If you have limited credit history, or past or current credit issues, you may have a problem qualifying for credit cards.  It is possible to get an unsecured credit card, even with bad credit, but it can be very difficult to do so.

If you don't qualify for an unsecured credit card, a secured credit card can be a smart choice.  Some advantages of secured credit cards are that most of them feature easy approval and some can help build, rebuild, or re-establish credit by reporting your account activity to the three major credit bureaus.   Additionally, if you make on-time minimum payments to all of your creditors and maintain your account balances below the credit limits, it is likely the company will eventually qualify you for an unsecured credit card.

Secured credit cards require that you provide a cash collateral deposit, which becomes the line of credit for your account, i.e., the amount of the cash collateral is your credit limit.  For example, if you put $500 down, you will have a line of credit of up to $500.  Such cards are guaranteed by your funds, which act as a security deposit in case you default on the loan with the credit card company.  You will be sent a bill each month for charges that you've made to the card.  Once you get upgraded to an unsecured card or otherwise cancel the account, the amount you deposited up front gets refunded back to you, less any money you might owe on the unpaid balance.

There are often fees associated with these credit cards such as setup fees, annual fees, and plan change fees.  Please read the terms and conditions for each card when applying. Also, it’s critical that you verify that your account history does in fact get reported to all three major credit bureaus.  In addition, be sure to look for low interest rates.

Many of these cards offer helpful features, such as email and text messages to let you know you're approaching your credit limit and to remind you of your upcoming payment due dates.  Also, most have knowledgeable customer service representatives to assist you with questions or concerns.

A "short sale" generally means that a home is being sold for less than the owners owe on their house.  In many cases, the house is "upside down" in value, meaning the owner owes more money on the house to one or more lenders than it is currently worth.  Short sale homes don't necessarily have anything wrong with them; their owners simply choose to sell for one reason or another.  The following provides information about how to go about purchasing a short sale house:

Do not attempt to make a short sale purchase without representation by a qualified, licensed real estate agent with experience in short sale properties. An agent with experience in this area will be able to better help you navigate the short sale market and work with the sellers and their bank when the time comes.  Discuss any issues and/or questions with your agent before proceeding.  For your protection, it may also be advisable to obtain legal advice from a competent real estate attorney and discuss short sale tax ramifications with an accountant.

Be sure you have the required loan approval before making an offer.  You don’t want to miss an opportunity due to poor financial planning.

Work with your real estate agent to find homes that are being short sold by the owner.   Focus on properties where the owner owes a large amount on the loan and is in pre-foreclosure.   The owner does not need to be in default, i.e., to have stopped making mortgage payments, before a lender will consider a short sale.  However, if the owner is not paying their mortgage and owes more than the house is worth or would sell for, that property is a prime candidate for a short sale.  Short sales are required to be listed as such in the agent comments of the property listing that's posted to the Multiple Listing Service, so your agent will be able to identify these properties.  In addition, a seller must disclose if the home already IS a short sale or likely WILL BE due to the market value.  Remember, the listing agent represents the seller's interests, not those of the buyer.

One of the biggest complaints from buyers is that a short sale can take 60 days or more to close after an offer has been made.  When you find a property, even though the lender will probably require an "as is" sale, it is critical to view it and conduct a home inspection so you know what repairs will need to be made.  The bank wants the best offer, and the cleanest one, i.e., with a minimum of contingencies, so if you decide to make an offer, typically, the only contingency should be that the short sale be approved by the lender, with a set time frame for approval.

Work with your agent to ensure that all the necessary paperwork accompanies your offer.  Be aware that the owner has the right to reject your offer if he feels it is too low to present to his lender.  Even though a seller may accept your offer, it will ultimately be subject to approval by the lender.

The lender will probably send out an appraiser to evaluate the property in light of recent sales; in order to minimize their loss, they are also looking to determine market value, so don't expect that every short sale will be a great deal.  The owners and their agent may know the appraised value and what the bank is willing to take, but are not obligated to tell you.  There is a good chance that there will be more than one offer for a short sale home, so your offer will need to be as close to the appraised value of the property as possible.

Be sure you know your absolute highest price and be ready for counter offers from the lender.  If your offer is rejected, you can make another offer; however, do not waste time making offers with very small increases -- you may lose the sale.  Make a fair market offer.  A fair market offer still means you are likely getting a good deal and saving a lot of money on your purchase.  As an example, if the home is appraising at $300,000, the lender will likely take close to that, so if your offer is within roughly $25,000 of the appraised value, there should be a reasonable chance that your offer will be accepted by the lender.  Once your offer has been accepted, if your finances are in order, you should be able to close on the home within 30 days.

What is a Debt Ratio?
Your debt-to-income ratio can be a valuable number -- some say as important as your credit score.  It's exactly as it sounds: the amount of debt you have compared to your overall income.

A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts.  Speaking precisely, DTIs often cover more than just debts; they can include certain taxes, fees, and insurance premiums as well.  Nevertheless, the term is a set phrase which serves as a convenient, well-understood shorthand in the mortgage industry.  There are two main kinds of DTIs, as discussed below.

The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, and homeowners' association dues [when applicable]).

The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.

History of Debt Ratios
The business of lending and borrowing money has evolved in the post-World-War-II era. It was not until that era that the Federal Housing Administration (FHA) and the Veteran's Administration (VA), through the G.I. Bill, led the creation of a mass market in 30-year, fixed-rate, amortized mortgages.

It was not until the 1970s that the average working person carried a credit card.  Thus the typical DTI limit in use in the 1970s was PITI (front-end ratio) of less than 25%, with no set limit for the second (back-end) DTI ratio (the one including credit cards and other payments). In other words, in today's notation, it could be expressed as 25/25, or perhaps more accurately, 25/NA, with the NA limit left to the discretion of lenders on a case-by-case basis.

In the following decades, these limits gradually climbed higher, and the second limit was set (coinciding with the evolution of modern credit scoring as lenders determined through experience how much risk was acceptable. This empirical process continues today.

Sample Calculation
In order to qualify for a mortgage for which the lender requires a front-end debt-to-income ratio of no more than 28% and a back-end ratio of no more than 36%:

• Yearly Gross Income = $60,000 / Divided by 12 = $5,000 per month income.
  • Front-End Ratio
    • $5,000 Monthly Income x 28% = $1,400 allowed for housing expense.
  • Back-End Ratio
    • $5,000 Monthly Income x 36% = $1,800 allowed for housing expense plus recurring debt.

