Mortgage chances

[CAS2019]

I am in a unique position in that my brother wants me to buy his townhome where he will gift me the equity, and all I will have to do is get a mortgage for the amount he has left on his loan (he has a first and second mortgage, no liens).  I do live in SoCal, and the amount still owed is approx $194,000.  I am new to credit and have a thin file, my oldest cc is a secured card that is six mos. old.  I have been working with a mortgage loan officer who has been giving me advice along the way.  I should mention that I’ve been building credit and not repairing.  MyFICO scores are currently showing (FICO 5, 4 & 2) EQ 703, TU 701, and EX 720.  I was recently (like 2 1/2 weeks ago) approved for Chase Freedom and Chase Amazon Prime Signature VISA and  both have a CL of $5400 each.  I also have a car loan of $5200–this loan is three mos. old.  I talked with the LO today to give her an update, and she feels I’m in a good position now as I will also be a first time homebuyer.  I was planning on applying for the mortgage in April 2019, but she is suggesting applying before the end of this year because of the interest rates rising.  Are my chances good?  I am having anxiety over this, as I know with the two new cc’s, my FICO scores will take a hit.  I should mention that I pay all CC’s in full, so The only continuous debt is the car loan.

If I took drugs I’d need a Xanax right now  worrying something will go wrong!  Thanks for any info!

[ShanetheMortgageMan]

What is the significance of your own April 2019 time frame?  Are you hoping for higher scores?  

If you are going with FHA financing (townhome will need to be FHA approved) then your mid score of 703 will qualify you for essentially the best rates.   With conventional financing there will be a small rate improvement with a 740 score, and if you don't have 20% equity (from the gift of equity) then a higher credit score will also result in lower PMI costs.

[CAS2019]

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@ShanetheMortgageMan wrote:

What is the significance of your own April 2019 time frame?  Are you hoping for higher scores?  

If you are going with FHA financing (townhome will need to be FHA approved) then your mid score of 703 will qualify you for essentially the best rates.   With conventional financing there will be a small rate improvement with a 740 score, and if you don't have 20% equity (from the gift of equity) then a higher credit score will also result in lower PMI costs.

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I was aiming for April 2019, as I thought I would have a somewhat established credit file and have a better chance of being approved.  There is approximately $175,000. in equity, and if needed, I was going to put $25,000 down, as well as closing costs.   I know zero about mortgages, as I’ve rented all of my adult life.  My brother moved to NYC, and rented the condo to me and now wants it out from under him.  

[ShanetheMortgageMan]

There appears to be enough equity to where you can get a gift of equity of at least a 20% down payment (possibly up to a 40% down payment if everyone wants it to work that way).  The benefit of a 40% down payment vs. a 20% down payment (assuming your loan term is greater than 15 years) is that if you put 40% down, your below-740 score will qualify for the same rates as if you had a 740+ score.  That will create a larger gift from your brother though, so if you haven't already, then both you and your brother should speak with your tax advisors to determine how the gift of equity will impact your taxes.  Regardless, if it's structured correctly then you shouldn't need to bring in any of your own down payment or closing costs.  You are always free to bring in your own funds to cover some/all of the down payment and/or closing costs.  If you can afford it, then another route to consider is a 15-year fixed (this eliminates any "hits" to the rate for lower credit scores, and then 20% down would yield the same terms as 40% down).

Your loan officer is there to make sure you'll qualify.  Your credit history should be sufficient, and as long as you get an automated underwriting approval then someone with a thin credit file will get the same rates as someone with years & years of credit history, as rates are all based on credit score.  Not everyone needs perfect credit scores to qualify, and with the gift of equity you'll have then I would consider purchasing now rather than waiting until April. 

[CAS2019]

Thank you so much, Shane!  This relieves some of the anxiety.  You are a wealth of information!

[ShanetheMortgageMan]

You're welcome, just remember that qualifying for a mortgage isn't nearly as hard as most people think it is.