The US Government has passed enactments to ease up the troubles of home buyers, when they addressed the problems arising out of the foreclosure crisis. The US economy is facing challenges and struggling hard to avoid recession.
So in the changed scenario of credit crunch, a home buyer in the Real Estate market should be aware of the pre-requisites towards securing mortgage loans for buying his or her dream home.
1.FHA Loan limits: The latest stimulus bill by the Obama administration has modified the loan features, which are guaranteed by government sponsored agencies of Fannie Mae and Freddie Mac. The Federal Housing Administration (FHA) is the administrative wing of the Government for issuance of guarantees for home loans. Three aspects have been changed in the FHA programs for housing loans namely – the loan limit: the highest amount that can be borrowed by an individual borrower from the above mortgage lending institutions; second is the FICO credit score; and the third is the down payment that the borrower should make at the time of receiving the home loan.
The new limits are being assessed State to State. Emphasis has been given for high cost housing markets. FHA is allowing limits up to $729,000 in 33 identified Counties. In more than 600 Counties all over United States, there are also loans awarded for more than $271,050. These new limits apply to specific Counties and depending upon the State the home buyer emerges, they will not find much of the change.
Among the change is the loan to value is limited. Home buyers can get 125% loan to value in high cost markets and this limit is extended for the year 2009. After this year the current market will be assessed. Home buyers going for a FHA loan can ascertain the limit from the lenders in their area.
2. FICO Credit Score: Fair Isaac Corporation (FICO) credit score is widely accepted by most of the mortgage lenders in US to determine the credit worthiness of the barrower. Prior to 2009 a borrower needed 580 for their FICO score. The lenders negotiated with FHA to increase the score due to the risk they felt 580 posed. So in April 2009 this is changed to 620. It is imperative on the borrower prior to embarking on a home buying activity to check their credit score. A higher credit score ensures best welcome by lenders and low interest rates. Keeping track on the credit rating by paying all your bills promptly is the key. It is to be noted that the credit history of the borrower in the last 7 years is taken into consideration by mortgage lenders to decide – good, bad or ugly.
3. Down payment: The next change FHA modified is the down payment required. One needs to have at least 5 percent down payment now, changed from 3 percent prior to 2009. In effect this means the lender will give only 95% of the value of the property as home loan.
There are other factors in vogue for sanctioning home loans, which home buyers can do well to bear in mind.
4. Employment history: Lenders look for stability and consistency in the background of employment and they expect the borrower to have continued in employment for at least 2 years in the same industry. This is a good basis for enhancing credibility.
5. Debt-to-Income Ratio: While calculating debt-to-income ratio, mortgage lenders add up all the monthly payments of the borrowers like car loan, credit cards, student loan, rent payment etc. with the loan repayment that is being applied for. This amount is divided by the monthly income of the borrower and the debt-to-income is expressed as a percentage. To qualify for a FHA loan, your debt-to-income ratio should not exceed 29%. For a conventional mortgage, 33% is a comfortable ratio.
6. Cash Reserve: This is a proof that you have cash resources to pay a minimum of 2 months of monthly repayment instalments of the applied loan. It can go up to 6 months in case of some lenders.
Although lending requirements have heightened, if home buyers heed the above requirements they may take advantage of the current “buyer’s market”.