Help us find the path to our first home?

[OCcouple]

Hey all. Dissatisfied with bouncing around, dealing with rent increases and small spaces with a growing family, I've been researching what it's going to take to get a mortgage so my wife and I can finally have a first place. We're certainly in no position it even qualify for one now, but we'd like to get a plan to get there. I've scoured the internet for information and although I've read a large amount of articles and resources on the subject, I have yet to find a place where I can ask questions about our status and direction and get really good feedback. Then I found this place.

I originally was going to come here to seek just loan information, but I just learned here that my credit score dropped about a hundred points since I got married (mostly due to accounts she has that I wasn't worried about until now).

I've read the sticky on on what information to post when seeking this sort of help, so here's a breakdown using the list from that thread:

1. Credit.  Currently only know my equifax score: 605. This includes medical bills that went to collections in '09 (all collections were paid in full immediately upon notice and the credit report shows them as having 0 balance). My wife also has more than one account with several late payments, apparently even one with a large amount of 90+day late payments from '07.  There is a line that has a few 30+ and one 60+ from the last couple years. Also is something with an unpaid balance from 7 years ago that I know nothing about. Wish I knew all of this before getting married lol as none of these are my fault.
2. Income.  Here's the #1 problem here, I was recently laid off. I expect to be making about $70k when I'm back on the job. My wife is currently a freelance artist with sporadic income, so I think it's fair to not even count it.
3. Source of income.  Employment.
4. Monthly debt payments.  Right now we have a quite a bit of debt, 10k in credit cards with monthly finance charges nearing $300. 2 auto loans at $300/month each, one of which is over $10k away from being paid off (but with 0% apr) and one of with at 8% with 6k left. Our plan is to pay down all credit card debt and the small car loan, leaving us with 1 auto loan at $300/month. I'm worried that we may need to eliminate that one as well though, depending on the front end DTI ratio.
5. Employment Before being laid off it went back 3 years at the same job and I will be in the same industry when I return. There will obviously be a gap between jobs, and I'm wondering if that will have an effect.
6. Assets/Reserves.  We won't be paying rent where we are living (which is how we will be able to pay down the debt), so our assets will depend on how long we are willing to stay and save. I'm projecting up to 3k a month going into savings once most of the debt i paid off. We plan on having the seller pay closing costs, and getting a grant for the downpayment (we most definitely qualify for a lot of programs I've seen with the income level and family size we have.)
7. Location. Orange County, CA
8. Property. Not going to start looking at places for a long time, probably not for at least another year, but with the prices out here being what they are, it will probably be a condo or some other small attached property.
9. Value.  There is little point in doing all this if we don't improve the living space we get from renting, and in order to do that we need to aim for around $300k using current prices as an indicator.
10. Occupancy.  Primary residence, with intention of staying at least 5 years.
11. Transaction Type.  1st time home owner purchase.

So here's my current plan:

1. Get employed again.

2. Stop wife from making late payments.

3. Pay down the credit card balances to zero. (Should take 4-5 months)

4. Pay down the small auto loan (Should take 2-3 months)

5. Start saving for down payment (if necessary) or at least cash reserves to better qualify, not to mention other expenses we'll have after moving in.

Based on everything I've read here, it seems we should be able to raise my credit score back above 700 by the end of next year if I try hard enough, but since some of her our missed payments are within the past couple years, will we still have a chance?

Does this plan of attack make any sense, or should we give up on our dream for awhile and focus on repairing credit for at least a couple years?

A huge thanks in advance to anyone who helps - we're making some pretty big decisions soon based on how feasible this plan sounds.

[Anonymous]

The first obviosuly is you need to get back to work.  Depending on the situation, it may require both same field and same line of work.  I am just clarifying because some people go bac to the same industry but a different part of that industry and it can cause issues.

As far as payments, you need to get 2 years clean credit with no lates.  At a minimum they want 1 full year clean, but with numerous accounts late and some of them 60 and 90 days late, you will more than likely going to need the 2 years. 

