Better to lower DTI or Higher reserves? How to best qualify for FHA

[bluevalentine78]

Trying to decide what to do over the next 3 months to prep for a FHA mortgage application.  Here are my numbers:

1. Mortgage Credit Scores:  

Mine : 638, 656, 656.  This was back on August 15th. My fico has gone up about 20 points with each bureau so I suspect my mortgage scores have as well.  These are worst case numbers.

Husbands: 668, 670, 685
2. Credit Negatives: If you have any, what negatives are on your credit reports. For each negative, please provide:

• Type: Medical Debt in Collection.  4 accounts, each under $600
• Status: Unpaid
• DOFD: 3 are from 11/11.  One is from May 2014
• Type: Collection.  Apartment complex - 3000.  Don't feel its valid.  We gave notice and moved out 20 days before end of lease.  Paid for full month of $550/month They're claiming 3k owed. 
• Status: Unpaid
• DOFD May 2011.  

Husband only has the apartment complex since we were both on the lease.

• Miscellaneous: 
• 3 credit cards.  Two where I am the primary and husband is auth user.  One where husband is primary and I am auth user.  Mine have 750 limit and 25 balance.  Other has 2250 limit and 0 balance.  Husband's has 3750 limit and 1500 balance.

3. Gross Income. 

• Me: Salaried 42,000 / year.    Been full time with my employeer for 2 1/2 years.  Was part time with them since Sept 2012 until I went full time.  Also have addl 1099 income through a contract gig I've had for 4 years.  Ranges from 700-900/month.
• Husband: Been with current employer (same company I work for) since July 2014.  Same industry he's been in for over a decade.  Was part time from July '14 until hired full time in Feb 2016 with a comissioned sales position.  Still does the part time job description as well.     Comission averages about 2200/month.  Other work is about 350 / month.  Both are w-2'd 

5. Monthly debt payments. 

• Car payment of $335
• My credit card has $25 min payment.  
• Husband's card has $65 min payment
• $100/month payment arrangement to pay off 2k tax bill.

7. Assets/Reserves. This is to determine how much you could potentially have as a down payment and also as reserves to help qualify (for example if your debt to income ratio is high this could help qualify you anyway).

• Savings  -  11,500
• Checking - 2,000
• Currently adding 1000/month to savings

8. Location:  This is to determine govt guaranteed loan limits, what special programs might be available for you, how much property taxes & homeowners insurance will likely be, amongst other items.

• Tx
• Dallas
• East Dallas or Mesquite, Tx 

9. Property Description: 

• Single family.  Will be our primary occupancy

10. Property Value. 

• Ideally, looking in the $125000-$14000 range

So, first, how are we looking?  I'm concerned that they wont count my husband's comissioned income but I think we'll be ok without it.  

Second, with what we have stocked away and our current monthly debts, I'm wondering if its best to continue to add 1k every month over the next 3 months so we have closer to 15,000 or should I take that and pay off my 2k IRS bill with a $100/month monthly payment?  Or put dent in that 1500 credit card?  I'm not too concerned about bumping up the scores since we're looking ok and more concerned about squeezing out every dime we can get on the loan since there is a good chance my husband's 2000/month income wont be factored in.  Thoughts?

[bluevalentine78]

1. Mortgage Credit Scores:  

[bluevalentine78]

Mine : 638, 656, 656.  This was back on August 15th. My fico has gone up about 20 points with each bureau so I suspect my mortgage scores have as well.  These are worst case numbers.

[bluevalentine78]

Husbands: 668, 670, 685
2. Credit Negatives: If you have any, what negatives are on your credit reports. For each negative, please provide:

• Type: Medical Debt in Collection.  4 accounts, each under $600
• Status: Unpaid
• DOFD: 3 are from 11/11.  One is from May 2014
• Type: Collection.  Apartment complex - 3000.  Don't feel its valid.  We gave notice and moved out 20 days before end of lease.  Paid for full month of $550/month They're claiming 3k owed. 
• Status: Unpaid
• DOFD May 2011.  

Husband only has the apartment complex since we were both on the lease.

• Miscellaneous: 
• 3 credit cards.  Two where I am the primary and husband is auth user.  One where husband is primary and I am auth user.  Mine have 750 limit and 25 balance.  Other has 2250 limit and 0 balance.  Husband's has 3750 limit and 1500 balance.

3. Gross Income. 

• Me: Salaried 42,000 / year.    Been full time with my employeer for 2 1/2 years.  Was part time with them since Sept 2012 until I went full time.  Also have addl 1099 income through a contract gig I've had for 4 years.  Ranges from 700-900/month.
• Husband: Been with current employer (same company I work for) since July 2014.  Same industry he's been in for over a decade.  Was part time from July '14 until hired full time in Feb 2016 with a comissioned sales position.  Still does the part time job description as well.     Comission averages about 2200/month.  Other work is about 350 / month.  Both are w-2'd 

5. Monthly debt payments. 

• Car payment of $335
• My credit card has $25 min payment.  
• Husband's card has $65 min payment
• $100/month payment arrangement to pay off 2k tax bill.

7. Assets/Reserves. This is to determine how much you could potentially have as a down payment and also as reserves to help qualify (for example if your debt to income ratio is high this could help qualify you anyway).

