New home purchasing advice please.

[Anonymous]

This will be my first time purchasing a home, so I really don't have much knowledge regarding the whole process.

First off, my credit score is in the high 700s. My only debt is my car ($317/mo) and it will be paid off this December. I have zero debt on my credit cards, no student loans, etc. I'm pretty certain I would be approved for a mortgage loan. However, I only make 49K/year.

Now, my significant other's credit score is in the low 600s and has a few collector hits on his report. The only debt he has is a small personal loan, which we will have paid off in two months, and his car that still has 3.5 years left of payments. He also makes almost twice as much as I do.

We would like to get a pretty decent newer home, if possible.

So, my question is, should I just go ahead and get approved for a loan? - which will probably only be around $125,000 (it's doable), but we would like to get a house somewhere around $150,000-175,000. Will both of us applying for a loan be affected due to my SO's bad credit? Such as not getting approved? or the loan amount would be low and interest rate high?

Any tips or advice would be greatly appreciated! Or company/broker/bank to go to for a loan?  Thanks!

[Lel]

Hi Shes2010, and welcome to the forums.  There are several things to consider.

It may be possible for you to qualify for a conventional mortgage on your own, with your scores and income.  A $150,000 mortgage at 5.5% would result in a P&I payment of about $850.  Add in the probable property tax and homeowners insurance and your front-end debt-to-income ratio (home-related debt) would be right around 30-33%.  Adding in your car payment brings your back end DTI to about 35-38% (roughly), so you may still be able to qualify.  For a conventional mortgage, you'll need a 20% down payment.

Regarding your SO, having a score in the low 600s may still qualify him for an FHA loan.  Standards are rising - some lenders are now looking for scores of 640 or higher, but there are still lenders offering loans for scores in the 600-620 range.  However, if his collections are very recent, then this could making qualifying difficult.  He could try to solve his credit score and collection problems by contacting the creditor and offering to pay the accounts in exchange for their deletion off his credit report (a strategy called "pay for delete", or PFD as commonly seen on these boards).

When applying jointly, by the way, the scores of the co-borrower with the lower scores are used.  So your SO's low 600s would trump your high 700s.

If you don't have enough for a 20% down payment, then FHA may be the way you have to go.  The rates don't vary with credit score, but you will have to pay an upfront and monthly mortgage insurance premium, which adds to the cost of the loan.

One last comment - before you and your SO enter into a mortgage commitment together, make sure that you are also committed to each other for the long term.  You don't want to have to deal with a potentially complicated refinance later on if your relationship doesn't last.  I don't mean to be negative, but this is a realistic consideration.

[Anonymous]

Thank you for the great feedback and advice.

As for our relationship, we have been together for seven years, in our 30s, engaged and about to have a baby.  So, I don't think either one of us will be going anywhere. but thank you for your concern.  I completely understand.

I just got my FICO Score and it's actually an 800.  I'm not quite sure if that helps much regarding a mortgage loan. 

It sounds like I should try to get a mortgage on my own based solely on my income and credit.  We definitely do not have a 20% down payment.  However, we have around $6000 saved and can probably bring that up to $10000 in the next two months or so.  Should we wait until we have a higher down payment? 

Or should I apply for an FHA loan?

Thank you for all your help!

[BrianB_The_Loan_Professor]

There is nothing wrong with an FHA loan

You may want to at least see what their scores are and if 620 or above include them (since you are comitted)

If not it wont matter you can easily qualify on your own based on what you have said

Just dont feel cheated because your great credit doesnt get you any special perks with FHA

the fact is there is little difference with FHA and rates when it comes to scores

The downside these days not going FHA is finding Mortgage Insurance when you have less than 20% down

Since you are not married yet your credit will have to be pulled seperate

apply together then if theirs isnt up to snuff just drop them and continue on with just your own info

Pretty simple on the paperwork

Just thinking if you are really starting your life together (after 7 years you know what I mean) you probably should at least try to get the house together.....

Good Luck

Brian

[Anonymous]

FWIW, my situation a year ago was very similar to yours in income (c. $50,000 annual) and debt (zilch, at the time) -- except that my FICO scores were marginal, though acceptable (in mid-640s). I qualified for a loan an a $130,000 property with the minimum 3.5% down on an FHA guarantee, and got a 5.5% fixed rate and PITI of c. $922 monthly, or 23% front-end debt. While I realize how much house you can get for that money varies widely by area, I'm living alone with a house and yard big enough in which to raise a mid-sized family in my market. If I were you, I'd take advantage of my high credit status -- which almost a slam-dunk for approval -- and apply alone.

Message Edited by oldhack62 on 02-01-2010 06:32 PM

[Anonymous]

Oldhack62- Thanks so much for the advice!  I guess applying on my own wouldn't be such a bad thing.   We live in Dallas and both are aware that $130,000 won't get us what we want in the "safe" Dallas areas, so we have been looking in close surrounding areas.  Do you recommend that I apply for a FHA loan or going through a bank (such as Bank of America - since I've been with them for 8 years or so) or a different lender altogether? 

[Anonymous]

Thanks Brian for the advice.... When we get married how will that affect my credit?  I've heard (from friends and family -which could not be so reliable. ha!) that my credit will drop and my SO's will improve.  Is this true? 

Another question, how much does mortgage insurance usually run?  And do you suggest going with an FHA loan or through a bank/different lender?

Thanks again!

[BrianB_The_Loan_Professor]

That is not true

Your credit will always be independent

However as you enter into things together if you are both on the same item (like a mortgage)

Your credit will reflect his payment history

as long as things are seperate the credit will not overlap

Good Luck on your purchase -

Brian

[Anonymous]

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@Anonymous wrote:
  ...Do you recommend that I apply for a FHA loan or going through a bank (such as Bank of America - since I've been with them for 8 years or so) or a different lender altogether? 

---

Frankly, I'd take whatever is the best deal offered. With a good credit rating and earnings background, that may well be from a conventional lender, such as -- but not necessarily -- Bank of America, but FHA-guaranteed loans have some advantages, such as low down-payment requirement, assumability, and no pre-payment penalty. Of course, you also have the mandatory PMI payment up-ront with FHA, unless you bring a substantial down payment. It may well be in your best interest to find a mortgage broker -- well-referred, and well-versed in the market -- to sort through the available options and neighborhoods. Dallas, you here? Seems to be your neck of the woods...

[Anonymous]

Congratulations.  That's a lot of good life changing stuff all at once. 

I have a lot of great things to say about BofA as a checking/savings lender.  I'm a mortgage banker so I prefer being both a bank & broker over being solely one or the other.  

Here is the "secret" on loans these days:  Both 30 Year rates are basically 5% today, no points.  The decision is solely based on lowest credit score and down payment.  

3.5% down--FHA

5% down--700+ (your) FICO probably conventional, 620+ almost certainly FHA

10% down--similar with a break-point of 680 for conventional

I've run spreadsheets up, down and sideways, but it seems to break out the same.  Unlike prior years, the FHA vs Conventional rates are nearly identical. It's the mortgage insurance and those Fannie/Freddie loan level price adjustments that tip the scale.   

What are you thinking for down payment?