See if you can use the Hippa process to get the medical collections removed.  That will help your score and make approval easier as they are pretty recent.

One thing I should note is that unless your wife is going to have some verifiable income this may all be pointless.  At 70K income, that only gives you about 1800 allowable for a mortgage payment and 2500 for all debt .  That puts you into roughly a 220K place.  No where near the 300K  you are talking about.  They will sometimes make exceptions but without a long employment history and with alot of lates in the past that is unlikely (although not impossible)  I do not think you will get anywhere near 30K though.  You may be able to push through 240 or 250K.   Also you need to factor that interest rates (I used 5%) and prices are likely to be up 2 years from now.  Anyways, good luck with it.   

[Anonymous]

A few things I would do is

1. Go to the rebuilding your credit forums and lookup hippa.  You should see directions on how you can get paid medical collections removed from your credit reports which would help you scores.  Also since your wife has alot of bad credit info, if you haven't done so pull a credit report from each site for both of you as they offer you one free each year and compare whats one it and get rid of inaccurate info.

2. If your being laid off because thats what usually happens in your job industry then it shouldn't be a problem just get it documented.  If its because it's cost cutting, that should be fine as long as your next job is in the same field and the gap between employment isn't large.  If your wifes income can be accounted for with a w2, her income will count regardless of how small it is aslong as she has atleast 2 years documentation.

3. Paying down your credit debt will up your fico scores the quickest..  I would attack the auto loan with 0% last but your still gonna need a downpayment of atleast 3.5%. While your wife has alot of late payments on her reports, its good that their atleast 2 years old which underwriters want to see 24 months of clean payment history.

[OCcouple]

Well, I was worried about that. It seems that those recent missed payments are what's going to bite us the most. Still, if we spend two years repairing credit and saving up, we can probably be close to having a 20% down payment. Although rates will probably be up by then, not having PMI will definitely help in addition to being able to go conventional to lower the rate a little (not to mention having such a lower purchase price due to money down). There's also a good chance that my wife can supplement the income, but we'll probably have a lower score to raise since I hear that it's the worst middle score of the co-borrowers that is used.

It sounds like the 2 year plan will solve a lot of the problems. That's going by what would ideally happen though, and things never work out that way =/

Thanks for the advice. It's very much appreciated

[OCcouple]

Hi all, it's been a half a year since I first posted. Since there have been some changes and I'm still confused about what to do, I thought I'd update my original post and hopefully get some more insight.

1. Credit. Now I know my credit is mine, my wife is hers. I was an authorized user on her account and am no longer. That jumped my score about 50 pts. I've got about another 50 from paying off my credit card balances over the past 5 months. My score is now 695 and will be over 700 within a week or two. By the time I have a down payment saved my score will be closer to 750.
2. Income. I got employed in the same industry and am earning my expected wage ($70k).
3. Source of income.  Employment.
4. Monthly debt payments.  As I've been attacking this for the past 5 months, so this is the biggest change. No CC debt anymore . Still have 2 auto loans at $300/month each, one of which is $11k away from being paid off (but with 0% apr) and the other with 4k left at 8.5%. Now that CC is done I'm going to be saving up to pay off the rest of the car loan that has 8.5% interest. Still makes no sense to me to pay off the one at 0%. This will only take a couple months. That is why I'm again trying to figure out my long-term strategy.
5. Employment 4 years same industry with documated 4 month lapse in employment due to lay off. No problem here.
6. Assets/Reserves.  After the car is paid off and some other school costs, I'll be able to save between $2k and $2.5k a month for down payment etc
7. Location. Orange County,  CA
8. Property. Still a long way off from being able to look.
9. Value. I've seen that we'd be okay with the condos available for $300k. It seems to me that because of the high property taxes (mello roos) and HOA dues, I'll probably need a 20% down payment. Honestly, I don't see home prices going back up for a long time. I've been closely watching home prices for several months and there are far more deals now than when I started.
10. Occupancy.  Primary residence, with intention of staying at least 5 years.
11. Transaction Type.  1st time home owner purchase.

