Home Buying Scenarios*
Check out the issues first time buyers face when purchasing a home and find answers to your challenges on the road to homeownership.
Problem: Tom has a 680 credit score but his wife Joanne has bad credit with a 492 credit score. Tom makes $35,000 per year and Joanne makes $30,000. They want to apply for an FHA loan and they are trying to purchase a $200,000 home in Chicago, Illinois.
Solution: They will not be able to qualify for a $200,000 home because both credit scores need to be 640+. Tom may apply for a loan on his own but will only qualify for a much lesser priced home. They may not be able to find any homes in this price range so Joanne may need to work on improving her credit and hopefully, they can purchase a home within a year.
Solution: They will not be able to qualify for a $200,000 home because both credit scores need to be 640+. Tom may apply for a loan on his own but will only qualify for a much lesser priced home. They may not be able to find any homes in this price range so Joanne may need to work on improving her credit and hopefully, they can purchase a home within a year.
Problem: Tammy has no credit history or credit scores with 2 medical collections on her credit report.
Solution: Unfortunately, you need a credit history these days to get a home loan. You will need at least 2 scores and a lender will use the lower of 2 scores or the middle of 3 scores. Tammy will not qualify for a home loan right now. She needs to build up a credit history with 3 to 4 accounts with a minimum history of 12 months to qualify for the first time home buyer program. First, she should get a few secured Visa or Master cards which report to the credit bureaus, then she may be able to get an unsecured card, and finally she should try to get one installment account such as an auto or computer loan. I would like to note that many firsthomebuyers think bad credit is no credit but that is not true. No credit means no credit history whatsoever, good or bad. Tammy should pay off the medical collections as soon as possible so time will pass before she applies for a mortgage. If Tammy pays offs the collections and establishes 4 credit accounts with a perfect 12 month history then she should qualify for a loan within 1 year.
Solution: Unfortunately, you need a credit history these days to get a home loan. You will need at least 2 scores and a lender will use the lower of 2 scores or the middle of 3 scores. Tammy will not qualify for a home loan right now. She needs to build up a credit history with 3 to 4 accounts with a minimum history of 12 months to qualify for the first time home buyer program. First, she should get a few secured Visa or Master cards which report to the credit bureaus, then she may be able to get an unsecured card, and finally she should try to get one installment account such as an auto or computer loan. I would like to note that many firsthomebuyers think bad credit is no credit but that is not true. No credit means no credit history whatsoever, good or bad. Tammy should pay off the medical collections as soon as possible so time will pass before she applies for a mortgage. If Tammy pays offs the collections and establishes 4 credit accounts with a perfect 12 month history then she should qualify for a loan within 1 year.
Problem: Bob has worked as an accountant for 10 years and now he has just opened up a new consulting business in the last six months
Solution: Today, there are few no income verification programs for self-employed individuals. Bob will not qualify for our loan program right now. His business needs to be operating for 2 years and he will need 2 year's tax returns before underwriting will use his business income to qualify for a loan and they will average his income for the last 2 year’s which can’t be declining from one year to the next. For example, if Bob wants to purchase a $100,000 home and he makes $75,000 in 2010 and $50,000 in 2011 but he reports $32,000 net income for 2010 and $15,000 net income for 2011 then he will probably not qualify for a $100,000 home loan because his net income is not enough to qualify and his income is declining so underwriting may only use $15,000 or not use his income at all. Bob needs to show increasing or stable NET income which is sufficient to qualify for the home he wants to purchase.
Solution: Today, there are few no income verification programs for self-employed individuals. Bob will not qualify for our loan program right now. His business needs to be operating for 2 years and he will need 2 year's tax returns before underwriting will use his business income to qualify for a loan and they will average his income for the last 2 year’s which can’t be declining from one year to the next. For example, if Bob wants to purchase a $100,000 home and he makes $75,000 in 2010 and $50,000 in 2011 but he reports $32,000 net income for 2010 and $15,000 net income for 2011 then he will probably not qualify for a $100,000 home loan because his net income is not enough to qualify and his income is declining so underwriting may only use $15,000 or not use his income at all. Bob needs to show increasing or stable NET income which is sufficient to qualify for the home he wants to purchase.
