By now we’ve all heard buzz about the supposed “credit crisis,” with tales of all Dallas real estate buyers being required to put 20% to purchase a home and then still having to search to find a lender who will write a loan. It seems the press just can’t get enough of all the “misery” in the Dallas real estate industry. But is this really what is happening?

To be sure, we are in the middle of what might be considered the biggest disservice ever perpetrated on potential home buyers. The truth is that mortgage money is as available today as it was a year ago and loans are being made every day with little or no money down. Who are these lenders and where can you find one? They may be right down the street - you just have to know where to look!

Federal Housing Administration (FHA) loans are making a huge impact on the mortgage industry; recent estimates show that about one out of five mortgages is an FHA loan. Although FHA loans never “went away,” their re-emergence is a result of the collapse of the sub-prime market. Technically, FHA doesn’t require a minimum credit score; in reality, however, lenders typically will not approve an FHA loan with a credit score below 500 in Dallas Texas. That is still a far cry from the notion that an 800 score is the only thing lenders care about.
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Fair Isaac Corp., the company that made the FICO credit score popular, is changing the way it determines that score. The model, named “FICO 08” should do a better job predicting loan defaults, according to the company. It is set up to be more forgiving of occasional slips by a consumer, but will take a tougher stance on repeat offenders. This new version will still score from 300 to 850 and will still take into account level of credit indebtedness, credit length, number of new accounts and inquiries, and types of credit, to determine scores. But, it will do a better job of separating “good risk” from “bad risk”, with thin, or young credit files, as well as consumers who are actively seeking new credit, being a part of the client profiles that will be more heavily scrutinized. The model will also be more lenient to people with serious delinquencies (greater than 90 days) if they have other accounts in good standing, which backs up their claim of forgiving occasional slips.

The VP of global scoring for Fair Isaacs is predicting that more consumer scores will go up than go down!

As far is this relates to the mortgage industry, good credit is always a plus when you are trying to buy a house. I can’t see the new model making much of a difference either way unless borrowers are serial delinquents, in which case they will see a decrease in their scores. With the abolition of most 100% financing programs, most lenders are now requiring scores above a certain level just to be able to obtain Mortgage Insurance for any program above 80% LTV. There are different scenarios too numerous to list that pertain to the new rules. However, the best way to find out your ability to purchase a home is to contact me directly so we can discuss your individual situation. Have a great week!

Craig Pollard is a mortgage professional and owner of Texas Mortgage Team. He specializes in the Dallas Fort Worth area and is a frequent voice on Texas Home Central’s blog. Craig can be reached at CPollard@Texasmt.com or 972-317-9900

Here are a few of the highlights from the ‘Mortgage Forgiveness Debt Relief Act of 2007′ that I thought you may be interested in.

Permanent exclusion from gross income of discharged home mortgage indebtedness. The bill would amend current law, which requires taxpayers to include discharges of mortgage indebtedness as income and to pay tax on this income. The bill would provide a permanent exclusion for discharges of up to two million dollars of indebtedness (on or after January 1, 2007) which is secured by a principal residence and which is incurred in the acquisition, construction, or substantial improvement of the principal residence. Instead of including this amount as income, the basis of the individual’s principal residence would be reduced by the amount excluded from income under this bill. This proposal is estimated to cost approximately $1.4 billion over 10 years.

Long-term extension of the deduction for mortgage insurance. The bill extends the deduction for mortgage insurance for seven years (through the end of 2014). Current law limits the deduction for mortgage insurance to payments (including Veterans Administration, Rural Housing Administration, and Federal Housing Administration insurance premiums) made prior to the end of 2007. The bill would provide that payments will qualify for this deduction whenever they are paid so long as the contract is entered into after 2006 and before 2015. This proposal is estimated to cost $570 million over the next 10 years.

Modification of the qualification tests for cooperative housing corporations. The bill would modify the requirements for qualifying for the special rules available to cooperative housing corporations. Under current law, a cooperative housing corporation must meet several requirements, including a requirement that 80 percent or more of the cooperative housing corporation is earned from the corporation’s tenant-stockholders. The bill would provide two alternatives to this 80 percent rule (i.e., one based on square footage and another based on cooperative expenditures). These two alternatives will make it easier to qualify as a cooperative housing corporation. This proposal is estimated to cost $22 million over 10 years.

Modification of exclusion of gain on sale of a principal residence. The bill amends the current law exclusion of up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. Under current law, the sale of a home will qualify for this exclusion if the home is a taxpayer’s principal residence for at least two of the five years ending on the sale or exchange. This exclusion applies even if the home was initially purchased as a second home. Under the bill, if a taxpayer moves their principal residence to a second home, the taxpayer will only be able to utilize this exclusion to the extent that it relates to the period of time when the home was first used as a principal residence. The bill grandfathers use before 2008. This proposal is estimated to raise $2.005 billion over 10 years.