[ShanetheMortgageMan]

If your goal is to buy a $300k condo in an area that has Mello-Roos (which can vary widely, check http://tax.ocgov.com/tcweb/search_page.asp to see what Special Assessments there are - Mello-Roos isn't always the only one, and Mello-Roos prices can vary widely, for example Aliso Viejo is typically a lot less than Ladera Ranch), 20% down, assuming a $250/mo HOA fee, $6k/year property taxes, $300/year condo insurance policy, a 5% interest rate - total payment would come out to about $2,063/mo.

$70k/year, or $5,833/mo, would put your housing ratio at 35.3%, and with $600/mo in other payments, your total debt ratio would be at 45.6%.  While both ratios are a little over whate conventional prefers, with 20% down, and the mandatory 2 months reserves after closing, it's likely those ratios wouldn't have trouble qualifying.  Once the higher rate/lower balance auto loan is paid off, that'd drop your total debt ratio to 40.5% - and you'd have a real difficult time not getting approved in my opinion.

Not sure how much you have saved up now, but saving at $2k/mo, starting at $0, to save up for 20% down, settlement costs (estimate about $8k), and the 2 months reserves - it'd be about 3 years give or take.  By that time you'd be back on the job plenty of time for an underwriter not to care about the job gap, but in case you already have saved up some money so you won't need to take 3 years, then just being back on the job for 6 months should be enough time for an underwriter to find your employment & income acceptable.

Are you considering a condo over a single family house for particular reasons?

[OCcouple]

Yes, because for the things that are most important to me (neighborhood, safety, age), all I can afford is a condo. It would probably take another $100k at least to start seeing detached properties.

After evaluating all the potential cities for all this time, Ladera Ranch is actually at the top of my list. It's just so familiy orientated and nice looking, and has some good schools. Trust me, I've looked all over the surrounding cities and always have a very hard time justifying them. Plus I've lived in south county for 30 years, so I have a good grasp and what matches our tastes. I don't mind sacrificing privacy or square footage for a nice neighborhood, at least for my first home.

My worries now are how to get that down payment saved in time so we don't miss the chance with these low home prices and low interest rates. If we're aggressive and save $2.5k a month and get a grant for 3%, it will still take about 2 years to save. Granted we could get more income by then to help accelerate the process.

From what I can tell, I can't afford it if we go FHA with a small down payment. Is this correct?

[ShanetheMortgageMan]

Yeah, can't get much newer than Ladera Ranch.  I know how different Ladera is vs. Aliso or Laguna Niguel, but you have to admit that most of the same features are available in a lot of the nearby communities - safe, good schools, and areas of newer homes.  Ladera does take the "family activities" to another level though.  If you have kids, I can see Ladera having a big benefit over other areas.

What you can afford vs. what you can qualify for are two different items - if you haven't already figured out a budget then I'd advise you and the spouse to attend a homebuying course that has a budgeting module so you can figure out what you could realistically afford.  If you could swing a $2,650/mo payment then that same $300k condo with FHA financing 3.5% down there'd be about a 50/50 chance your debt ratio of 44.2/54.2% (with both car payments) would get approved.

[OCcouple]

I agree. Aliso used to be my #1 targeted area and I still have a good eye on it as there are plenty of quality deals there, even some without Mello-Roos.

It sounds like I have to just keep saving and try to hit it at the right time, but how do I know how much to save? How do I find out what downpayment assistance programs I might qualify for? It can change the picture quite a bit. I have 2 kids with potential for 1 more (hence the desire for Ladera) so I'm almost always within income limits. I've searched online and found possibilities but what person can handle these sort of questions? Do I have to wait until I've already saved enough to start talking to someone, or how else will I know how much to save?