Lenders look at these ratios when they are trying to decide whether to lend you money or extend credit.  Low DTIs shows you have a good balance between debt and income.  As you might guess, lenders like these number to be low – generally, the lower they are, the greater the chance you will be able to get the loans or credit you seek.

When considering the sources of funds for down payment and closing costs, different types of lenders have different rules. Generally, mortgage lenders want borrowers to meet the down payment requirement with funds they have saved because this indicates that the borrower has the discipline to save.  For this reason, some may restrict the amount of the down payment that is provided via other sources.

If you are planning on purchasing a home, please ensure that as early as possible in your process you deposit or allocate the funds for down payment. Keep in mind that lenders will try to determine the source of funds by tracing the funds back to their origins.

Conventional Loan

A conventional loan requires the borrower to verify that they have at least 5% of their own funds for the down payment.

FHA Loan

The Federal Housing Administration (FHA) allows for the entire down payment to be a gift.

Some of the more common sources which the FHA considers to be acceptable for down payment funds are cash from personal savings and checking accounts, cash saved at home, savings bonds, IRAs, 401K accounts, other investments, the proceeds from the sale of personal property, and, as previously mentioned, gifts.  Gift donors are restricted primarily to a relative of the borrower, but they can also be certain organizations, such as a labor union, a governmental agency, or a non-profit organization.

Buyers are prohibited from receiving down payment money directly from sellers, but buyers can receive down payment money as gifts from nonprofit agencies. A possible approach is for the seller to contribute the down payment (plus a fee) to a nonprofit agency; then, at closing, the nonprofit agency may give the down payment to the buyer.

In any case, the giver must provide a "Gift Letter," which states that the funds are a gift to you for your down payment and that you do not have to pay it back. If you did have to pay it back, the lender would look at that as increasing your debt ratio, which may adversely affect your ability to secure a loan.

There are other programs available through non-profit agencies and/or your local, state or federal government called Down Payment Assistance (DPA) programs.

Another source for down payment assistance are grant assistance programs such as the Nehemiah program that you do not have to pay back.  You can get as much as 6% of the final contract sale toward down payment or closing costs.

Many states and cities have bond programs that provide down payments for homebuyers.

If you are relocating at the request of your employer, find out if your company offers programs to assist in paying for part of the down payment and closing costs. Many large corporations offer such programs as employee benefits.  Even if you work for a small company that does not have such programs in place, you may still be able to negotiate for some relocation assistance.

It is important for borrowers to understand that in addition to these rules, down payments are also governed by the FHA’s rule on closing costs. According to FHA home loan guidelines, the closing costs cannot be considered as part of the 3.5% down payment requirement.  FHA Mortgagee Letter 2008-23 states, “Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages.”

Each type of mortgage and lender has different guidelines for what are allowable sources for down payments.  Consult with your mortgage professional to discuss your down payment options in detail.

According the Public Broadcasting Service, credit scoring models did not exist before the 1970s. Instead, lenders and loan officers used personal judgment, such as a person's appearance, job, street address, etc. when assessing a loan application. Unfortunately, human judgment is not nearly as reliable as a mathematical model based on verified data in determining credit risk.

Fair Isaac Corporation (FICO) is the creator of the most widely used credit scoring model. The calculation of the actual FICO score is a closely guarded secret, but the Fair Isaac Corporation offers a general idea of how it works.  Payment history, such as late and on-time payments, makes up 35 percent of the score.  The amount owed, which includes the number of accounts, makes up 30 percent.  According to FICO, length of credit history, new credit accounts and the types of credit accounts used make up the remaining 35 percent.

Those with more than one type of debt will generally have a higher score than those with only one type.  For example, a mix of installment and revolving debt will show you can manage a car payment and credit card debt, resulting in a higher credit score.

Each of the three primary credit bureaus, Experian, TransUnion, and Equifax, scores your credit differently.  You need to know all three of your scores in order to know where you stand.  Lenders use all three credit scores to assess a person's credit worthiness.  Knowing all three of your credit scores puts you in a better position to negotiate the best rates possible.

Please visit the following Federal Trade Commission web site to learn how you can request a free copy of your credit report from each of the three primary credit bureaus once a year: https://www.ftc.gov/bcp/edu/microsites/freereports/index.shtml.  There are small fees if you would like to see your actual credit scores.

Here are some suggestions for improving your credit scores:

Monitor your credit reports and correct errors.

Look not only for negative events on your record, but also examine the credit limits to make sure they're accurate. If the credit limits appear lower on the report than they actually are, that has the potential to hurt your score.

Pay bills on time and keep card balances low

Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit to which you have access, are important components of your score. Your credit score will be adversely affected if the reported balance on one or more of your cards is near the account's limit.

Take on new credit only when you need it

Some credit cards come with great offers, including a percentage off your bill if you sign up for one at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile.  Taking on additional credit could end up hurting your score.

As always, talk to your loan officer or credit professional PRIOR TO making changes which may affect your credit to ensure you’re making the right choice to increase your credit scores.

*Disclaimer – Loan guidelines change often and may have recently changed; be sure to consult with your lender about current requirements.

Two Ratios – Front End and Back End
Lenders use two types of debt ratios in determining a person’s ability to qualify for a mortgage. The front end ratio is real estate-related debt (mortgage principal and interest, real estate taxes, real estate insurance) divided by gross income. The back end ratio is real estate-related debt plus other liabilities listed on your credit report divided by gross income. Therefore, a person’s front end and back end debt ratios would be the same if there is no additional debt listed on the credit report. However, since most people have additional debt listed on their credit report, most borrowers have a higher back end ratio.

The important thing to understand about the two ratios is that lenders not only look at the total (back end) debt ratio, but they also use the front end ratio to examine the impact of the new real estate debt.

Example – Debt Ratios
Let’s assume a person who applies for a mortgage makes $60,000 a year gross (or $5,000 a month) income. The new mortgage debt including principal and interest, taxes, insurance (both home and mortgage insurance) totals $1,500 a month. Their other debt, including a car loan and two revolving charge accounts totals $750 a month. Their ratios are:

Front End Ratio: $1,500/$5,000 = 30%
Back End Ratio: $2,250/$5,000 = 45%

Max Debt Ratios Allowed? – Not a Given
The first thing to understand about today’s mortgage environment is that the vast majority of loans are reviewed by an automated underwriting system. Neither conventional nor FHA is set up to auto-approve someone based on a single debt ratio limit. Instead, the system takes into account other factors such as down payment, credit scores, and assets in determining whether the borrower’s debt ratios are permissible. For example, someone with a higher credit score may very well be allowed to have a higher debt ratio in comparison to someone with a lower score.

