Road
This is the flavor of subprime
And perhaps layered risk
But I’m not referring to nuts and marshmallows
We’re talking low credit score, low down payment, and other questionable stuff
Mint chip ain’t so bad when there’s Rocky Road around. While some people like the heavenly mix of chocolate ice cream, nuts, and marshmallows, not everyone will be so enthused.
In other words, you may have a hard time getting your deal to close with ANY bank or lender, even so-called subprime lenders (if they still exist).
This is your “bad news” loan scenario, one where multiple things are going wrong all at once.
Think poor credit score, minimal assets, low down payment/equity, funky job situation, and maybe even more serious issues like previous late mortgage payments or a short sale/foreclosure.
Long story short here is that approval is more of a concern than the mortgage rate you ultimately receive.
Your first priority is finding a lender that is willing to work with you. You should certainly shop around, but expect rates much higher than those advertised for the significant risk you present.
Bubble Gum
This is a special edition flavor
Dedicated to those who took out mortgages right before the bubble burst
Many are now in underwater positions (owe more than the mortgage is worth)
Thanks to those zero down home loans they used to buy homes at the height of the market
Here’s a bonus flavor in light of the ongoing mortgage crisis. Post-housing bubble, there are a ton of good homeowners out there with negative equity.
In other words, their loan-to-value ratios exceed 100%, making their loans very high-risk, even if they’ve got a great job, stellar credit, and plenty of money in the piggy bank.
Fortunately, there are numerous options for severely underwater homeowners, including the popular HARP Phase II.
So all hope is not lost, even if it’ll take you a decade or two to get back in the black…
You can even snag a super low mortgage rate when refinancing, so again, be sure to shop around with a variety of banks, credit unions, and mortgage brokers.
The moral of the story, regardless of your flavor, is to know it before you apply for a home loan.
This can help you prepare for the road ahead, and better align your expectations with reality.
Over the past several years, scores of homeowners have elected to ditch their unmanageable mortgages via short sales to avoid foreclosure.
It’s estimated that roughly 370,000 short sales closed last year alone. Because short sales have been so popular, there will inevitably be tons of former homeowners re-entering the marketplace in the near future.
In fact, there are already plenty of so-called “boomerang buyers” who dumped their old homes via short sale and acquired new ones.
Of course, whether you’ll actually be eligible for a mortgage after a short sale will depend on a number of factors.
There are already plenty of qualification requirements for a mortgage, and you’ll need to add “prior short sale” to that list as well.
The Short Sale Waiting Period Depends on Mortgage Type
The short sale waiting period is dependent on loan type
Along with what transpired leading up to the short sale
Those with extenuating circumstances may not have to wait at all
Assuming they weren’t delinquent on the loan before the sale
Perhaps the easiest loan to qualify for after a short sale is a FHA loan, mainly because it has the shortest post-short sale waiting period.
In fact, it has NO waiting period if you weren’t delinquent on your former mortgage during the 12 months preceding the short sale and the proceeds of the sale served as payment in full.
Additionally, you must have stayed current on all other installment debts during the same time period.
Sadly, most borrowers who pursued short sales didn’t keep up with mortgage payments because lenders tend to be more willing to work with those who are behind and in danger of default.
Assuming you did stay up-to-date, you can’t buy a similar property within a “reasonable commuting distance” of your old home.
In other words, if you sold short just to take advantage of declining property values, you won’t be approved for a FHA loan.
So only a small percentage of those who pursue short sales will be eligible for a FHA with no waiting period.
If you were delinquent when you pursued the short sale, the FHA waiting period is three years, though it can be reduced if you can prove extenuating circumstances.
The main advantage to a FHA loan is the low-down payment requirement, as compared to conventional loan options.
For VA loans, the waiting period after a short sale is two years. However, there is NO waiting period for those who managed to avoid late payments on the mortgage and all other lines of credit, similar to the FHA rule.
Get a Conventional Loan Just Two Years After Short Sale
If you sold your home short
And can prove extenuating circumstances
You can get a conforming home loan just 2 years after a short sale
But most borrowers will have to wait 4 years to get a mortgage
For conventional loans, it depends if the new loan is backed by Fannie Mae or Freddie Mac, which shouldn’t matter much to the borrower.