Problem: Betty just graduated from Florida State University and she has $100,000 of student loans.
Solution: Betty does not need a 2 year work history to qualify for the first time home buyer program if she just graduated from school. She just needs to have a job and we will need a copy of her diploma. One issue which comes up frequently are student loans. Betty has a huge balance on her student loans which are deferred for less than 1 year and they have not been consolidated into one loan yet. Underwriting will pick up a payment even though they are not due for awhile and her debt ratio is too high. Betty needs to consolidate her student loans into one low payment as soon as possible to make it easier for her to qualify for a home loan.
Solution: Betty does not need a 2 year work history to qualify for the first time home buyer program if she just graduated from school. She just needs to have a job and we will need a copy of her diploma. One issue which comes up frequently are student loans. Betty has a huge balance on her student loans which are deferred for less than 1 year and they have not been consolidated into one loan yet. Underwriting will pick up a payment even though they are not due for awhile and her debt ratio is too high. Betty needs to consolidate her student loans into one low payment as soon as possible to make it easier for her to qualify for a home loan.
Problem: Frank decided to do the right thing and he paid off some old medical collections but his middle credit score went from 680 to 629. What the ##$%^! happened?
Solution: Frank should not have paid off the old collections unless he was several months to one year from purchasing a home. When you pay off old collections, the credit bureaus look at this as a recent derogatory event and scores can drop significantly. Only time will heal the scores and he should have consulted a loan officer first. He possibly should have left the collections alone, applied for the home loan because he had the minimum credit score of 640 to qualify and underwriting would have approved the loan subject to the collections being paid off prior to closing. You want to pay off collections as close to closing as possible because the lender may run another report a day before closing and the collections being paid off will not factor into the scoring because it usually takes 30 days or so for the bureaus to update your credit report. Also, some loans, such as FHA, may not require you to pay off medical collections.
Solution: Frank should not have paid off the old collections unless he was several months to one year from purchasing a home. When you pay off old collections, the credit bureaus look at this as a recent derogatory event and scores can drop significantly. Only time will heal the scores and he should have consulted a loan officer first. He possibly should have left the collections alone, applied for the home loan because he had the minimum credit score of 640 to qualify and underwriting would have approved the loan subject to the collections being paid off prior to closing. You want to pay off collections as close to closing as possible because the lender may run another report a day before closing and the collections being paid off will not factor into the scoring because it usually takes 30 days or so for the bureaus to update your credit report. Also, some loans, such as FHA, may not require you to pay off medical collections.
Problem: Maggie is a nurse who lives in New York and she has been offered a new nursing job with more pay at Mercy Hospital in North Carolina. She is excited about buying her first home.
Solution: Maggie can use the income from the new job as long as the start date is prior to her closing date and she can provide one pay stub which may difficult because she has to find a place to stay for a few weeks until closing. Also, she is receiving an increase in pay which we can used to qualify for the loan program. Maggie must provide the lender with a signed employment contract which states the start date, position, and salary. Note: You can’t purchase a home in another state several months prior to starting a new job and use your current job to qualify because it will not be considered an owner occupied property. You may purchase the home as an investment property but you will need 20% or more as a down payment and the interest rate may be higher.
Solution: Maggie can use the income from the new job as long as the start date is prior to her closing date and she can provide one pay stub which may difficult because she has to find a place to stay for a few weeks until closing. Also, she is receiving an increase in pay which we can used to qualify for the loan program. Maggie must provide the lender with a signed employment contract which states the start date, position, and salary. Note: You can’t purchase a home in another state several months prior to starting a new job and use your current job to qualify because it will not be considered an owner occupied property. You may purchase the home as an investment property but you will need 20% or more as a down payment and the interest rate may be higher.