Conventional versus FHA – Debt Ratio Maximum
Conventional back end ratio limits normally top out at 45%, although on occasion an approval will go as high as 50%. FHA’s system will go as high as 56.99% for a back end ratio for more qualified borrowers. However, it’s crucial to point out that many lenders have pre-defined limits that are lower than what the system allows. For example, many lenders won’t lend to anyone who has a back end ratio higher than 45%, regardless of whether the system indicates they’re approved to go higher.

Conclusion
If your debt ratio is holding you back from qualifying, take the time to learn what your ratios are and determine exactly how far away you are from qualifying. Something simple, such as a small raise or a small reduction in purchase price may lower your debt ratio enough to purchase now rather than later.

All across the United States the housing market has an abundance of distressed homes for sale. A home sold under distress conditions refers to both short sold and foreclosed home sales. Potential home buyers should understand the differences between these types of sales as they impact the buying process in a number of ways.

As implied, short selling refers to selling a home for less than what is owed. In order to complete this type of transaction, the seller must get the mortgage holder to issue a reduced pay off amount. The primary reason a mortgage holder may issue a reduced pay off is if they believe the homeowner has the potential to go into the foreclosure process. The mortgage holder would prefer to avoid the foreclosure process as it is costly and it tends to drive the property value down even more, resulting in an even greater loss.

Property Condition – Short Sale Pro, Foreclosure Con
Most of the time a person short selling their home will still reside in the property. In the case of a foreclosed home, the seller is the mortgage holder; typically, the prior owner either abandoned the property or was evicted. Normally it is better to have a person residing in the home at the time of or just prior to the sale, as they will still need items such as plumbing and electricity to work properly in order to stay in the home. A foreclosed home on the other hand, may have been empty for many months, and issues with utilities or appliances can be created from lack of use. In addition, a homeowner being evicted from their property is more likely to have a lack of regard for the property’s upkeep, knowing they will have to move out.

Transaction Time – Short Sale Con, Foreclosure Pro
The short sale purchase process is typically much longer than the process when purchasing a foreclosed home. Whereas buying a foreclosed home can fall into normal timelines of one to two months, buying a short sell house can drag on for much longer, sometimes taking upwards of six months. The reason for the increased timeline is that the bank has to decide on whether it would benefit from issuing a reduced pay off. As such, they examine items such as the likelihood of the customer going into complete default and whether other options, such as loan modification, would be better. Additionally, the bank has to determine what they believe the property is worth, whereas a foreclosed home has already had some type of valuation done.

Getting Value – Short Sale Pro, Foreclosure Pro
Typically, the sale of a home under distress will lead to a reduced price in comparison to the traditional non-distressed sale. Regardless of whether you wish to purchase a home being sold short or a foreclosure, getting a home inspection done is absolutely critical in order to understand potential issues with the property you intend to purchase.

The Home Affordable Refinance Program (HARP) is now in its second version, 2.0. The question is who may this benefit and why was a second version rolled out?

Let’s answer the latter part of the question first. The original HARP didn’t do much to help folks in states such asArizona,California,Nevada, andFloridawhere home values were hit the hardest. Under the old program, lenders were limited to loaning up to 125% of the value of the property (LTV). This guideline immediately prevented millions from potentially qualifying.

So what’s different in HARP 2.0? The major difference is the removal of the loan-to-value restriction.  In other words a homeowner could be leveraged to 200% or more against their home and still qualify; there simply is no loan-to-value limits in the 2.0 version.

What does this program do? In essence, this program is a rate and term refinance program designed to let homeowners take advantage of today’s lower interest rates. This applies to people with fixed rate mortgages simply looking to lower their rate, those who have adjustable rate mortgages (ARMs), those with interest only loans, or those who simply want to move to a shorter term.

The program is available only for homeowners whose current mortgage is owned by either Fannie Mae or Freddie Mac. Additionally, the mortgage had to have been taken out on or before May 31, 2009.

It’s important to note that this isn’t a program to help those who are way behind on mortgage payments. The program requires that there have been no late mortgage payments (late payments meaning 30+ days behind) within the last 6 months and a maximum of one late mortgage payment in the last 12 months. Anyone who doesn’t meet these requirements should still speak to his or her mortgage servicer and ask what assistance may be available.

While technically released now, HARP 2.0 won’t be offered widely until March, 2012.  At this time, the Automated Underwriting System (AUS) is being updated to accommodate the program changes. Since most lenders lean heavily on these computer systems to assist with underwriting, most are waiting until the new update has been released.

If you believe that you or someone you know may benefit from this program, the best thing to do is to consult a lending professional.

To determine whether Fannie Mae or Freddie Mac owns your loan, you can go to the following web sites:

Fannie Mae: https://www.fanniemae.com/loanlookup/

Freddie Mac: https://ww3.freddiemac.com/corporate/

 

When interest rates drop you’ll often hear the term “streamline” in mortgage advertisements. For many homeowners there is a real opportunity to take advantage of lower interest rates; so let’s examine closely what streamlining is all about and how it may benefit you.

The process of streamlining refers to the refinancing of an FHA loan. FHA rolled out the streamline loan process in the early 1980’s and according to guidelines they “are designed to lower the monthly principal and interest payment on a current FHA-insured mortgage...” If your current loan is not an FHA loan, you’ll need to speak to your lending professional to see if there’s a similar program for the type of loan you have.

The term streamline refers to the reduction in the amount of documentation and underwriting required to be performed by the lender. Additionally, many FHA loans can be refinanced without the need of an appraisal! Obtaining the original FHA loan typically requires thorough documentation of income, assets, and credit. This dramatic reduction makes the mortgage process much easier on both the homeowner and the lender. The result of the reduced paperwork on the lender’s behalf often times results in lower costs to the homeowner as well.