Fannie Mae was the more lenient of the two, allowing a new loan just two years after the completion date of the short sale with 20% down payment. But they changed that, perhaps because it sent the wrong message.
Nowadays, there is a standard 4-year wait without extenuating circumstances, or two years if you do have a valid excuse.
For Freddie Mac, the waiting period is also four years (48 months) for what they call “financial mismanagement,” or just two years (24 months) if you can prove extenuating circumstances, just like Fannie Mae.
But the max loan-to-value ratio (LTV) and combined LTV (CLTV) is 90%. That means you need a minimum 10% down payment. In other words, they want skin in the game this time around…
What Are Extenuating Circumstances?
Something beyond the borrower’s control
Such as sudden job loss and reduced income
And/or increased expenses
That render the borrower unable to make mortgage payments
For the record, extenuating circumstances include things like the passing of the primary wage earner, a long-term illness, a divorce, sudden job loss, etc.
Basically something outside the borrower’s control that resulted in major financial hardship.
If any of these events took place, the borrower must be able to provide third-party documentation as confirmation, and they must re-establish their credit profile to acceptable levels.
Note: There are other types of loans out there, such as jumbo loans, VA loans, USDA loans, and so on.
Be sure to inquire about all types when working with your loan officer or mortgage broker to cover all your options.
Your Credit Score Matters Too
On top of these waiting periods, you must also re-establish your credit to meet the minimum score required by the lender who originates your loan.
In other words, if your credit score is shot as a result of the short sale, and hasn’t improved during the waiting period, you still may not be eligible.
And even if you are eligible, your credit score may result in a higher mortgage rate, so there are consequences beyond the waiting period.
But this should illustrate the major benefit of a short sale vs. foreclosure.
When you get foreclosed on, the waiting period to obtain a new loan is significantly longer.
So even if the credit score impact of both a foreclosure and short sale are similar, this detail alone is pretty important for those looking to get back in the game.
Tip: After a short sale, be sure to stay current on all your credit lines to ensure you re-establish good credit and get your score back to a reasonable level.
It will make qualifying easier and should result in a lower mortgage rate as well.
Short Sale Waiting Periods
Getting an FHA Loan After Short Sale:
– NO waiting period if certain conditions met (see above) – Otherwise three (3) years unless extenuating circumstances (it’s now one year!)
(HUD source)
Getting a VA Loan After Short Sale:
– NO waiting period if certain conditions met (see above) – Two (2) year waiting period otherwise
Getting a Fannie Mae Loan After Short Sale:
– Two (2) year waiting period if you can prove extenuating circumstances – Four (4) year waiting period otherwise
(Fannie Mae source)
Getting a Freddie Mac Loan After Short Sale:
– Two (2) year waiting period if extenuating circumstances – Four (4) year waiting period otherwise – Max LTV/CLTV of 90% if within 7 years of short sale
(Freddie Mac source)
*The Fannie and Freddie rules are the same for a deed-in-lieu of foreclosure or a pre-foreclosure.
By Peter Anderson15 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 10, 2012.
Lending Club had another great year in 2011, reaching a variety of milestones. They reached 400 million in loan originations in November (pushing 500 million now) – only a couple of months after reaching 300 million. They were also recognized as a World Economic Forum 2012 Technology Pioneer, a Forbes Top 20 Most Promising Company, 2011 Webby Award Winner, Top 300 Startups at 2011 fundedIDEAS and continued to receive great mentions in the mainstream media. They’re becoming more and more mainstream. The word is out!
While Lending Club had a good year, the returns I saw last year were good as well, better than I saw in my retirement or savings accounts. I think Lending Club and social lending in general are a great way to diversify your savings and investments especially in turbulent times like we’re going through right now. You can also open an IRA with Lending Club as well if you want to make this part of your retirement plan.
Interested in my original Lending Club Review? check it out below.
Check out my original Lending Club review
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Returns Increase To 11.23% Despite Charged Off Loan
As I begin preparing for my taxes and looking at my Lending Club taxable earnings for last year, it’s clear that Lending Club had another good year. Yes, my account had it’s first default and charged off loan this year, but it was the first since I started Lending Club a couple of years ago. I’m surprised I dodged that bullet as long as I did.