Craig Pollard is a mortgage professional and owner of Texas Mortgage Team. He specializes in the Dallas Fort Worth area and is a frequent voice on Texas Home Central’s blog. Craig can be reached at CPollard@Texasmt.com or 972-317-9900

One of quickest ways to get ‘Unapproved’ for the loan on your dream home is to do something that negatively effects your credit score during the home loan process. One of the first conversations we have with all clients (good or not so good credit) is notifying them to NOT make any major purchases while building or buying a home. That means NO new car, new boat, furniture, electronics, etc…until the loan is closed.

To better understand why or how this will effect you, I will give you an example of a client with good credit that buys a new car during the home loan process and the real cost of buying that new car. Oh, and the “Cost” I am referring to is not just the new payment.

Client’s situation before buying the new car:

• 700 credit score - You should target to minimally have a credit score of 680. Ideally 740+.
• 37% backend debt-to-income ratio - Backend ratio is the new house payment plus all current liabilities divided by monthly income. The target is 38% or less for conventional lending.
• Current car payment is $315 with original balance of $18,016 and current balance of $7,206. This is a great trade line that is helping the credit score.

*Note- Something to remember for each line of credit - Your credit score will climb once you are 50% or less of the original balance or high limit. There is also another tier that will jump the credit score even more at 30% or less.

Client’s situation with the new car:

• 670 credit score – Now they are below the 680 mark (New credit can cause your credit score to drop 30+)
• 45% backend debt-to-income ratio – Now they are above the target 38% or less for conventional lending
• The new car payment is $634 with new balance of $36,261

This one new credit line has caused their credit score to drop below the minimum target of 680 and caused their backend ratio to climb above the target 38% or less for conventional lending.

In a scenario like this, even though this may only hurt our ‘good credit’ clients by an additional .25% to .50% to the rate, now you would no longer qualify for the original program that requires less than 38% debt-to-income and 680 credit score. This small rate increase could equate to thousands and thousands of dollars over the life of the loan. Plus, if you were looking for 100% financing then this might even take you out of that option and now you have to put 3% to 5% down.

If that wasn’t bad enough, your home owner’s insurance may be higher since many companies use your credit score to determine which tier put you under.

For the ‘less than perfect’ credit, you may see an additional .5% to 1%+ increase in rate or even worse, no longer qualifying for your new home.

No matter what the credit situation is for you, please DO NOT go out and make any major purchases. I would even recommend that you do not make any new purchases on current credit cards. Remember, if you climb over the 50% balance vs. high limit then your score will drop.

This is a lot to absorb and understand so please feel free to contact me with any questions.

Sean Varin is a mortgage professional and co-owner of Texas Mortgage Team. He specializes in the Dallas Fort Worth area and is a frequent voice on Texas Home Central’s blog. Sean can be emailed by Clicking Here or at 972-317-9900

1. Check your credit report at all three agencies- Equifax, Experian and Trans Union (checking your own credit is called a “soft-pull” and will not negatively affect your credit). Look for errors that may appear on your report. Each agency offers a place on their website to submit online disputes. They have 30 days to verify the information is correct or they will remove it.

2. Do NOT open new credit cards that you don’t need just to increase your available credit. This approach often backfires and will lower your score.

3. Keep your current account balances as low as possible. High outstanding debt will negatively affect your score since you will have a greater chance at missing a payment.

4. If you have old credit accounts that are paid off, don’t close them, simply cut up the cards. This will show a longer history of good credit and will help your score.

5. If you cannot make a payment due to illness, losing your job or another serious issue, write a letter to your credit companies explaining the situation and requesting a work out payment plan. You would be suprised how willing they are to work with you before it becomes a problem. After there’s a problem is another matter… they can get nasty

6. Pay all of your accounts ON TIME! Accounts over 30 days past due will show up on your credit report. If you are late, make that payment as well as the one currently due or every month will show 30 days past due until you are caught up and can ugly quickly.

7. If you do not have any credit cards and cannot get approved, consider getting a Secured Card. This is a credit card secured by money you already have and will improve your credit by reestablishing a credit history.

8. Keep a small balance on your accounts (small is the keyword). A small balance is better than a zero balance for improving your score… but a zero balance is better than a big balance so lean to the conservative side.

9. Do not let a lot of companies check your credit. Each time your credit report is pulled from an outside company, your credit score will go down slightly. Five companies pulling your credit can be the difference between that new home and renting for another year.

10. Stay on top of your credit and check your report at least once a year which is provided free upon request from each of the Credit Agencies.

Also read Understand your credit score and then improve it!

I have had the pleasure of working with a lot of home buyers looking to buy their first home or even their second or third home. I can’t tell you how many times I meet people who are ready and willing but not able. They have a steady job with a good income and by all accounts should be able to buy that new home. There is just one little 3 digit number getting in the way. Their credit score!

Improving your credit takes time and hard work but when done right will make all the difference.