Streamlines can be summarized as follows:

• The required documentation and underwriting is less than a regular FHA loan
• There may not be a requirement for an appraisal
• The borrower must save more than 5% of their current principal, interest, and monthly mortgage insurance in order to qualify
• The new loan amount cannot increase substantially if the no appraisal option is used

Minimum 5% Savings

The litmus test FHA places on streamline loans is the borrower must see a drop of at least 5% of their current principal, interest, and mortgage insurance in comparison to their new payment. As an example, let’s assume the following:

Principal and interest payment: $850
Homeowner’s insurance: $75
Real estate taxes: $200
Mortgage insurance: $150

The minimum savings required in this scenario is $50 a month which is principal and interest of $850 plus $150 for mortgage insurance multiplied by 5%. As you can see the homeowner’s insurance and taxes are excluded in this calculation.

Determining Streamline Loan Amounts – No Appraisal Option
The maximum amount of the new streamlined loan allowed by FHA without an appraisal is the current outstanding balance minus the refund of the up front mortgage insurance premium on the current loan plus the new up front mortgage insurance premium. Additionally, the outstanding balance may include accrued interest due for the month. Here’s an example of determining the new streamlined maximum loan amount:

Current balance: $100,000
Accrued interest due: $500
Up front MI refund: $600
New up front MI: $999
New maximum loan amount:$100,899

To arrive at this amount you take the $100,000 balance, add the $500 of accrued interest due, subtract the $600 refund to get $99,900. The new up front MI (as of early 2012 up front MI is 1%) is 1% times $99,900 or $999. Since up front MI can be financed, you add $999 to $99,900 to arrive at the $100,899 maximum loan amount without an appraisal.

As you can see there are a lot of benefits to streamlining an FHA mortgage. Remember the 5% rule is the minimum savings required; many people save a lot more than 5%, which can equate to hundreds of dollars a month in savings. Contact your lending professional to find out if a streamline loan is available to you.

All across the United States the housing market has an abundance of distressed homes for sale. A home sold under distress conditions refers to both short sold and foreclosed home sales. Potential home buyers should understand the differences between these types of sales as they impact the buying process in a number of ways.

As implied, short selling refers to selling a home for less than what is owed. In order to complete this type of transaction, the seller must get the mortgage holder to issue a reduced pay off amount. The primary reason a mortgage holder may issue a reduced pay off is if they believe the homeowner has the potential to go into the foreclosure process. The mortgage holder would prefer to avoid the foreclosure process as it is costly and it tends to drive the property value down even more, resulting in an even greater loss.

Property Condition – Short Sale Pro, Foreclosure Con
Most of the time a person short selling their home will still reside in the property. In the case of a foreclosed home, the seller is the mortgage holder; typically, the prior owner either abandoned the property or was evicted. Normally it is better to have a person residing in the home at the time of or just prior to the sale, as they will still need items such as plumbing and electricity to work properly in order to stay in the home. A foreclosed home on the other hand, may have been empty for many months, and issues with utilities or appliances can be created from lack of use. In addition, a homeowner being evicted from their property is more likely to have a lack of regard for the property’s upkeep, knowing they will have to move out.

Transaction Time – Short Sale Con, Foreclosure Pro
The short sale purchase process is typically much longer than the process when purchasing a foreclosed home. Whereas buying a foreclosed home can fall into normal timelines of one to two months, buying a short sell house can drag on for much longer, sometimes taking upwards of six months. The reason for the increased timeline is that the bank has to decide on whether it would benefit from issuing a reduced pay off. As such, they examine items such as the likelihood of the customer going into complete default and whether other options, such as loan modification, would be better. Additionally, the bank has to determine what they believe the property is worth, whereas a foreclosed home has already had some type of valuation done.

Getting Value – Short Sale Pro, Foreclosure Pro
Typically, the sale of a home under distress will lead to a reduced price in comparison to the traditional non-distressed sale. Regardless of whether you wish to purchase a home being sold short or a foreclosure, getting a home inspection done is absolutely critical in order to understand potential issues with the property you intend to purchase.

*Disclaimer – Loan guidelines change often and may have recently changed; be sure to consult with your lender about current requirements.

Two Ratios – Front End and Back End
Lenders use two types of debt ratios in determining a person’s ability to qualify for a mortgage. The front end ratio is real estate-related debt (mortgage principal and interest, real estate taxes, real estate insurance) divided by gross income. The back end ratio is real estate-related debt plus other liabilities listed on your credit report divided by gross income. Therefore, a person’s front end and back end debt ratios would be the same if there is no additional debt listed on the credit report. However, since most people have additional debt listed on their credit report, most borrowers have a higher back end ratio.

The important thing to understand about the two ratios is that lenders not only look at the total (back end) debt ratio, but they also use the front end ratio to examine the impact of the new real estate debt.

Example – Debt Ratios
Let’s assume a person who applies for a mortgage makes $60,000 a year gross (or $5,000 a month) income. The new mortgage debt including principal and interest, taxes, insurance (both home and mortgage insurance) totals $1,500 a month. Their other debt, including a car loan and two revolving charge accounts totals $750 a month. Their ratios are:

Front End Ratio: $1,500/$5,000 = 30%
Back End Ratio: $2,250/$5,000 = 45%

Max Debt Ratios Allowed? – Not a Given
The first thing to understand about today’s mortgage environment is that the vast majority of loans are reviewed by an automated underwriting system. Neither conventional nor FHA is set up to auto-approve someone based on a single debt ratio limit. Instead, the system takes into account other factors such as down payment, credit scores, and assets in determining whether the borrower’s debt ratios are permissible. For example, someone with a higher credit score may very well be allowed to have a higher debt ratio in comparison to someone with a lower score.

Conventional versus FHA – Debt Ratio Maximum
Conventional back end ratio limits normally top out at 45%, although on occasion an approval will go as high as 50%. FHA’s system will go as high as 56.99% for a back end ratio for more qualified borrowers. However, it’s crucial to point out that many lenders have pre-defined limits that are lower than what the system allows. For example, many lenders won’t lend to anyone who has a back end ratio higher than 45%, regardless of whether the system indicates they’re approved to go higher.

Conclusion
If your debt ratio is holding you back from qualifying, take the time to learn what your ratios are and determine exactly how far away you are from qualifying. Something simple, such as a small raise or a small reduction in purchase price may lower your debt ratio enough to purchase now rather than later.

*Disclaimer – Loan guidelines change often and may have changed; be sure to consult with your lender about current requirements.

The two most common mortgage loans, conventional and FHA, both require a minimum down payment along with proper documentation of these monies. If you desire to use one of these programs, here are a few tips on how to meet guideline requirements.