Net Annualized Return of 11.23%: Up from 11.03% in November, 10.93% in September, 10.76% in August and 10.53% before that. That puts me in the 62nd percentile. My returns are higher than 62% and lower than 38% of all investors. Note: The compare feature in Lending Club account is gone from your account page now because of some problems in how it’s calculated, but you can still find it here if you’re interested.
Number of defaults.. no longer zero: For the past two years I’ve defied the odds and I’ve never had a single loan default or get charged off. This past month, however, I had my first default and charged off loan. The funny thing is that the charged off loan was a Grade B loan for someone who originally had very good credit. Just goes to show that the higher graded loans aren’t always the best bet.
Twenty two loans have been paid off early: Nine were A grade loans, six were grade B loans, five were C grade, and one grade E and F. Looks like grade A loans, while they’re more likely to be paid back, may also be more likely to pay of early – reducing returns. Another reason to look at including more higher grade loans.
My account balance still going up: I currently have $2,663.59 in my account, with $231.14of that ready to invest.
I’m still diversified by investing across a large number of loans: I’ve had 148 loans, with no more than $25 in each loan. That way when you have defaults like I did this month, while my returns may go down somewhat, the risk is minimized.
NOTE: Did you know that 100% of investors who have invested in 800 notes or more had positive returns. Not too shabby, not everyone in the stock market can say that!
How Do You Measure ROI?
One thing that is often talked about in the peer-to-peer lending world is how you can determine a more accurate way of knowing your true return on investment (ROI). Some have complained that the numbers on the Lending Club and Prosper sites will give an overly rosy view of what your actual or projected ROI will be, and the ways that they calculate your ROI are not standardized. They don’t take into account future default rates of your loans, how young or old your portfolio is, and other things that may be a factor. It’s basically a take or leave it when it comes to accepting their stated ROI on your portfolio.
One site that tries to take into account more factors when calculating actual ROI is Nickel Steamroller’s Lending Club portfolio analyzer. Basically the analysis tool with give you an estimated ROI after you download all your notes from your Lending Club account and upload the .csv file. It will go through you notes and give sell recommendations, show duplicate notes and highlight notes that are below Lending Club’s average return (so you can sell them on the secondary platform). In looking at my returns on the analyzer, my actual return according to the site will be closer to 10.26%.
I think my returns are showing lower than in LC in part because I’ve had one charged off loan now, and a number of my loans are still relatively young. We’ll see how it pans out though.
Lending Club Strategy
Here’s the basic strategy I’ve been using with Lending Club over the past couple of years.
Less than $10,000: I believe I’ll still be sticking with mostly loans below $10,000. Lower amounts mean higher likelihood of payback of the loan.
Zero delinquencies: Again, I may fudge slightly on this one, but I still want it to be very few or zero delinquencies.
Debt to income ratio below 20-25%: I like to invest in loans where the borrowers have a lower DTI ratio, and preferably have higher incomes. I’ll try to keep this as is.
Good employment history: I like loans with a decent employment history of at least 2 years, and a decent income.
So that’s what I’m doing with my Lending Club portfolio right now, and how I’m investing.
Not ready to invest, but looking to consolidate debt or pay off a high interest credit card? You might want to consider borrowing from Lending Club. Check out my post on borrowing from Lending Club.
Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!
Your debt-to-income ratio, or DTI, is your total monthly debt payments divided by your total monthly gross income. DTI ratio is one of the criteria lenders use to determine whether you can realistically pay back a loan. As a general rule of thumb, you want to have a DTI ratio between 35% and 50%.
Save more, spend smarter, and make your money go further
If you’ve been shopping around for a mortgage, then you’ve probably run into the term “debt-to-income ratio”. This can be a confusing term for someone with limited knowledge when it comes to finance. But, when you apply for a major loan, your debt-to-income ratio can have a significant impact on whether or not a lender approves your application.
So knowing what a debt-to-income ratio is, and how to calculate debt-to-income ratio, is essential if you plan on taking out a mortgage or any other major personal loans in the near future. In this article, we’ll cover the following questions and topics:
What is a Debt-to-Income Ratio?
How to Calculate Your Debt-to-Income Ratio
What is an Ideal Debt-to-Income Ratio?