• Savings  -  11,500
• Checking - 2,000
• Currently adding 1000/month to savings

8. Location:  This is to determine govt guaranteed loan limits, what special programs might be available for you, how much property taxes & homeowners insurance will likely be, amongst other items.

• Tx
• Dallas
• East Dallas or Mesquite, Tx 

9. Property Description: 

• Single family.  Will be our primary occupancy

10. Property Value. 

• Ideally, looking in the $125000-$14000 range

[bluevalentine78]

So, first, how are we looking?  I'm concerned that they wont count my husband's comissioned income but I think we'll be ok without it.  

[bluevalentine78]

Second, with what we have stocked away and our current monthly debts, I'm wondering if its best to continue to add 1k every month over the next 3 months so we have closer to 15,000 or should I take that and pay off my 2k IRS bill with a $100/month monthly payment?  Or put dent in that 1500 credit card?  I'm not too concerned about bumping up the scores since we're looking ok and more concerned about squeezing out every dime we can get on the loan since there is a good chance my husband's 2000/month income wont be factored in.  Thoughts?

[DallasLoanGuy]

if you pay down credit cards. make sure you have the balances all reported before the loan officer pulls credit.

with that said: apply. have a loan officer calculate dti and advise you.

they dont have to pull credit to do that

[ArmyWifeMBA]

I think they will either ask you to pay the $2k, IRS bill or be required to count it against income if you have more than 10 payments remaining when you apply. Looks like it will be about 18-24 months @ $100 per month.  

If you are not able to get your $3000 bill for the apartment deleted  the mortgage company will probably ask you to pay it.

Commission probably will not be counted because he hasn't had it long enough (Feb 2016).  There is no documented proof of how much he will get in commissions.i.e. taxes.  Your salary looks pretty good. Your two incomes will be counted.

I advise to pull your 3 credit reports at MyFico to get a better idea of your mortgage scores.  You may be surprised to find out your scores are below 620 threshold.  It doesn't appear that you have enough installment accounts which are weighed more heavily within the mortgage scores.  However, because your credit file doesn't look too bad, it will probably be okay.

As the other poster stated, if you pay off your credit cards, wait until they are posted on all credit reports before applying.  Btw, Transunion is slow in updating credit reports.

I am sure others will chime in.  Good luck.

[ShanetheMortgageMan]

Debt ratio should be OK for a $145k sales price and FHA financing.  I peg it just being around 53%, using just your $42k/year of income + the debt payments you listed (+5% of the $3k collection to the apartment complex).  If the IRS payments have been paid for 3 months then they should be included in your DTI rather than being required to be paid off.  ArmyWife brings up a good point about the apartment complex debt though, it's housing related, so some underwriters may require it to be paid in full.

Have you asked how the apartment complex is calculating the $3k you owe them?  Damages to the apartment that the security deposit didn't cover, etc.?  Sometimes it just takes a conversation to get it resolved.

[bluevalentine78]

Thanks for the response.  Those scores are my mortgage scores.  Regular Fico8 scores are 694, 672, 684 as of this morning  They were 649, 669 and and 651 last time I pulled my mortgage scores to get what I posted above.  I also realized I forgot to mention I have a store credit card with a 850$ limit and 0 balance (I havent used it in 3 years so always forget about it).  We also have a paid off car loan, paid off in Dec 2014.

Sounds like my best course of action is to just horde the money for now and wait to see what my LO says when we apply in about 8-10 weeks?  

[bluevalentine78]

Yeah, been paying that tax bill for well over a year.  Thought we had it paid off last month but there was 2k left on a year where we listed my husband as the primary instead of me and it wasn't showing up when I logged in to see my remaining balance.  So, thats what I'm continuing to pay on.  

curious if only my 42,000k would be considered? I assumed my 1099 income would also be factored since I have 2 years of 1099s to show for it, which should get me closer to 49,000-51000 a year.  Would that not be the case and help lower my DTI?  53% seems a bit high and unlikely to get approved, no?

The apartment complex has been totally unresponsive and has been sold 4 times since we moved in 2011.  tried to validate it a few years ago and never got a response but it never got removed and I kind of gave up after a while.

So, would you suggest I just continue to stock away my money and wait and see what happens when I apply vs preemptively choosing something to pay off?  just my luck I'd pay off my IRS bill and be told I didn't need to and need to pay off that apartment complex instead or vice versa.  Our lease isn't up until May and we're looking to apply in November so we have wiggle room in case we need to delay things a month or two

[ShanetheMortgageMan]

I wasn't using the 1099'd income in my calculation, because no offense, but often borrowers do not know how to calculate self-employment income.  A very general way to do it is to take the net income from your 2014 & 2015 Schedule C, and divide by 24 months.  However, since your $42k/salary qualifies alone, I was insinuating that any extra income that can qualify will just help lower your already-able-to-qualify debt to income ratio.

Yes, I'd recommend exactly that - save up your money and let the underwriter inform you of anything that needs to be paid off.  If anything, the IRS taxes would be the last I'd pay, since it's a smaller amount and you are also on a payment plan with it.

[bluevalentine78]

Sounds like an ideal plan.  And yeah, my net average on my sch c comes to 6144 a year from the last 2 returns so good to know that should help a good deal

[DallasLoanGuy]

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@bluevalentine78 wrote:

Sounds like my best course of action is to just horde the money for now and wait to see what my LO says when we apply in about 8-10 weeks?  

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yep... good plan