FHA/Mortgage Requirements - Credit

[Anonymous]

Hi all!

I'm looking to buy a home in July or August of this year and my wife has been working to clean up my credit report since January of 2007. My score then was 538. She sent validation request letters to 14 negative entries on my report, 3 were validated (which we then paid), others either didn't report again or fell off (7 years), and I pulled my FICO today. 707.

We took out an auto loan for $2791 in May 2007 (score then was 598) and another for $13,648 in June 2007. We have been current since. Actually, we're sending our credit union a check for the payoff of $1857 on Friday so that amount will be gone and we'll just have a remaining balance of $12,475 on the bigger loan. (My wife just loves those paper trails.)  No other items have been reported since November 2007, just those two [current] loans. There are no other debts between the two of us. I gross $80K/year and my wife is a stay at home mom to our 3 children.

We don't want to take out any credit at ALL until after we're in our new home, whatever it is. The loan amount we're looking at is about $100K. Under FHA, we'll put down the $3K (3%.) We have an emergency fund of $15K and are building substantial savings.

To me, we look good for a home loan but my wife is anxious. Is there something I'm overlooking? Would taking out a credit card do anything to increase my FICO score? She worries that just the two loans is too little diversity but that obtaining a credit card so close to applying for a mortgage would only have the potential to make it worse.

FICO gurus... what do you think?

[Anonymous]

If you have $15k in emergency and are 'building substantial savings', then why don't you put down 20% ($20k) in order to avoid PMI (aka 'throwing money out of the window').

Also, FHA doesn't care about FICO scores - just so you know.

They only care about DP, DTI, and DTI after PITI. You only help PITI by putting down the 20% - so I would focus on getting the $20k.

[Anonymous]

I wanted to add that she's also concerned about the debt balance to high limit percentage is too high. It will be around $11,500 and the original loan amounts totaled $16K+. Does the percentage count for auto loans too? Or just credit cards?

[Anonymous]

My wife has an ever bulging security gland. She doesn't want to put down that much cash until after the New Year, in case "something" happens. We don't want to use credit cards or take out anymore loans, ever, so she wants enough to cover large repairs if they come up. She agrees that all savings after the New Year will be directed at principal until it's paid off entirely. I'm fine with this arrangement if it makes her feel safer and happy.

We could wait to move but we're expecting our fourth in October and are currently in an 800 sq.ft. apartment. It's getting cramped and we [SHE] need OUT. That's another reason why I agree with putting down less money down. Our share of the last emergency birth and NICU and her recovery was over $8K. I'd feel beter with a large reserve to take care of anything that comes up.

[Anonymous]

That's interesting about the FICO score not being a factor. I wouldn't have thought that. My poor wife has been obsessed with increasing my score for the past year - I don't know if I want to tell her that. haha. She pushes me to be a better man in everything and I am incredibly blessed that she was put in my life. It is she who has helped put us into a good financial position and made me want better for our family. I fought her "Dave Ramsey says" long and hard but she won out!

[Anonymous]

Based on how much you make and your current debts I would guess you'd be a shoe-in.  You'll qualify one way or the other.  TSM is right, credit score does not affect you, DTI is much more important and you should be fine.  Why not try to qualify now and end the suspense?  Based on your description of your wife, it doesn't sound like she'll be satisfied by anything we say.  

Sounds like you need that emergency fund so keep it.  3% down is enough.  You may not want FHA, by the way, a good broker or lender will find the right program for you.  Congrats on your credit and your new found financial management skills.  They will serve you well.

And be sure to pass those skills onto your children.  Good luck!

[Anonymous]

She wants to be in a house yesterday. LOL. Our lease isn't up until August 28th though so we're stuck until then. We were thinking to apply for a mortgage (pre-approval) in June and start looking immediately. Is that too late for FHA? Why not use FHA? What are the disadvantages? I was thinking that a federally insured loan would be the best option. ??

And thank you!

[Anonymous]

Don't get me wrong, FHA might be the best option.  I was only trying to say it isn't the only option.  There are subtle differences but nothing mind blowing.  Rates are not exactly the same either.  Don't stress to much about FHA or not, a good lender or broker will get you the best program either way.

I always suggest looking early.  1) You have an idea of what you want and the price range it falls in (plus what condition you're ok with and what you want to fix asap, if you buy existing).  2) As a couple months go by, you'll know what the market is doing which gives you leverage and power for negotiation.  And sometimes the perfect home doesn't wait until you start looking.  If you find something a couple months ahead of time there is always the opportunity to lease it back to the owners until your lease is up.  Of course if you buy new, then all that is out the door.

Not saying do it now, but you don't have to wait until July either....

[Anonymous]

Doesn't FICO matter in the sense that the higher it is, the lower the interest rate you'll get?

[Anonymous]

The lender we plan on using had rates as of 1/30/2008 up at 5% for FHA borrowers and 5.25% for convential borrowers. ?? I wonder why it would be less. That is, I'm assuming, for only prime candidates?