Down Payment Savings Account
A great way to fast track your savings is to set up a separate account for the sole purpose of establishing enough down payment funds. The psychological benefits of a separate account are many. First, you know exactly where you stand in meeting your down payment requirement. Second, keeping your down payment funds separate from your day-to-day spending account, makes it more difficult to inadvertently tap into these funds.

Convert “Mattress Money” into Down Payment Money
Using cash on hand, often referred to as mattress money, is normally not allowed by lenders as a source of down payment. Remember, debt ratio guidelines are strict and the lender must ensure that the borrower didn’t go out and borrow money for their down payment. If you have cash that can be used for your down payment, the easiest thing to do is to get these funds into a bank account at least two months prior to the purchase process. This will make it easier for you and your lender to ensure you will meet underwriting guidelines.

Converting an Asset into a Down Payment
One way to come up with down payment monies is to sell an asset, such as a car that’s paid off. Remember though, you will need to document where these monies came from, so be sure to have a bill of sale, make a copy of the title, and keep a copy of the check used to purchase the item from you. As mentioned above, cash can provide a documentation obstacle, so avoid any issues up front by documenting everything you can if you plan to sell an asset for this purpose.

Retirement Accounts
Prior to tapping into these funds, be sure to get professional advice as to whether this is a smart use of an asset. Additionally, realize that if you convert retirement monies into down payment funds, any payment that results from doing so will likely need to be counted in your debt ratio and can impact your ability to qualify; so be sure to carefully research payment options and speak with your lender on the impact of any new payments.

Gifted Funds
The gift of a down payment is used quite often and can be a great way to meet down payment guidelines. If you have the opportunity to be gifted funds, be sure to check with your lender that the person gifting you monies is allowed per your loan program. Additionally, take the time to research and understand the tax implication for both you and the person providing the gift.

Is Time On Your Side? 
Lenders will normally only require bank statements for the most recent two months as proof of funds; so if you have cash, plan on selling an asset, taking money out of retirement funds, or getting a gift from someone other than a family member, a simple solution is to put these monies into a bank account ninety days or more prior to starting the purchase process. By doing so, these monies will have been in your account long enough to satisfy a lender’s requirement to document down payment monies. In general, if you can show you have the capacity to have held the required monies for an extended period, the original source of the monies isn’t an issue.

*Disclaimer – Loan guidelines change often and may have changed; be sure to consult with your lender about current requirements.

There are many factors to consider when deciding on the type of loan to use when purchasing a home. Understanding the differences in down payment requirements plays an important role in forming your home buying strategy. These differences are items such as the amount of the down payment required and what source of monies are allowed. Understanding these differences will put you on the right path in deciding the proper loan for you.

The Amount of Down Payment Required
As of 2011, conventional loans require a minimum 5% down while FHA requires 3.5%. Be careful though, as closing costs and escrow funds (monies for taxes and insurance), if not paid for by the seller, would be in addition to the down payment. For example, let’s assume the purchase of a $200,000 home for each of these types of loans:

Conventional – $200,000 purchase price X 5.00% required down = $10,000
FHA – $200,000 purchase price X 3.50% required down = $ 7,000

On a typical purchase, closing costs and escrow monies typically range from an additional 1% to 5% of the purchase price ($2,000 – $10,000), depending on the loan program, points charged, and cost of insurance and taxes on the property. Both loan types require providing documentation regarding the source of all monies paid at closing.

Documenting Funds to Close – Why does the lender require this?
Regardless of loan type, your lender will need to verify that you have the funds necessary to pay for the down payment, closing costs, and escrows. The reason the lender requires this proof is to ensure that the borrower didn’t take on additional debt in order to come up with the required funds; this ensures that the debt ratio used to qualify the borrower hasn’t changed.

Types of Funds Allowed
Bank Accounts – The most common source of funds comes from bank or credit union accounts (checking, savings); be careful though, as the lender will typically require one or even two months’ proof, such as all pages of bank statements, that you had access to these funds. For example, putting a large deposit into one of these accounts during the loan process won’t satisfy underwriting, and additional documentation as to where these monies came from will be required.

Gift Funds – Conventional lending is more restrictive regarding using gift funds than FHA. For example, conventional rules state the borrower must meet the required minimum down payment on their own, regardless of whether there’s a gift, unless the gift is 20% or more. For example, using the $200,000 purchase price again, the borrower would be required to put a minimum of $10,000 of their own money down unless the gift is $40,000 or more and at least $40,000 of the gift is used for the down payment. FHA, on the other hand, allows for all or a portion of the 3.5% down payment to come from a gift.

Additionally, be sure to carefully review whether the person giving the gift is eligible to make the gift. While direct family members are eligible, other persons, such as the seller or loan officer, aren’t allowed to gift monies. If you’re fortunate enough to have someone interested in providing you monies for your down payment, make sure your lender will allow the use of these funds.

Retirement Accounts
Although use of retirement funds is allowed under both programs, there are tight restrictions and additional documentation that would be needed. You will be required to not only document that you have access to these funds, but in addition, you will need to disclose the terms of any payments associated with withdrawing those monies. For example, let’s assume you desire to pull $10,000 from your 401(k) account for a down payment. Most of the time you will have to do so in the form of a loan to yourself and an associated payment schedule would be created to replenish these funds. That new payment would now figure into your debt ratio, so be careful that this new payment doesn’t impact your loan qualification.

Conclusion
With proper planning, meeting either conventional or FHA down payment guidelines can be easy. Remember, you’ll need to know both how much and what type of monies are allowed in order to meet guidelines, so speak to your lender to ensure your down payment plan is sound.

Here are a few tips to increase your credit score sooner rather than later. Word of advice — speak to your loan officer or credit advisor PRIOR TO making any changes to your credit to make sure it will have the positive impact you desire.

Tip # 1 – Review your credit report in detail

This one seems obvious, but based on experience, too often consumers have an erroneous account or misreported item on their credit of which they are simply not aware, because they haven’t taken the time to carefully review their report. Be smart about pointing out errors, since sometimes they will work out in your favor, and there’s no law stating you have to remove a mistake that helps your score!

Tip # 2 – Review your revolving account balances (credit cards)

While Fair Isaac (the FICO people) doesn’t give out their exact formula, the understanding is that owing more than 30% of your credit limit on any credit card hurts, owing more than 50% hurts more, and being maxed out (100%) is killer! So, take the time to review your balances, and make appropriate adjustments. If, for example, you owe $350 on a credit card with a $1,000 limit, you’ll likely see a bump in your score if you pay down your balance to below $300.