What is the 43% Rule?
Does Your DTI Ratio Impact Your Credit?
How to Improve Your DTI Ratio
What is a Debt-to-Income Ratio?
A debt-to-income ratio, or DTI ratio, is a metric that measures an individual’s gross monthly income against their total monthly debt payments. What your DTI ratio ultimately represents is the percentage of your monthly income that is used to pay off your outstanding debts.
This ratio is commonly used by lenders to evaluate potential borrowers, determine whether or not they’re able to take on additional debt, and assess the likelihood that they will be able to repay a loan. While a low DTI ratio indicates that you have been able to manage a healthy balance between debt and income, a high DTI ratio indicates the opposite—namely, that you owe a high amount of debt relative to your income, likely aren’t able to save much money each month, and are essentially living paycheck to paycheck.
Now that you have a foundational understanding of DTI’s meaning and application, let’s dive a bit deeper.
What Factors Make Up Your DTI Ratio?
The sum of your monthly debt payments includes credit card payments, your mortgage, child support, alimony, and any other loans you may have taken out. However, some recurring monthly payments aren’t included in your DTI ratio. According to moneyfit.org, you shouldn’t factor in non-debt payments such as:
Insurance premiums
Phone bill
Childcare expenses
Home utilities, such as your electric, heating, water, sewer, and trash bills
Gym membership
Music, cable, and streaming subscriptions
Internet bill
Landscaping costs
Storage unit rent
Income tax
Your gross monthly income is just your monthly pay before things like taxes and other deductions are taken out. Some common types of income that are factored into your DTI ratio, are as follows:
Gross income, whether hourly or salaried
Tips and bonuses
Any income earned from a side gig
Pension income
Rental property income
Self-employment income
Social Security benefits
Alimony received
Child support received
How to Calculate Your Debt-to-Income Ratio
Learning how to figure out your debt-to-income ratio is a valuable skill that can help you with more than just your mortgage applications. We’ve provided step-by-step instructions for how to calculate your DTI below.
You can calculate your debt-to-income ratio by dividing the sum of your monthly debt payments by your gross monthly income. Once you figure out your total monthly debts payments and add up your gross monthly income, you’ll be ready to divide those numbers and calculate your DTI ratio.
Dividing your monthly debt payments by your gross monthly income will give you a decimal number. In order to view your DTI as a percentage, you’ll have to multiply the decimal outcome by 100.
Example Calculation
To get a better understanding of how to calculate your DTI ratio, let’s take a look at a fictional example.
Here’s the situation: Mike has a gross monthly income of $5,000. He pays $1,000 on his mortgage, $400 for his car, $400 in child support, and $200 for other debts.
So, following the equation above to calculate Mike’s DTI ratio, we end up with:
$1,000 + $400 + $400 + $200 = $2,000
Therefore, Mike’s DTI ratio = $2,000 / $5,000 = 0.4 x 100 = 40%
What is an Ideal Debt-to-Income Ratio?
In general the lower your debt-to-income ratio is, the more likely it is that you’ll be approved for a loan you’re applying for. According to incharge.org, DTI ratios that fall between zero to 35% are considered healthy according to the standards of most major lenders, since they indicate that your debt is at a manageable level relative to your monthly income.
So what is a bad DTI ratio? Having a DTI ratio of 50% and above is considered an unhealthy level of debt in most cases, and can severely limit the kinds of loans you qualify for. Such a high ratio indicates that you likely don’t have much money to save or spend each month after making your current debt payments.
What is the 43% Rule?
The 43% rule is a rule of thumb used by banks and lenders to determine who is able to be approved for a Qualified Mortgage. Generally speaking, 43% is the highest DTI ratio you can have in order to be approved for a Qualified Mortgage by a lender.
If you’re unfamiliar with what a Qualified Mortgage is, it’s a category of loans that meet a particular set of standards and certain safety features that protect both the borrower and the lender. In order for a lender to offer you a Qualified Mortgage, they must adhere to certain requirements and make a good faith effort to evaluate your finances and determine whether you’ll be able to repay the loan or not.