Problem: Tony has been late on his rent 3 times in the last year.
Solution: Lenders look at rent history very closely for first time home buyer programs. Tony should have 12 consecutive on-time rent payments to qualify for the loan. If he is late a few times but less than 30 days late, then underwriting may accept a letter of explanation. You need to have a good reason for paying your rent late because your housing payment history is indicative of how you may make your mortgage payment. If your landlord is willing to fill out a verification form that you have paid your rent on time for the last 12 months then you may not have to deal with the issue of late rents payments. Once, I had a client who only had 2 late pays on rent which were only 1 and 10 days late but the landlord indicated that she was over 30 days late on each payment and we had to get cancelled rent checks and good letter of explanation why she was late in order to get the loan approved.
Solution: Lenders look at rent history very closely for first time home buyer programs. Tony should have 12 consecutive on-time rent payments to qualify for the loan. If he is late a few times but less than 30 days late, then underwriting may accept a letter of explanation. You need to have a good reason for paying your rent late because your housing payment history is indicative of how you may make your mortgage payment. If your landlord is willing to fill out a verification form that you have paid your rent on time for the last 12 months then you may not have to deal with the issue of late rents payments. Once, I had a client who only had 2 late pays on rent which were only 1 and 10 days late but the landlord indicated that she was over 30 days late on each payment and we had to get cancelled rent checks and good letter of explanation why she was late in order to get the loan approved.
Problem: Mary was earning $80,000 per year as a sales manager for XYZ company but she just started a new job in sales for Make The Sale Company with a $40,000 plus commissions which are expected to be $60,000 or more for the first year which brings her projected total 1st year income to be $100,000 or more.
Solution: Underwriting will only pick up the base pay and Mary will need to show 2 years of commissions before the lender will pick up the income. Mary should have bought her new home prior to the job change and she would have known this earlier if she would have contacted a lender and submitted an online pre-approval application.
Solution: Underwriting will only pick up the base pay and Mary will need to show 2 years of commissions before the lender will pick up the income. Mary should have bought her new home prior to the job change and she would have known this earlier if she would have contacted a lender and submitted an online pre-approval application.
Problem: Debbie is buying a home from her mother but she has zero down payment. The home will appraise for $120,000 and her mother is willing to sell it to her for $110,000.
Solution: Debbie may qualify for the FHA Gift of Equity Program which means you can use the equity or $10,000 for down payment and closing costs and may not have to bring any money to closing. This program only works if you are purchasing a home from a family member who lives in the home or you are renting the home for 6 months or more.
Solution: Debbie may qualify for the FHA Gift of Equity Program which means you can use the equity or $10,000 for down payment and closing costs and may not have to bring any money to closing. This program only works if you are purchasing a home from a family member who lives in the home or you are renting the home for 6 months or more.
Problem: David just got a new job out of college but he doesn’t qualify for the home he wants. His fiancé Patricia has bad credit but good income to help pay the mortgage payment. David was turned down by his local bank because he doesn’t make enough income to qualify on his own even though Patricia will be contributing to the payment. He told his father Nick about the situation and he agreed to be a co-signer on the loan.
Solution: David’s father can be the co-borrower with HomeReady Program and help David qualify for the program. Nick does not have to occupy the property and David can refinance the loan into his and possibly Patricia’s name in a year or two to get dad off the mortgage. Important note: If David’s dad has a mortgage then the payment will be counted in the qualifying ratios so the income has to be good enough to help carry the new mortgage as well as his dad’s existing mortgage.
Solution: David’s father can be the co-borrower with HomeReady Program and help David qualify for the program. Nick does not have to occupy the property and David can refinance the loan into his and possibly Patricia’s name in a year or two to get dad off the mortgage. Important note: If David’s dad has a mortgage then the payment will be counted in the qualifying ratios so the income has to be good enough to help carry the new mortgage as well as his dad’s existing mortgage.
