Loan Officer Gustan Cho
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The credit score that was pulled when you applied for a mortgage loan is the credit scores that will be used throughout the mortgage process. If your credit scores dropped during the mortgage process, it does not matter because the credit score that was pulled is good for 120 days. If your credit scores drop during the mortgage process, it can potentially affect your loan approval, interest rates, and terms if the credit score drop was due to late payments, or other derogatory credit tradelines. Here’s what may happen:
- Re-Evaluation: The lender may re-evaluate your application and pricing if your credit scores went up. Higher credit scores mean lower rates.
- Rate Change: A lower credit score could lead to a higher interest rate if the credit report is 120 days or older and a new credit report needs to be pulled and your credit scores dropped.
- Approval Risks: If the score drops significantly after 120 days when a lender needs to pull a new tri-merger credit report, you may no longer meet the lender’s criteria.
What to Do:
- Communicate with Your Lender: Explain any factors causing the drop.
- Avoid Major Financial Changes: Don’t open new credit or make large purchases.
- Monitor Your Credit: Ensure there are no errors causing the score drop.
Staying proactive and working closely with your lender can help mitigate potential issues. Do not worry about your credit scores dropping because the original credit score that was pulled will be used throughout the mortgage process. The original credit scores from the initial credit report pulled to issue your pre-approval letter is good for 120 days. Any credit report that is older than 120 days needs to get repulled and the new credit scores will apply.
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QM Loans: Qualified-Mortgage Loans
The Consumer Financial Protection Bureau (CFPB) has strict criteria for classifying loans as qualified mortgages. One of them is a cap on debt-to-income ratios at 43%. Other criteria include prohibiting interest-only payments, common among risky loans, and ensuring borrowers can repay their debts.
Non-QM Loans: Non-Qualified Mortgage Loans
Non-qualified mortgages, on the other hand, don’t adhere strictly to QMs, but they still provide safe and responsible lending. These loans offer more flexibility to cater to unconventional income sources such as self-employment, investors, or people with credit challenges.
Key Differences between Non-QM and QM Loans:
QM loans have stringent guidelines, making them less risky. In contrast, non-qualified mortgages have higher risks and typically attract higher interest rates.
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Suppose you have a non-forgivable down payment assistance (DPA) second mortgage. In that case, you may still qualify for an FHA or VA streamline refinance. However, the DPA second mortgage would need to be subordinated. The second lien holder must agree to remain in a subordinate position behind the new FHA or VA loan. This is necessary because streamlined refinancing deals only with your first mortgage; all current subordinate liens must stay put to continue with refinancing smoothly.
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Closing Expenses on FHA and VA Streamline Refinance:
FHA Streamline Refinance Closing Prices: Usually vary between 2 % and 5 % of the loan amount. These include things like charges for appraisals and titles, as well as other fees charged by lenders.
VA Streamline Refinance (IRL) Closing Costs: Similar to FHA, the closing cost is usually about 2%- 5% of the loan amount but can be lower because there’s no need for an appraisal or income verification.
VA Funding Fee: This is usually around half a point (0.5%) but can vary depending on whether someone qualifies with their status as an eligible veteran or not. Sometimes, this fee gets waived entirely.
Rolling Closing Costs: Certain costs may be rolled into an FHA loan while others cannot; alternatively, both the funding fee and some closing expenses can be rolled into a VA streamlined loan.
The process from Application to Closing:
Application: Submit a streamlined application with reduced documentation required.
Approval: Because there is less underwriting involved in these programs than in traditional refinances, approval tends to happen fast
Closing: Sign papers and complete all remaining steps necessary to finalize a refi transaction, such as wiring funds.
In general terms, one should expect little difference regarding overall cost. However, each lender may have different fee structures associated with their products. Hence, it pays off to always ask questions upfront!
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To check your credit scores without spending a dime, visit Credit Karma, Credit Sesame, or AnnualCreditReport.com. These services allow you to monitor your credit reports and scores to understand how you’ll qualify for a mortgage.
Minimum Credit Scores for Buying a House
FHA Loans: 580 (3.5% down payment) or 500 (10% down payment).
Conventional Loans: Usually 620 or higher
VA Loans: No official minimum score requirement exists, but most lenders want at least 620.
Review your scores and talk to a lender about your chances of approval.
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Several factors can hold up a home closing, including:
Loan Approval Delays: Underwriting issues, documentation requests, or last-minute financial changes can delay approval.
Title Issues: Problems like unresolved liens or unclear ownership can prevent the title from being cleared.
Appraisal Discrepancies: Renegotiations or delays may occur if the property appraises for less than the purchase price.
Inspection Issues: Necessary repairs or disputes over inspection findings can cause delays.
Final Walkthrough Problems: Unresolved issues during the final walkthrough can delay closing.
Addressing these factors proactively can help avoid delays.
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Forward and Backward Mortgages: What Are They?
Forward Mortgage: A conventional home loan that requires you to repay the mortgage over time by making monthly payments to a lender. You gain ownership as you repay the borrowed amount.
Reverse Mortgage: This type of mortgage is usually used by individuals at least 62 years old or older; it enables them to convert some portion of their home equity into cash. In most cases, the creditor will only ask for repayment once you sell your house, move out permanently, or die.
Main Contrasts:
Payment Direction: In forward mortgages, money is given to lenders, whereas in reverse mortgages, lenders give money to borrowers.
Utilization of Equity: While forward ones build it up, backward ones tap into this resource.
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In the case of Federal Housing Administration mortgages, the standard practice for lenders is to employ FICO Score models 5, 2, and 4. These represent the versions used by the three major credit bureaus as follows:
Experian: FICO Score 2
Equifax: FICO Score 5
TransUnion: FICO Score 4
These are a little older and sometimes used because they are more conservative. They better reflect what a lender wants to know about your credit history. Additionally, ensure that you ask your mortgage officer what version they need to approve an FHA loan for you.
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The maximum debt-to-income (DTI) ratio of conventional loans typically depends on the lender and the borrower’s financial profile.
Generally:
45% DTI: Most lenders consider this the standard maximum, especially if the borrower has no strong compensating factors. For borrowers with credit scores below 700 FICO, the automated underwriting system will cap the debt-to-income ratio at 45%.
50% DTI: Some lenders may allow up to a 50% DTI if the borrower has higher credit scores, larger down payments, or other compensating factors. For borrowers with credit scores higher than 700 credit scores, the automated underwriting system will approve debt-to-income ratios up to 49.99% on conventional loans.
The exact limit can vary, so it’s important to check with individual lenders regarding their specific guidelines.
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