Illinois Mortgage Rates and News

“How low of a credit score can I have and still be able to get a mortgage?”

This is a question I hear almost every day. One of the frustrating things for many people trying to buy their first home, has been dealing with old credit problems. Some people consistently have problems with credit, and if you just don’t pay your bills on time (or at all) and if you don’t take credit seriously, buying a home and qualifying for a mortgage is probably not an option. But for many people their credit has been damaged due to isolated life events. Too many people have run into problems over the last few years, often as a result of losing a job, medical issues or other traumatic events. For these people, the real frustrating part is that once their lives are back on track and they are back to paying their bills on time, it is still hard to improve their credit scores. To add insult to injury, mortgage guidelines have continued tightening over the last few years. A few years ago credit scores pegged 620 as the lowest level of good credit, that is, credit scores good enough to qualify for the best rate on a conventional mortgage. Now it takes a Fico score of 740 to get the best terms, and those with scores under 700 should expect higher rates or bigger fees.

FHA is much more common sense in regards to credit. With FHA your whole credit profile is considered and the scores themselves aren’t nearly as much of a focus. FHA underwriters also base their decisions on letters of explanation telling what happened to your credit, why it happened and why it isn’t likely to happen again. FHA is much more common sense, and FHA doesn’t have a minimum credit score that they require. But over the last year almost all of the lenders who fund FHA loans have added overlays (additional requirements) that have raised the required FICO score to a minimum of 640. There might not be much difference in the credit profile between someone with a 640 score and someone with a 629 score. But statistically, credit scores under 640 are much more likely to default on their loans. The sad thing about concentrating on credit scores is that it doesn’t take the human element into effect, and there are people who have scores where the credit is improving, and others with the same scores where the credit is going down. Up until now they have all been looked at the same way if their score was below the 640 minimum. But this is now changing.

Prospect mortgage, the company I work for, has just come out with a new loan program that allows people to buy homes with Fico scores between 580 and 639. In my opinion, this is a huge step in the right direction. This isn’t a new version of sub-prime and it doesn’t mean anyone with a credit score over 580 is now able to get a loan. What it does mean is that those people who have been doing the right things and who can show they are able to afford a home payment  won’t be frozen out simply because their Fico scores came in too low. This program is going back to old school FHA underwriting. In order to qualify for this program, we need to see that even though your credit scores are lower than what is normally called for, you are handling your credit responsibly and whatever caused the problems is all past history. The real key to this loan is affordability. Having a payment that fits in your budget means you aren’t stretching too far, means less stress on your finances, so one of the biggest factors for approval will be showing that both your total mortgage payment and your mortgage payment plus all your other debt, are at comfortable levels. If your payment is going to jump with the new mortgage compared to what you have been paying for rent, we will need to see that you have been saving regularly and that the higher payment won’t be a burden.

This new program is an FHA fixed rate mortgage. Here are some of the features of this new loan:

• Borrowers credit scores between 580-639.

• Available for purchase loans only.

• 3.5% down payment.

• All the funds for closing can come from a gift.

• Available for single family homes, townhomes, condos and 2 unit buildings (rental income can’t be used to qualify).

• Ratios (this is to show affordability) are 31% of income cam be used for the housing payment and 43% of income can go toward the housing payment plus all other debt. These ratios can be increased if there are at leas 2 compensating factors.

• Can apply 2 years after a chapter 7 bankruptcy discharge – 12 months after chapter 13.

• 2 months reserves required (based on 2 times the full mortgage payment).

• Home buyer counseling is required.

The rates on this program are higher than for conventional FHA mortgages because of the higher risk. This program won’t help everyone, but it will help a lot of people buy a home now. If you are looking to buy a home but worried that your credit will hold you back (or a Realtor working with clients who have had problems in the past), give me a call.

Free Home Buyers Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

Over the last months conventional mortgage guidelines have tightened, and with risk based pricing mortgage financing has gotten more expensive for most borrowers. Conventional mortgage insurance has pulled back on what they will cover, and the cost of mortgage insurance has gone up (more increases are coming in August). This combination has made it harder to qualify for a conventional loan, and more expensive for those who have lower down payments and good but not great credit scores. The one bright spot in the real estate financing market has been FHA. Earlier this year FHA raised their maximum loan limit (up to $410,000 for a single family home here in the Chicago area, lower in other parts of Illinois) making FHA a great option for many borrowers who would have once been conventional borrowers. But FHA is feeling the pinch of the market, too. Effective July 14^th FHA is changing to risk based mortgage insurance.

FHA is a government backed loan which is designed to help more people buy homes. FHA doesn’t loan the money themselves, they set up the guidelines and insure the lenders against loss through their mortgage insurance premiums. The goal of FHA isn’t to make a profit, like the private mortgage insurance companies, but to encourage more home ownership which makes a more stable society. This means they are willing to take on borrowers who are considered higher risk due to low down payments, lower credit scores, and those who haven’t built up traditional credit. This is still their mission, but now the riskier borrowers will end up paying a little more to make sure the program stays solvent.

FHA breaks their mortgage insurance premium down into 2 parts: an up-front portion that is added to the loan amount and financed over the life of the loan, and a monthly insurance premium which is part of your normal payment. This used to be a one size fits all solution, as long as you qualified for FHA financing you paid the same premium. They are now basing the premium on borrower’s down payment and credit scores. This means the borrower’s with the lowest risk will get the best pricing, and those who are higher risk will have to pay a little more. The current cost of FHA is a 1.5% up-front mortgage insurance premium and .50% yearly premium which is paid monthly. The new schedule will lower the up-front premium for most borrowers who invest at least 5% for their down payment. The monthly premium is going up for all minimum down payment buyers (3% cash investment) and the up-front portion changes based on their credit score.

FHA is still the best choice for many borrowers and the only choice for home buyers with little or no money for a down payment and closing costs. Here is some more information on some of the advantages of FHA financing.

This is what the premiums will be after July 14^th.

Illinois Mortgage Rates and News