Problem: Jennifer wants to buy her first home from her landlord but her current credit score is 522 and the minimum credit score for the FHA program is 620. Also, she has no money for down payment.
Solution: Jennifer should approach her landlord with a lease-to-own option for 2 years to purchase the home at a specific price so she will have time to repair her credit. Furthermore, she can offer to pay $200 above the current market rent and the landlord will give her back $4,800 ($200 x 24 months) at end of the 2 year period to be used toward the down payment. This program works if the landlord is not in a hurry to sell the home right now.
Solution: Jennifer should approach her landlord with a lease-to-own option for 2 years to purchase the home at a specific price so she will have time to repair her credit. Furthermore, she can offer to pay $200 above the current market rent and the landlord will give her back $4,800 ($200 x 24 months) at end of the 2 year period to be used toward the down payment. This program works if the landlord is not in a hurry to sell the home right now.
Problem: Dennis wants to use cash in a safe for his down payment on the house.
Solution: You can’t use cash on hand such as mattress money for a mortgage loan except for the Fannie Mae HomeReady Program. Underwriting is very strict about the source of funds to purchase your home. You should deposit cash into a bank account at least 3-4 months prior to mortgage application. The lender will usually ask for 2 months bank statements and the large cash deposit will not show up on these statements and create an issue. If you can’t deposit these funds then you will need to get a gift from a family member which is considered a legitimate source of funds on most first time home buyer programs.
Solution: You can’t use cash on hand such as mattress money for a mortgage loan except for the Fannie Mae HomeReady Program. Underwriting is very strict about the source of funds to purchase your home. You should deposit cash into a bank account at least 3-4 months prior to mortgage application. The lender will usually ask for 2 months bank statements and the large cash deposit will not show up on these statements and create an issue. If you can’t deposit these funds then you will need to get a gift from a family member which is considered a legitimate source of funds on most first time home buyer programs.
Problem: Alicia is an accountant and she has worked for 3 different companies in the last 2 years and she did have one employment gap for 3 months while looking for her current job. Also, she has been working a lot of overtime on all 3 jobs but she has been on her current job for only 2 months.
Solution: Frequent job changes may be okay but underwriting will look at the stability of your income. For example, Alicia was getting overtime on her previous jobs and she expects to get a lot of overtime on her new job but underwriting will probably only use her base pay to qualify and not count the overtime income until she has been on her current job for 2 years. Today, lenders have really tightened their guidelines so you need to contact FirstHomeBuyers to discuss the qualifications for the program.
Solution: Frequent job changes may be okay but underwriting will look at the stability of your income. For example, Alicia was getting overtime on her previous jobs and she expects to get a lot of overtime on her new job but underwriting will probably only use her base pay to qualify and not count the overtime income until she has been on her current job for 2 years. Today, lenders have really tightened their guidelines so you need to contact FirstHomeBuyers to discuss the qualifications for the program.
Problem: Justin’s credit score is 530 and he wants to know if he can qualify for a special first time home buyer program. He has several unpaid collections, an IRS judgement, and 2 collections which are not his accounts.
Solution: Justin does not qualify for any first time home buyer program. He will need to repair his credit and pay off the collections. Usually, you can negotiate with creditors to settle the account for 50% to 60% of the balance and you should start with the smaller accounts and work your way up. Unfortunately, the IRS judgement will need to be paid off even if he is on a payment plan with the government because the judgement can potentially turn into a lien on the new home. Justin needs to dispute the 2 collections which are not his accounts. He will need to contact all 3 bureaus and file a dispute and hopefully, the bureaus will remove these items from his credit report within 30 days. Paying off past bad credit will not help you qualify for a loan. You must have 3-4 active accounts with 1 year on-time payment history. Many first home buyers think it is enough just to pay off the bad debt which is far from the truth.
