The lending industry has been through huge changes and continues to evolve.  It seems that the media gets a headline and promotes mortgage news even before the guidelines are put into place.  It can be confusing and overwhelming.   

To shed some light on current lending guidelines and the $8000 tax credit, we spoke with Kathryn Welch, Mortgage Advisor with Nova Home Loans.  She has been in the industry since 2002, offering services throughout most of the U.S. 

$8000 Tax Credit
On May 29, 2009, the U.S. Department of Housing and Urban Development (HUD) announced that the Federal Housing Administration (FHA) will allow state housing finance agencies to provide second mortgages "monetizing" the tax credit so that borrowers can use the funds toward their down payments and closing costs for the purchase of homes with FHA-insured mortgage loans. 

WHAT IT MEANS: Eligible consumers can immediately apply the tax credit toward their home purchase closing costs, for needed repairs on the property, to help reduce their interest rate, or as an additional down payment.  

WHO: First time home buyers, defined as someone who has not had any ownership interest in a property in the past three years.  Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. 

WHEN: Home purchases between January 1, 2009 and December 1, 2009. 

HOW: This can only be applied to FHA loans.  Important Info on FHA loans:

• FHA loans require a 3.5% down payment, which can be gifted by family member. The $8000 cannot be included in 3.5% percent down payment.
• There is a mandatory FHA funding fee up front, which is 1.75% of the loan amount.
• The FHA loan will have monthly mortgage insurance equal to .55% of the loan amount.
• FHA interest rates are usually lower than conventional loans.

NOTE: Qualifying consumers obtaining conventional loans can access the $8000 credit on their tax return when filing next year.  Conventional purchase loans that are non-FHA have a minimum down payment requirement of 10%. 

NO REPAYMENT: This is a tax credit; the $8000 does NOT have to be repaid. 

The National Association of Home Builders has great information on the Tax Credit here.  You can also see if your state has additional tax credits available for home buyers at this site.

Credit Score Information

We asked Ms. Welch about the importance of good credit when applying for a home loan.  It comes as no surprise that the requirements have gotten tighter; there are very few loans being made with scores under 600 and if they are, the rates are high. 

The FHA now has credit minimums for loan qualification.  For a purchase loan, a minimum mid-score of 620 is needed.   Conventional loans are typically stricter on credit guidelines than FHA loans; VA loans do not have a minimum credit score requirement at this time. 

NOTE: Lenders use the middle, or mid, score for loan applications.  They look at all three scores from the three credit bureaus and take the middle one.  Not the highest, not an average, just the mid score.  If a consumer only has two scores, the lowest score is used. 

There are some lending programs for people with a bankruptcy discharge in the past 12 months.  Consumers must show that they have rebuilt their credit and must have some open accounts in good standing. 

There are no more stated income loans.   This is especially challenging for the self-employed or people who work on commission.  They now must show an average of two years of tax returns and a current Profit & Loss Statement.  And they must have a minimum of two years being self employed or commissioned. 

What about refinancing a mortgage?

Ms. Welch said that a good candidate to refinance is someone who owes less than half of what their house is worth.  That means the total of all first and second mortgages is less than 50% of the home’s current value. 

Property value is currently the largest obstacle for consumers trying to refinance their existing loan.  Additionally, there are new federal guidelines for property appraisals that are extending the time and cost of determining eligibility for a refinance.  And right now, purchase loans are taking priority over refinance loans. 

Loan modification is a good alternative for homeowners who might be upside down or are close to being upside down in their mortgage as opposed to refinancing.  This article has links to no-cost, confidential info on loan modifications. 

Final Thoughts

Check your credit report before you contact your lender to be sure it is accurate and that you have the best score possible for your application. 

Be proactive.  Stay aware of properties in your area that have been in foreclosure or had a short sale.  These prices will be used in the property comparisons and can give a more accurate figure of property value as opposed to listed prices on homes that are for sale. 

Provide all of the requested documentation up front as quickly as possible.  Giving your lender the paperwork they need at the beginning can save precious time during the loan process. 

Lenders can no longer lock in loans at a 30 day lock; the minimum is now a 45 day lock for a refinance.  Rate wise, this means higher interest rates for consumers. 

All lenders work with the same loans and guidelines.  The difference among lending companies can be the fees they charge their customers to originate and process the loan.  Consumers can, and should, ask for a detailed explanation of all charges connected to their loan.   

Maintain open communication with your lender.  If you have an unexpected challenge, let them know so that they can continue working on your behalf with accurate and complete information.   

Lastly, be patient and realize the lending guidelines are changing.  When government programs are announced and then rescinded two days later, it makes it challenging for even the most experienced lenders to get the accurate details they need for their customers.   

Thank you to Kathryn Welch, who answered our questions for this article.  She can be reached at 520.808.4340 or kathrynw@novahomeloans.com. 

NOTE: This article is intended for informational purposes only.  Consumers should contact their accountant, mortgage advisor, and/or attorney to determine individual qualification and for specific guidelines to their situation.