Question about qualifying for an FHA loan

[mccallb]

Hey all, I think I have a reasonable idea about my chances of getting an FHA loan but I am curious as to your thoughts and if you have any suggestions.

I have a credit score that should be in the 700s around the time I buy a house, and I don't have any severe delinquincies that are recent.  I had a collection for 300~ from another state that I didn't know about and even though it won't help my score, I paid it, to show any potential mortgage company that I pay my debts.

My wife however just got a deed in lieu of foreclosure on a house she owned before we were together.   We pulled her report, and she has excellent credit on everything but that, and before the deed went through, I cosigned a car for her, so she's re-establishing type I credit.  Her sccore, including the deed is around 650.

The last caveat is that I owe the IRS about 25K. I have a streamlined agreement with them, and its totally above board, no lien, no problems.  They're happy, I'm happy, etc.

I'm gearing my potential home purchase to about 39% total debt to income (including the house payment... Just the bills are only about 19% DTI ratio) based on my salary alone (she works, but she may quit if we get pregnant)

So, with all that said, do you guys forsee any problems qualifying for an FHA loan?  I think I have most of my ducks in a row for this, and I"m looking to buy in june (i have some inquiries that will drop and some lines of credit that will mature in June (( this was timed this way on purpose))

Any thoughts would be great.  Thanks!

[ShanetheMortgageMan]

Is your wife going to be on the new mortgage, and if so, when was her DIL?

Tell us more about this "streamlined agreement" with the IRS for the $25k - are you making payments?  Is it a tax lien or not yet?

If she isn't going to be on the loan, are you buying in a community property state?  If so, then even if she isn't on the loan then her monthly debt payments would count against your debt ratio.

[mccallb]

She can either be on the loan or not.  I'm basing everything on my salary.  There was no lien.  I just established the payment arrangments, but I'm in good standing with the IRS.

The amount owed to the IRS was a complete anomaly, it happened when my company mishandled a relocation package.  I never owe.  Regardless, they were perfeclty fine to deal with and set me up on a payback plan of 350 per month.

This is South Carolina, not a community property state.  My DTI consists of all my bills and loans, all her bills and loans and the monthly amount to the irs., etc, and my income my salary alone, not hers included.  I am the major breadwinner in the relationship.

[ShanetheMortgageMan]

With the DIL, her lower scores, and you being able to quailfy on just your income, I'd recommend leaving her off the application.  It'll help you get a better rate. 

With the $25k owed to the IRS you'll need to document the $350/mo payment agreement and the payment history, and the payment will be included in your DTI. 

Sounds like if you've accounted for all of that then your DTI should be good to go.

[mccallb]

Awesome.  Thanks a bunch.   I really appreciate the help.  

I guess i'm surprised that even though my wife has a 650~ credit score the DIL would still mean she needs to be left off the loan, but I mean, really I don't much care.  It shouldn't affect what I get approved for and I am undercutting how much I want to spend anyway.

I suppose at the time that i get preapproved, the lender will be able to give me specific rates both with me as the sole and with both of us on, yes?

Again, thanks!

[StartingOver10]

There is a waiting period for a new FHA loan after a DIL, that's why Shane was saying to leave her off the loan.

The waiting period is 3 years from the date she deeded the property back to the bank to the new application date for a new FHA loan. Longer for conventional. There are exceptions for extenuating circumstances.  I don't know if she would qualify under the new Back to Work program.

Sounds like you prefer to have the loan under one name anyway which you can do in a non-community property state.

[ShanetheMortgageMan]

If you can muster 5% down then you should also consider conventional financing.

[mccallb]

Ok.  So we might not be able to get a loan with her on the papers becasue she's not 3 years after her DIL.  Makes sense.  Will they calculate debt to income as just my credit cards, and my car payment, etc or will i shoulder her bills as well?  It doesn't matter it just makes me curious.

For example, FHA says it wants the total amount of your DTI to not exceed 41% of your gross monthly salary.  So, would that be just my bills in my name for my DTI?

Also, and this I am curious about, the amount of the "loan payment" that constitutes that 41%, is that mortgage payment only, or does it include PMI/Homeowners Inc/Taxes?

Whats the benefit of going for 5% down loan?

Thanks again for the help, you guys are great.

[StartingOver10]

When calculating DTI the entire new housing payment is used:  principal, interest, mortgage insurance, homeowners insurance, real estate taxes and HOA or condo fees when applicable.

Only your debt will be used to calculate your DTI because you are NOT located in a community property state.

Conventional loans require 5% down rather than 3.5% down. The advantage is the MI drops off after your LTV gets to 78%. Beginning June 2013 FHA now requires you to keep the MI for the life of the loan if you have 30 year amortization. Typically MI is less expensive in conventional loans.

[mccallb]

OK.  Well I'm planning to finance 225,000.  So if we just take my debt and the IRS, that constitutes 16% of my debt to income, which gives me 25% of my gross monthly income to be my upper limit for a payment which includes PMI, Homeowners, Taxes and Mortgage, Correct?

I was planning to have 10,000 set aside before I started looking for an FHA loan.

On a 225,000 house, at 3.5% downpayment that would be a total of $7875. I assumed there were other costs, home inspection, etc, that I'd have to front, even if i have closing costs covered by the seller. (A plan of mine)  My assumption was that 10,000 should cover the 'out the door' cost of an FHA loan at that cost.  

The monthly costs broke down to:

$1,518Total Mortgage Payment

$1,050 Principal & Interest

$225 Property Taxes

$67 Homeowners Insurance

$176 PMI

So, if I wanted to go for a conventional loan (excuse me, I know literally nothing about them) and needed 5% up front, thats $11,250 right off the bat.  What would be a good amount to strive towards for an "out the door" and what would i expect the montly breakdown to be on that?