Solution: Justin does not qualify for any first time home buyer program. He will need to repair his credit and pay off the collections. Usually, you can negotiate with creditors to settle the account for 50% to 60% of the balance and you should start with the smaller accounts and work your way up. Unfortunately, the IRS judgement will need to be paid off even if he is on a payment plan with the government because the judgement can potentially turn into a lien on the new home. Justin needs to dispute the 2 collections which are not his accounts. He will need to contact all 3 bureaus and file a dispute and hopefully, the bureaus will remove these items from his credit report within 30 days. Paying off past bad credit will not help you qualify for a loan. You must have 3-4 active accounts with 1 year on-time payment history. Many first home buyers think it is enough just to pay off the bad debt which is far from the truth.
Problem: Linda and Andrew want to buy a foreclosure home but it needs new appliances, windows, carpeting, and painting.
Solution:They can apply for an FHA 203k rehab loan which includes up to $35,000 of repairs. The repairs would be done after they close on the home and the contractors would be paid after completion of the work. The program requires a low down payment and the seller may be able to pay for most or all of the closing costs.
Solution:They can apply for an FHA 203k rehab loan which includes up to $35,000 of repairs. The repairs would be done after they close on the home and the contractors would be paid after completion of the work. The program requires a low down payment and the seller may be able to pay for most or all of the closing costs.
Problem: Pamela had a Chapter 7 Bankruptcy which was discharged 4 years ago and her current credit score is 690. She has 2 secured visa cards, one unsecured credit card, and a car loan which she has been making on-time payments for the last 2.5 years with no other issues on her credit report.
Solution: Pamela should qualify for the FHA or the USDA zero down loan program which requires a 640 credit score. A Chapter 7 Bankruptcy must be discharged for a minimum of 2 years for FHA loan and 3 years for USDA loan and you should establish 4 accounts with a minimum of 12 months on-time payment history.
Solution: Pamela should qualify for the FHA or the USDA zero down loan program which requires a 640 credit score. A Chapter 7 Bankruptcy must be discharged for a minimum of 2 years for FHA loan and 3 years for USDA loan and you should establish 4 accounts with a minimum of 12 months on-time payment history.
Problem: The minimum score for the first time home buyer program is 640 and Diane has a 634 credit score but she just paid off 3 credit cards which were maxed out. She is worried because she just signed a purchase contract on a home which the closing date is 45 days from now and she doesn’t know if the credit bureaus will update her credit card accounts in time for the closing.
Solution: The credit scoring system penalizes consumers on credit card accounts which show balances greater than 50% of the limit. Diane may need to find another home or let the seller know she can't close for 60 to 90 days because it usually takes 30 days for the credit bureaus to update the credit report to reflect the zero balances on the credit cards accounts.
Solution: The credit scoring system penalizes consumers on credit card accounts which show balances greater than 50% of the limit. Diane may need to find another home or let the seller know she can't close for 60 to 90 days because it usually takes 30 days for the credit bureaus to update the credit report to reflect the zero balances on the credit cards accounts.
Problem: John lives in small town, USA and he is tired of throwing away money on rent. He has decent credit with a score of 650 and a stable job as a mechanic for the last 3 years. The problem is that he has no money for down payment and cloisng costs. He just wants to purchase a modest house for his wife and kids and a place he can call home.
Solution: John is in luck! He may be eligible for the USDA Guaranteed Rural Development Program which requires zero down payment and the seller can pay for the closing costs. The loan has a 30 year fixed rate and the minimum score for the program is only 640.
Solution: John is in luck! He may be eligible for the USDA Guaranteed Rural Development Program which requires zero down payment and the seller can pay for the closing costs. The loan has a 30 year fixed rate and the minimum score for the program is only 640.
Problem: Tina has been thinking about buying a house but she is overwhelmed by the process and needs advice on where to begin and what to do.
Solution: Diane needs to fill out the short pre-approval application and a team member from the FirstHomeBuyers team will contact her to discuss the diferent programs she may be eligible for and what steps she needs to take to become a homeowner.
Solution: Diane needs to fill out the short pre-approval application and a team member from the FirstHomeBuyers team will contact her to discuss the diferent programs she may be eligible for and what steps she needs to take to become a homeowner.
