Q: I’m trying to buy my first home using a loan insured by the Federal Housing Administration (FHA). My offers keep getting rejected, and my agent says it’s because sellers don’t like FHA loans because of all the different repairs and guidelines. I understand that. But I’m looking for a clear answer as to how much of a downpayment I would need to come up with to qualify for a non-FHA loan. Can you clear this up?
A: In my experience, usually when things in real estate are unclear it’s because the teacher and the student aren’t on the same page, aren’t using the same vocabulary word or just don’t get each other. Your question poses one of the really kind of complicated things about the current market. I’ll break it down, but don’t fault your advisers for giving you an unclear answer. It is a tough thing to understand.
Need-to-Knows
Anytime you put less than 20 percent down on a home loan, private mortgage insurance (PMI) must be acquired to insure the lender against the risk that you will default.
PMI fell into disuse during the subprime mortgage era, mostly because there were so many second and third mortgage loans available standing in for the 20 percent downpayment (or some lesser amount, for buyers who wanted to put some money down). This is how we got those 80-10-10 or 80-20 loan combinations that facilitated 100 percent financing.
When the foreclosure crisis hit, virtually all of the second and third lenders that had helped finance these zero-down purchases were unable to recover any of the funds they had lent, because the value of the homes securing the loan had fallen so low that the foreclosure sale recouped only enough to pay the first lender (and sometimes not even pay them all the way off).
The upshot? Lenders are not making those second and third mortgages anymore.
There are conventional (non-FHA) loans for 80 percent, which require a 20 percent downpayment. And there are conventional loans that will do 90 percent of the purchase price, which would require a 10 percent downpayment.
But here’s the rub. If you make only a 10 percent downpayment, you will need PMI. And here’s the other rub. You also have to qualify for PMI. These insurers have their own credit guidelines, and currently the minimum FICO for non-FHA PMI is 700. FHA-loan PMI does not have a minimum credit score requirement. …CONTINUED
So if your credit score is under 700 your only options are to use an FHA loan or to put 20 percent down. If your credit score is over 700, your options are to use an FHA loan with a minimum of 3.5 percent down, get a non-FHA (conventional) loan with a minimum of 10 percent down and obtain PMI, or get a conventional loan with 20 percent down and no PMI.
And one more thing: because you mentioned "coming up with" a downpayment, it sounds to me like you might be considering taking a gift from someone you know or a loan from your own traded asset accounts, like a retirement account. Be aware that FHA guidelines are very flexible on allowing gifts from family members.
However, conventional loans have much stricter and frequently changing rules about how much you can take as a loan for your downpayment. Loans against your retirement accounts may impact your debt-to-income ratios, reducing the loan amount for which you qualify.
Action Plan
1. Talk with your mortgage broker and find out what your middle FICO score is on the credit reports that she has pulled — don’t use one that you get yourself online.
2. From that, you should be able to use the above rubric to get a better handle on your options. If you’re very near 700 and would be inclined to make a 10 percent downpayment if you could, ask your mortgage broker to counsel you on what you could do quickly to bring your score up — inquire as to whether her office offers a "Rapid Rescore" (credit assistance) service to help you execute this.
3. Involve your mortgage broker in your planning for "coming up with" the larger downpayment to qualify for a conventional loan, if that’s what you decide to do, to avoid making a move that will foul up another area of your mortgage qualifications.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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