Another technique that may cost you nothing is to see if your credit card company will increase your limit. Remember, this only helps if you don’t increase what you owe on that card.

Tip # 3 – Get current!

Being past due on any open account is a score killer. If there’s anyway to get and stay current, each and every month that passes by will result in a boost to your scores. The derogatory item will remain on the report for several years of course, but the fact it’s not currently late has an enormous positive impact on your scores.

Tip # 4 – Start now

If your strategy is to increase your scores over the long term, now is the time to open accounts versus later. All other things being equal, the longer an account has been open, the higher the credit scores; in other words, the scoring models like older accounts. Remember though, this is not to suggest taking on more debt; you may simply want to open an account or two and leave a small or zero balance on the account monthly.

Tip # 5 – Review the type of credit outstanding

For those who have little or no credit, it’s important to have a mix of different types of accounts. For example, from a credit score perspective you’d be much better off having an installment account, such as a car loan, and a credit card account versus having two credit card accounts; so attempt to have different types of credit accounts if possible.

Early in 2013, the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) announced changes that would be made to the FHA mortgage insurance policy, beginning on April 1, 2013. Changes were made to both the mortgage insurance premium policy and the length of time those policies remain in effect.

In summary, these changes include a higher Mortgage Insurance Premium (MIP) for case numbers assigned on or after April 1, 2013 as well as a change that will require mortgage insurance to be paid for a longer period of time, and in some cases, for the life of certain FHA home loans.  Some types of refinancing, however, such as certain single family streamline refinance transactions that are refinancing existing FHA loans that were endorsed on or before May 31, 2009, are excluded from the MIP increase. Please contact your loan officer or other mortgage professional for details of these changes or for any other questions you may have regarding mortgage loans.

MIP Rate Increase
According to the FHA official site, on most FHA loans the annual premium will increase by 10 basis points (0.10 percent), or $100 per year for each $100,000 in loan amount.

For Jumbo FHA loans ($625,500 or higher) with a term longer than 15 years, the increase will be 5 basis points (0.05 percent), or $50 per year for each $100,000 in loan amount.  Jumbo loans with terms of 15 years or less will increase by 10 basis points (0.10 percent) or $100 per year for each $100,000 in loan amount.

The premium itself varies depending on the loan size, term, and loan-to-value (LTV) ratio.  Please see the following example:

For a $500,000 30-year loan with an LTV ratio greater than 95 percent, the new premium will be 1.35 percent, or $6,750 per year, up from 1.25 percent, or $6,250 per year. On a monthly basis, the premium increase amounts to about $42.

These premium increases do not apply if a borrower refinances an existing FHA loan that was endorsed on or before May 31, 2009, into a new FHA loan under the streamline refinancing program.

FHA is not changing the one-time premium borrowers pay up front (UFMIP); it remains at 1.75 percent of the loan amount.

In addition, the FHA has eliminated the exemption from the annual MIP for loans with terms of 15 years or less and LTV ratios of less than or equal to 78 percent at origination.  For case numbers assigned on or after June 3, 2013, the annual MIP rate for all loans with terms of 15 years or less and LTV ratios of less than or equal to 78 per cent will be 45 basis points (0.45 percent), or $450 per year for each $100,000 in loan amount.

MIP Payment Duration
FHA borrowers will have to continue paying annual premiums for a longer period of time – in most cases, for the life of their mortgage loan.  According to the FHA, the new “life-of-the-loan” MIP requirement begins with FHA case numbers assigned on or after June 3, 2013.  The following two paragraphs are excerpts from the HUD/FHA web site (www.hud.gov):

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• For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

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•  For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

To learn more about the policy changes mentioned here, contact your loan officer or other mortgage professional, or the FHA by telephone at 1-800-CALL-FHA, or go to the HUD/FHA web site.

Regardless of whether or not you are planning to make a major purchase (home, vehicle, home furnishings, etc.) in the immediate future, it is advisable to keep your credit score as high as possible.  Although there are sometimes ways in which you can obtain your credit score without incurring a charge, in general, obtaining your actual score costs something in the neighborhood of $10.  All consumers are eligible however, to obtain one free credit report (less the credit scores) from each of the nationwide consumer credit reporting companies (Equifax, Experian, and TransUnion) every 12 months.

How to obtain a copy of your credit report
A copy of your credit report may be ordered at https://www.annualcreditreport.com/ or by calling 1-877-FACTACT (1-877-322-8228).  If you prefer to write, a request form is available at https://www.annualcreditreport.com/.

Information included in your credit report

• Your name, current and previous addresses, phone number, Social Security number, date of birth, and current and previous employers. Your spouse’s name may appear on your copy of the credit report, but will not appear on copies provided to others.
• Federal district bankruptcy records and state and county court records of tax liens and monetary judgments.  This information comes from public records.
• Specific information about each account, such as the date opened, credit limit or loan amount, balance, monthly payment and payment pattern during the past several years. This information comes from companies with whom you do business.
• The names, and often the addresses, of anyone who has recently obtained a copy of your credit report.  This information comes from the credit reporting company.
• Statements of dispute, which allow both consumers and creditors to report their version of the factual history of an account. Statements of dispute are added after a consumer officially disputes the status of an account, the account has been reinvestigated, and the consumer and creditor cannot agree about the account status. Both the consumer’s and creditor’s statements of the account status will appear on the credit report.
• Rental payment history from property management companies that report their information to the credit reporting company (or companies) that report rental payment history.

After receiving your credit report, you should review it very carefully, and correct any errors which may adversely affect your score.  You may dispute inaccurate or incomplete information online or call the telephone number on your credit report for assistance.  It is important to be specific by including the account number of any item you feel is in error or incomplete and explaining in detail exactly why you feel it is inaccurate.   Investigations of disputed items can take up to 30 to 45 days, so it is important to ensure that your credit report is always as accurate as possible.

How long does information remain on your credit report?

• Missed payments and most public record items remain on your credit report for up to seven years, with the exception of bankruptcies and unpaid tax liens.
• Chapter 7, 11 and 12 bankruptcies remain for 10 years, and unpaid tax liens remain for up to 10 years.
• Active positive information may remain on your credit report indefinitely.
• Requests for your credit history remain on your credit report for up to two years.

Summary
It is crucial that you understand all of the factors which can affect your credit report and credit score, and exercise continued diligence to keep your credit report accurate, in order to maximize the effect of those factors which are positive influences while minimizing the effect of those factors which are negative influences.