Problem: Dustin thinks he is ready to buy a house.
Solution: Really? Dustin needs to take the the HomeBuyer Readiness Quiz now to find out if he is ready to buy a home. The quiz offers valuable feedback on every quesiton to help you understand what it takes to be homebuyer ready. Lending guidelines have become more strict and you must educate yourself on the the qualifications of the firsthomebuyer programs and what actions you may need to take before you start the home buying process.
Solution: Really? Dustin needs to take the the HomeBuyer Readiness Quiz now to find out if he is ready to buy a home. The quiz offers valuable feedback on every quesiton to help you understand what it takes to be homebuyer ready. Lending guidelines have become more strict and you must educate yourself on the the qualifications of the firsthomebuyer programs and what actions you may need to take before you start the home buying process.
Problem: Jacob is living rent-free and thinks he needs to wait a couple of years to buy a home. He could save a lot of money and just relax.
Solution: Jacob shouldn't wait to buy a home 3 to 5 years from now. Interest rates and home prices may be much higher and the projected payment on a loan with a large down payment may be the same or higher than the payment on a low down payment program you can qualify for today. Also, if you are not paying rent then there shouldn't be any reason you can't save funds to buy a house within a year unless you spend money on other things which may happen if you get comfortable living with Mom and Dad. The opportunity to purchase a home at a great price and obtain a mortgage loan with a low rate is here now but could vanish tommorow.
Solution: Jacob shouldn't wait to buy a home 3 to 5 years from now. Interest rates and home prices may be much higher and the projected payment on a loan with a large down payment may be the same or higher than the payment on a low down payment program you can qualify for today. Also, if you are not paying rent then there shouldn't be any reason you can't save funds to buy a house within a year unless you spend money on other things which may happen if you get comfortable living with Mom and Dad. The opportunity to purchase a home at a great price and obtain a mortgage loan with a low rate is here now but could vanish tommorow.
Problem: Dana submitted a pre-approval application to our team and we were able to pre-approve her for a USDA Guaranteed Rural zero down payment program with an affordable loan payment to meet her financial needs. She is excited about becoming a homeowner and she had seen a listing for a home online she likes but she doesn't know how to buy a house and wants to know the next steps to buying a home.
Solution: Today's real estate market is very competitive and Dana needs a good Realtor to assist her with the purchase of her first home. We can find you a real estate agent in our network and all you need to do is fill out the short Realtor Finder Form. A Realtor will set up an appointment so you can see the home and if you like it then she will put in an offer on it and negotiate the price and terms such as seller paid closing costs on your behalf. If you don't get the home, don't be discouraged because your agent will provide you with more MLS property listings, make appointments to check out homes you like, and hopefully, find you the right home and you start living the dream as a happy homeowner.
Solution: Today's real estate market is very competitive and Dana needs a good Realtor to assist her with the purchase of her first home. We can find you a real estate agent in our network and all you need to do is fill out the short Realtor Finder Form. A Realtor will set up an appointment so you can see the home and if you like it then she will put in an offer on it and negotiate the price and terms such as seller paid closing costs on your behalf. If you don't get the home, don't be discouraged because your agent will provide you with more MLS property listings, make appointments to check out homes you like, and hopefully, find you the right home and you start living the dream as a happy homeowner.
Problem: Lauren has been looking at homes online and she doesn't know how much home she can afford.
Solution: Check out the home affordability caclulator to find out your maximum loan payment and house you can afford. Also, you need to get pre-approved before you begin searching for homes.
Solution: Check out the home affordability caclulator to find out your maximum loan payment and house you can afford. Also, you need to get pre-approved before you begin searching for homes.
* These scenarios represent some hypothetical home-buying situations and any solutions are merely suggestions and you should contact one of our team members at 847-305-3162 or fill out Quick Application and we will contact you to discuss which loan programs may work for you and what you need to do next.
