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If you are trying to purchase a home or refinance your existing mortgage, starting this month the break you may have been hoping for is here. At least for those on the margins who may have lower credit scores or excessive debt to income.
Tax liens and civil penalties may be dropped from your credit report, thus allowing your score to increase. Additionally, Fannie Mae and Freddie Mac who are the two largest institutional mortgage providers who purchase mortgages from their large cadre of lenders will allow borrowers debt to income ratio to move from 45 percent to 50 percent.
Tax liens and civil penalties can be a thorn for borrowers who sometimes don’t find out about them until late in a transaction. The issue is sometimes they are not 100% complete or may contain erroneous information. If that is your circumstance and you can document your position, the three credit reporting bureaus cannot report them as being authentically delinquently, thus your credit score will not reflect them as negative.
Again, this is critical if you are at the margins of being defined as having great credit versus good credit, or good credit versus poor credit. As an example, most lenders use risk based pricing to determine which interest rates borrowers will be afforded.
Using a first-time buyer for the sake of illustration on a $200,000 mortgage, using today’s benchmark 30-year mortgage at zero discount points, equals 3.875%.
Great credit, FICO above 720. payment is $940 per month.
Good credit, FICO below 720 but higher than 680, rate is 4.125% or to obtain 3.875% discount points of 1.250% must be applied. Payment is $969 per month or to achieve $940 payment, discount points of $2,500 must be paid.
$29 difference does not seem like a lot of money but over time you are paying more than necessary.
This is just a crude example but as you can see your credit score will determine which rate you are offered and before the announcement, lenders were required to put the information on your credit report as it was assumed to be accurate.
The other component where borrowers may get some breathing room is the increase of the debt to income ratio.
Again, using the $200,000 mortgage as an example and a purchase price of $250,000, assume taxes and insurance are $300, so the total mortgage payment would $1,240. Assuming you have $1,000 in debt, so your total housing debt based using basic underwriting guidelines would be $2,240, thus you would need a gross household income of $5,600 per month to gain mortgage approval. With the new guidelines, you now would need just $4,480 per month. The difference is a whopping $1,120 per month and that could represent the opportunity to qualify for a larger mortgage which is crucial as home prices continue to rise or you simply could easier qualify for the mortgage of your liking.
Of course, there are critics to these two changes as some reflect back to the housing crisis of 2008 as well as the core reasons which led to the downfall.
At the same time, many lenders feel their portfolios are healthier and the benefits outweigh the risk, particularly as application production has been tepid, if not flat.
If you are in these two categories the best advice is:
- Present your documentation or your dispute to the three major credit reporting agencies Equifax, TransUnion and Experian.
- Check with your lender or mortgage originator to make sure the mortgage is based on Fannie Mae or Freddie Mac underwriting guidelines, and to determine if the new debt to income levels are in place.