 

Most people mistakenly assume that the company to which they make their monthly mortgage payments to actually owns their loan. This is rarely the case. To understand why the recipient of your payment is unlikely to be the owners too let us define a few items and roles.

Mortgage Note

A mortgage note, otherwise known as a promissory note or real estate lien, is associated with mortgage loans. This document lays out specifics such as initial loan balance, interest rate, payment amount, payment due dates, and number of months to be paid.

Mortgage notes are similar to bonds in that they can be bought or sold and offer the investor, or the person or entity that purchased the note, a set stream of payments over the life of loan.

The Mortgage Owner

The entity that owns the mortgage note is the owner of the mortgage. More often than not the company to which a person makes their payment to is not the actual owner of the mortgage.

The Mortgage Servicer

The servicer is the entity that collects payments on behalf of the owner. Additionally, a servicer is responsible for a number of related items such as collecting past due payments owed to the mortgage owner (the holder of the mortgage note).

Why Knowing the Difference Matters

When Pursuing a New Loan

Often times when people are choosing a lender with whom to work, with they will inquire about whether the loan originating company will keep their loan. In reality, this is very rare. Even the largest banks in the U.S. sell their mortgage loans to outside organizations such as Fannie Mae. In 2012, an estimated 86% of all mortgages were backed (meaning insured or bought) by the government.

The important point is to know that your mortgage note as well as the mortgage servicing rights can and are often sold, regardless of the size of the institution who originated the loan. Regardless of whether your note is sold or not, the parameters of your note, such as the interest rate, cannot change! Other factors that are of more consequence, such as your comfortability with your mortgage loan originator or the speediness of your lender, should be considered.

When Considering a Refinance

A number of refinance programs were created in an effort to help those impacted by the housing crisis. For example, Fannie Mae and Freddie Mac offer the Home Affordable Refinance Program (HARP) which is currently in its second iteration. If you have a conventional loan it is very likely that Fannie or Freddie owns your loan even though you make your payment out to another entity.

Important Refinance Links

For information on how to find out who actually owns your loan and your rights you can go to HUD’s website: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/ramh/res/rightsmtgesrvcr

Does Fannie Mae own your loan? Go here to find out: https://www.knowyouroptions.com/loanlookup

Does Freddie Mac own your loan? Go here to find out: https://ww3.freddiemac.com/corporate/

VA Refinance Program Details: https://benefits.va.gov/HOMELOANS/irrrl.asp

FHA Streamline Details: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/buying/streamli

USDA Refinance Details: https://www.rurdev.usda.gov/hsf-refinance_pilot.html

Many people have been hurt by the economy over the past few years.  Most have had their credit damaged and many have had to declare bankruptcy, do a short sale of their home, a foreclosure, pre-foreclosure sale, or a deed in lieu of foreclosure.

The FHA realizes that, sometimes, events affecting credit may be beyond your control, and that credit histories don't always reflect a person's true ability or willingness to pay on a mortgage.  If you are one of these people who used to have good credit but perhaps lost a job and/or had health issues which resulted in loss of a home or damaged credit, but have been back on your feet for at least 12 months, the Federal Housing Administration (FHA) "Back To Work" program may allow you to purchase a new home, as early as 12 months after the derogatory event(s).

On August 15, 2013, the Federal Housing Administration moved to relax its guidelines for borrowers who "experienced periods of financial difficulty due to extenuating circumstances".  Termed the "Back To Work - Extenuating Circumstances Program", the FHA has removed the familiar waiting periods that typically followed a derogatory credit event.  Effective for FHA Case Numbers assigned on or after August 15, 2013, borrowers who have recently experienced any of the following financial difficulties as a result of any qualifying extenuating circumstance may be approved for an FHA-insured mortgage:

• Pre-foreclosure sale
• Short sale
• Deed-in-lieu (a deed instrument in which the borrower conveys all interest in a real property to the lender to satisfy a loan that is in default to avoid foreclosure)
• Foreclosure
• Delinquency
• Collection and Judgment
• Chapter 7 Bankruptcy
• Chapter 13 Bankruptcy
• Loan Modification
• Forbearance Agreement (where the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule over an agreed time period)

The program follows standard FHA mortgage guidelines.  You still have to at least meet the minimum requirements for credit scores, debt-to-income ratios, and other qualifications for regular FHA loans.  Most lenders require a credit score above 640, and credit scores below 500 are not allowed.  The FHA doesn't change mortgage rates based on credit score.  Also, there is no premium on interest rate, nor are there additional fees to pay at closing under the FHA "Back To Work" program.

In order to be eligible for the program you must be able to document that there was a loss of a job or some other "economic event" that occurred to cause a significant reduction in income due to circumstances outside your control.  You must prove that your household income declined by 20% or more for a period of at least 6 months, which coincided with the above "economic event".  In addition, you must be able to document that you have recovered from that event and are financially ready to purchase a home.  The program can be used by both first-time and repeat home buyers, as well as for FHA 203k construction loans.

In other words, if you ended up having to short sale your home, had your home foreclosed on or even filed bankruptcy and 12 months have now passed and you have a new steady source of income and are making all other payments on time right now, then you may eligible to purchase a new home, using an FHA-insured mortgage.

In addition, there will be a counseling requirement for all new potential homeowners who would like to use this program, adding another layer of support to ensure that someone is truly ready to purchase after a past derogatory financial event.  The counseling session, which typically lasts about one hour, can be taken in-person, over the telephone, or via the internet.

While accurate at the time of this writing, it is advised that the borrower, if considering purchasing or refinancing a home, verify that the information provided herein is still correct by contacting a licensed mortgage professional, in order to discuss this or any other program and to get fully pre-qualified.  The FHA "Back To Work" program ends September 30, 2016.

Although FHA loan originations have recently declined, HUD issued Mortgagee Letter 2013-24 on August 15, tightening (with the stated purpose of clarifying and amending previous guidance) FHA borrower restrictions effective with all case numbers assigned on or after October 15, 2013.  This guidance applies to all FHA programs with the exception of non-credit qualifying streamline refinances and the Home Equity Conversion Mortgage.

FHA raised upfront and monthly mortgage insurance premiums (and made monthly MIP effective for the life of the loan) earlier this year, leaving FHA loans far less desirable for many buyers.  These new guidelines will likely most affect buyers with credit issues, i.e., those least likely to qualify for loans outside the FHA program.