The upside of a Qualified Mortgage is that it has a number of parameters in place that are supposed to help prevent you from taking out a loan you can’t afford. Some of the requirements for a Qualified Mortgage include:
The restriction of risky loan features, such as interest-only periods and balloon payments
A limit on your debt-to-income ratio, the maximum typically being 43%
Caps—dependent on the size of your loan—on the amount of upfront points and fees a lender is able to charge
Legal protections for lenders, since it’s assumed that they did their due diligence to ensure you had the ability to pay back your loan
Maximum loan term is required to be no longer than 30 years
All of this isn’t to say that you can’t take out a mortgage at all if your DTI ratio exceeds 43%. You may still qualify for other mortgages with a high DTI ratio, but you generally won’t be able to get approved for a Qualified Mortgage.
Does Your DTI Ratio Impact Your Credit?
While your DTI ratio has no direct impact on your credit score and won’t show up on your credit report, it can affect your ability to secure loans from banks and other lenders. A low DTI ratio increases the likelihood that you will be approved for the loans you apply for. That’s because lenders take a low DTI ratio as a sign that you are competent when it comes to money management and they can rely on you to pay back any debt you accrue according to the agreed-upon terms. Lenders also take a loan applicant’s DTI ratio into consideration because they want to ensure that borrowers aren’t taking out more debt than they can realistically pay back.
Although a lower DTI ratio typically makes it easier to get approved for a loan, keep in mind that it’s only one out of many factors that lenders take into consideration. When evaluating a mortgage loan application, lenders will also take a look at a potential borrower’s gross monthly income, the amount they can afford on a down payment, their credit history, and their credit score.
How to Improve Your DTI Ratio
There are two variables that go into calculating your DTI ratio—your total monthly debt payments and your gross monthly income. Therefore, to improve your DTI ratio you’ll need to either reduce your total monthly debt payments or increase your gross monthly income.
Reduce Your Monthly Debt Payments
Completely paying off debts is a great way to lower your monthly debts payments, but of course this is much easier said than done. Your first step should be to take a look at any loans you’ve already taken out and your current credit card debt and come up with a comprehensive repayment plan. For example, check out our money tips for recent college grads to get some advice on how to formulate a repayment plan for your student loans.
To avoid going further into debt, you should also make an effort to work on your personal finance skills. Try creating a monthly budget for yourself that can help you prioritize essentials, track your spending, and save money, made easy when you use the Mint app.
If you’ve already done some research on how to lower your monthly debt payments, you may be asking yourself, “Is debt consolidation a good idea?” Debt consolidation is when you combine all of your various debts together into one monthly payment with a fixed interest rate, and it may be a good idea depending on your circumstances.
If you don’t think you’ll be able to make a payment on one or several debts, then you can potentially avoid a late payment by consolidating that debt. However, you must have good credit to get approved for a debt consolidation loan and you should be certain that your financial situation will improve in the near future. If you don’t think you’ll be able to pay back your debts, even with debt consolidation, then you’d likely be better off trying to settle the debts directly with your creditors.
Increase Your Gross Monthly Income
Just like reducing your monthly debt payments, increasing your gross monthly income is a lot easier said than done. After all, it’s not every day that you’re given a raise or offered a job with a high-paying salary. Nevertheless, there are still ways to potentially increase your gross monthly income. Research passive income ideas or check out these examples of things you can do to make a little extra money:
Take up a side hustle, such as driving for a ride share company, taking on freelance writing projects, babysitting, etc.
Rent out an extra room in your home (if you have more than one property, consider turning one of them into a vacation rental)
Get a relevant certification or license that would either increase the salary of your current position or help you find a new, higher-paying job
If possible, try to pick up more shifts or get extra hours at work
If you’re in the market for a sizable loan, such as a mortgage loan, you’ll have an easier time securing financing with a lower debt-to-income ratio. If your DTI ratio is higher than 43%, then you might consider waiting to purchase a home until you can lower that number and qualify for a better loan. You should generally try to keep your DTI ratio as low as possible even when you aren’t shopping around for loans. This means minimizing your monthly debt payments and maximizing your gross monthly income—two things that can be hard to achieve, but not impossible. Having a well-thought-out personal finance strategy will make it easier to achieve these goals, keep your DTI ratio consistently low, improve your overall financial health, and provide both you and potential lenders with a sense of financial security.
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