Thanks Shane. Your help is appreciated

[ShanetheMortgageMan]

Welcome.

You can talk to loan officers whenever you'd like, right before you buy, years before... anytime.

The issue with South Orange County is that it's such an affluent area that there aren't many city down payment assistance programs like there are in Los Angeles or even parts of Northern Orange County.  I have found a few programs, but funds don't seem to be available often and unless you go in in person, it's difficult to get details over the phone (or least it was 2 years ago when I heavily researched things) and the word "urgent" I'm not sure is in the vocabulary.  But can't look a gift horse in the mouth, right?

County of Orange Mortgage Assistance Program

The County's Mortgage Assistance Program provides silent second loans to aid low income first-time homebuyers, with annual incomes not exceeding 80% of the Area Median Income (AMI). The loans are designed to help pay for down payment and closing costs to purchase a home. The 3% simple interest, deferred payment loan has a term of 30 or 45 years depending on the funding source and a maximum loan amount of $40,000. Homebuyers must occupy the property as their primary residence. There is a 1% minimum down payment required, and the total sales prices shall not exceed 85% of the Orange County median sales price for all homes. All applicants are required to attend a homebuyer education workshop.

For additional information on the Mortgage Assistance Program or to get pre-qualified, please contact the Affordable Housing Clearinghouse at (949) 859-9255.

Orange County Workforce Loans

The Orange County Housing Trust also provides low-interest second mortgages to qualified first-time homebuyers and down payment assistance grants to members of the Orange County workforce who wish to move closer to their place of employment. Second mortgages up to $110,000 are available to first-time homebuyers with incomes up to 160% of the area median income.

For additional information on this program, please contact the Orange County Housing Trust at (714) 490-1250 or visit their website www.ochousingtrust.org.

Mortgage Credit Certificate Program

The Mortgage Credit Certificate (MCC) program is offered through the County of Orange, in partnership with Affordable Housing Applications. The MCC is a Federal Income Tax Credit program and entitles applicants to take a federal income tax credit of twenty percent (20%) of the annual interest they pay on their home mortgage. Because the MCC reduces an applicant's federal income taxes and increases their net earnings, it helps homebuyers qualify for a first home mortgage. The MCC is registered with the IRS, and it continues to decrease federal income taxes each year for as long as an applicant lives in the home.

For more information on the Mortgage Credit Certificate Program, call (800) 591-3111 or visit www.ahahousing.com.

Orange County Housing Fund

The NeighborWorks HomeOwnership Center of Neighborhood Housing Services of Orange County provides services and training for clients looking to purchase and maintain their home. Services range from providing comprehensive homeownership education to a wide-range of down payment assistance loans and grants. Neighborhood Housing Services also partners with lenders and realtors to offer a selection of affordable mortgage products and real estate services that assists homebuyers avoid excessive down payment and closing costs fees. For more information on the types of services Neighborhood Housing Services provides, call (714) 490-1250, or visit their website at www.nhsoc.org.

Down Payment Assistance Programs

Orange County Housing Trust

The Orange County Housing Trust can provide loans of up to $8,000 to first time buyers in Orange County, or current Orange County homeowners who will reduce their commute to their place of employment by 30 miles a day. To qualify for this assistance, the borrower must have an income below 40% of the area median income. The down payment assistance loan carries a 1% interest and is payable in full on the maturity date of the first mortgage or upon any sale, transfer, assignment, or refinancing of the first mortgage. For additional information on this program, please contact the Orange County Housing Trust at (714) 490-1250 or visit their website www.ochousingtrust.org.

WISH Program

The Neighborhood Housing Services of Orange County offers a down payment assistance grant program that provides up to $15,000 to each household, matching up to $3 for each $1 contributed by the first time homebuyer. Families must not exceed 80% of the Orange County median income, and must purchase a home within the County. For more information on the qualifying criteria, call Neighborhood Housing Services at (714) 490-1250, or visit their website at www.nhsoc.org.