FHA has declared that collections and judgments may indicate a borrower’s disregard for credit obligations and must be considered in the creditworthiness analysis. The guidance below applies to loans with collection accounts and all judgments. Medical collections and charge off accounts are excluded from this guidance and do not require resolution.

Applicable to Loans Run Through TOTAL Mortgage Scorecard: 

TOTAL Mortgage Scorecard "Accept/Approve"

There are no documentation or letter of explanation requirements for loans with collection accounts or judgments run through TOTAL Mortgage Scorecard receiving an “Accept/Approve”, despite the presence of collection accounts or judgments. These accounts have been already taken into consideration in the borrower’s credit score. If TOTAL Mortgage Scorecard generates a “Refer,” the lender must manually underwrite the loan in accordance with the guidance applicable to manually underwritten loans with collection accounts and judgments.

Collections

FHA does not necessarily require collection accounts to be paid off in full as a condition of mortgage approval; however, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a "Capacity Analysis", as detailed below, for loan applicants having collection accounts with a cumulative balance equal to or greater than $2,000, as described below.

Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance.

"Capacity Analysis" includes any of the following actions:

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• At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).

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• The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio, which could potentially prevent some borrowers from qualifying for the loan.

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• If evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio, which could potentially prevent some borrowers from qualifying for the loan.

Regardless of the Accept/Approve/Refer recommendation by TOTAL Mortgage Scorecard, the lender must include the payment amount in the calculation of the borrower’s debt-to-income ratio.

Judgments

FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance.  An exception to the payoff of a court ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments. The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval.

Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. Furthermore, lenders are instructed to include the payment amount in the agreement in the calculation of the borrower’s debt-to-income ratio.

FHA requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments above, unless excluded by state law.

Applicable to Manually Underwritten Loans:

Guidelines for loans underwritten manually are even more stringent, requiring the lender to document reasons for approving a mortgage when the borrower has collection accounts or judgments.  The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment. The explanation and supporting documentation must be consistent with other credit information in the file.

Regardless of the amount of outstanding collection accounts or judgments, the lender must determine if each collection account or judgment was as a result of:

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• The borrower’s disregard for financial obligations;

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• The borrower’s inability to manage debt; or

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• Extenuating circumstances.

Minimum payments must still be added to debt ratios, whether the charge offs/collections total $2000 or not.

As a result of these continued guideline changes by HUD, many FHA borrowers, particularly those with lower credit scores and higher debt ratios, will have more difficulty in qualifying for a loan.  Some will seek alternative means of financing, such as Fannie Mae's program requiring a minimum down payment of 5%.  It is suggested that borrowers examine their credit reports carefully and do whatever is necessary to remove any derogatory information that is in error; in addition, borrowers should obtain pre-approval letters as soon as possible to avoid potential delays during the loan process.

While accurate at the time of this writing, it is advised that the borrower, if considering purchasing or refinancing a home, verify that the information provided herein is still current by contacting a licensed mortgage professional, in order to discuss this or any other program, and to get fully pre-qualified.

Many people will be receiving good-sized tax refunds when they file their income taxes for 2013.  Saving enough money to cover the down payment on a home is often the primary stumbling block when people want to become homeowners.  With mortgage rates at or near record lows, it may make financial sense for first-time borrowers to use their tax refunds as a down payment to purchase a home that often carries lower monthly mortgage payments than what they pay in rent.  It also may make sense for people who are currently homeowners to use their tax refunds to enable them to upgrade to other homes.

The Down Payment
A sizeable refund might be enough to get you into a Federal Housing Administration (FHA) loan, which requires a down payment of as little as 3.5%. If you already have some money saved, that money, when combined with your tax refund, could even be enough to get you over the 20% down payment threshold so that you can avoid paying for Private Mortgage Insurance (PMI).  If so, that could be a great use of your money, because in addition to building equity in your new home, you’ll realize additional savings by avoiding PMI.

According to the Internal Revenue Service, the average tax refund for the 2012 tax year (2013 filing season) was about $2,650.  Borrowers who are able to qualify for an FHA loan would have to come up with about $6,300 for a 3.5% down payment for a home with a price of $180,000. The tax refund can certainly help, even if it doesn't cover the entire down payment.

If you already have enough money for the down payment on a home, you can use the refund in order to help you meet the cash reserve requirements of your lender, or to beef up your maintenance fund for home repairs.

A Tax Refund meets the Requirements for Mortgage Down Payment Funds
Most mortgage programs require that the money you use for your down payment be “Sourced and Seasoned”.

"Sourced" means you have to show where the money came from.  Your down payment and closing costs must come from the proper source.  Generally, a proper source is a bank account, savings account, retirement fund, etc.

"Seasoned" means that you have to show that you had the money in your account(s) for 60 days, which is why the lender asks for two months of bank statements when pre-qualifying a borrower for a home mortgage.

There are a few sources however, which are considered acceptable sources and fully seasoned even if the funds were received very recently, e.g., even in the past few days.

Three such sources are:

1.  Tax Refund – A copy of the Treasury check and a bank receipt showing the deposit are acceptable to prove sourced and seasoned funds.  If the refund was automatically deposited into the account, i.e., if there is no check, a notation on the bank statement will suffice to show that it is a tax refund.  In the case of automatic deposits, the only documentation necessary is the bank statement.

2.  Insurance Award – If you are the recipient of an insurance award, this check is considered sourced and seasoned.  Again, be sure to make a copy of the check and the deposit receipt showing the deposit into your bank account.

3.  Funds from the sale of personal property that you own.  You will need to produce a receipt for the sale of the item and a deposit receipt showing the deposit into your bank account.

Notes:

1. If you supply a bank statement for deposit verification purposes, be sure that you are prepared to document any deposits that are out of the ordinary.  For example, payroll direct deposits are normal, whereas an underwriter would likely require an explanation for a $500 cash deposit.

2. A cash advance or short term loan to cover an EXPECTED tax refund IS NOT an acceptable source of funds for a down payment or to close.

The cash required in order to close is often the very last step in closing escrow on your new home.  You don't want to be running into any problems regarding funding at the last minute.  As always, it is recommended that you keep your loan officer fully informed regarding any financial matters throughout the mortgage lending process.

Another piece of advice - if you are considering using a tax refund to buy a home in the near future, it's a good idea to get with your loan officer to get pre-qualified and to start shopping early, before millions of people get their tax refund in April and begin competing with you for the same home.