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South Bend Home Loan

Friday, August 29, 2014

How Your Credit Clean-Up Could Derail Your Mortgage Approval

When I ask a potential homebuyer if they know their credit score and they do, I do a little happy dance inside.  This tells me that they're proactive buyers who have probably already taken any steps needed to improve their credit, allowing them to get better terms on their mortgage.

There is also a little red flag that goes up in my head when I hear this, though.  If a buyer has taken steps to review and improve their credit score, there's a chance they've filed a dispute on things on their credit report.

"So what?"  you ask.  "Isn't it a consumer's right to file a dispute?"  Absolutely.  If something is wrong on your credit report you should dispute it and get it fixed.  While that's happening though, your lender will not be able to approve you for a mortgage.

WHAAAAAT???

Yep.  It's true.  A mortgage lender cannot approve your mortgage with an open dispute showing on your credit report.  Any disputes have to be removed or resolved.

Here's why - when a consumer files a dispute, they are telling the credit reporting agency that the item in question is wrong.  The credit reporting agency takes steps to confirm that.  To be fair to the consumer while that process is happening, they remove the disputed item from the calculation of the credit score.

The removal of that item likely will inflate the credit score (you wouldn't be disputing it if it was good stuff, right?) , which means you likely have a higher score while that dispute is in place than you would if it wasn't. 

When a loan underwriter sees a dispute on a credit report, this raises a red flag that tells them that your credit score is not a true credit score.  It's a temporary one until the item(s) in question are resolved.  Because of that, they have to stop the mortgage approval, get your dispute removed or resolved, and have your score recalculated.

This would not be a huge problem if a lender looked for disputes right upfront and discussed it with the buyer before a home was found.  The problem is, most loan originators don't think about this risk and don't review the credit report for it.  This often isn't recognized as a problem until a buyer is a couple of weeks into the process of a home purchase.

If the disputed item is newer or more significant in nature, the impact of adding it back into the credit score can be enough to cause a loan to be declined, sometimes days before closing.

So....what do you do now that you know this?  First, if you have any open disputes, contact the credit reporting agency to get them resolved and removed.  Second, when your lender pulls your credit report, ask them if there are any disputes showing on it.  Third, if the lender seems confused by the question or tells you that some are there but that they don't matter, find a more informed lender.

For homebuyers in Indiana and Michigan, I'd be happy to be that 'more informed lender'.  Just give me a call or drop me an email if I can be of service!

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.


Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Tuesday, August 19, 2014

Is the FHA HAWK Program Worth It?

Last May, FHA announced that they would be rolling out a new program this fall that would let first time homebuyers save money on the upfront and monthly mortgage insurance. 

The program is known as HAWK which stands for 'Homeowners Armed with Knowledge'.  In a nutshell, first time homebuyers who take an upfront and post-closing home buyer education class will get a reduction in the cost of both the upfront mortgage insurance and the monthly mortgage insurance charge.

Sounds like a good deal, right? 

Maybe.  Maybe not.  Let's compare the pros and cons.

Pros

  • Lower upfront mortgage insurance - right now, a homebuyer is charged 1.75% of their loan amount as an upfront mortgage insurance cost when getting a FHA mortgage.  This cost is added to their loan balance, making them owe more for the home.  With the HAWK program, the qualifying borrower would only pay 1.25%, so a 0.5% savings. 
  • Lower monthly mortgage insurance - right now, the typical FHA homebuyer pays 1.35% annually toward mortgage insurance.  This is paid in monthly installments (initial base loan amount x 1.35% / 12) and stays at that level for the life of the loan.  With this program, the rate would be reduced to 1.25% initially.  If the buyer completes a post-closing homebuyer education course and pays the loan on time during the first 18 months, they get a further reduction to 1.10% at the two year mark. 
  • More educated home buyers - this is the real reason for this program.  HUD is hoping it will help homebuyers be more educated about the home buying and home owning process.  Many home buyers go into home ownership unprepared.  Additional education could help with that.

Cons

  • Time Investment - the home buyer who participates in this program is going to invest a lot of time in it.  They need to do six hours of homebuyer education before finding a home, one hour after they find a home but before they close on it and one hour after they close, so a total of 8 hours of home buyer education, a portion of which has to be done one-on-one with a HUD approved counselor. 
  • Money Investment - the HUD approved counselor doesn't work for free, so someone will have to pay him.  At this point, it looks like the buyer will pay the counselor upfront and the lender who makes the FHA loan will reimburse them at the closing of the purchase.  What if the buyer doesn't buy a home after-all though?  Then they will have to pay that cost.  Exact costs are not determined yet seeing the program has not yet rolled out, but HUD has listed an estimated cost of $100/hour for one-on-one counseling (less if taken in a group setting). 

Bottom Line

So, is it worth it for the buyer to invest the money and time upfront?  If they have the time and are definitely going to buy a home with FHA financing, then definitely.  On a $100,000 loan, they will save $500 on the upfront fee, about $8 per month for the first 24 months and about $20 per month after that.

HOWEVER - if a buyer is proactive enough to do 6 hours of homebuyer education before making an offer on a home, could they be proactive enough to take the steps needed to make themselves eligible for conventional financing?  A conventional mortgage has no upfront financed mortgage insurance and, dependent on the credit score, the monthly mortgage insurance is typically significantly cheaper than even this program's discounted 1.1% rate.  Also, conventional borrowers eventually can remove the monthly mortgage insurance from their loan while most FHA borrowers have it for the life of the loan.

All to say....it can be a good program for the proactive buyer who absolutely has to go FHA.  If the buyer has the time and ability to become eligible for conventional financing, though, this route will typically beat FHA's HAWK program, hands down. 


Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.


Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.