Understanding the 4c’s the basics of qualifying for a home loan by Tom Mackrola
In the latest ebook from Tom Mackrola he sheds light on the 4c’s of mortgage underwriting. The 4C’s are a recurring theme first time homebuyers encounter when starting the home buying process. These concepts are explained thoroughly in the new ebook Understanding the 4c’s the basics of qualifying for a home loan by Tom Mackrola. The 4c’s are a generalization about the underwriting criteria that home loan approval is based upon. An understanding of the 4C’s prior to applying for a loan can be a significant competitive advantage over other homebuyers interested in the same properties as you.
The 4c’s are Credit Capacity Cash Collateral
In order to qualify for a home loan the borrower must have a credit score. There are three major credit bureaus experian, equifax, and transunion. Each of these has a unique score that is based upon the borrower’s credit history. Out of the 3 scores, there is a high score , a low score, and a middle score. The home loan is based upon the middle of the 3 scores. While the credit score is the main thing mentioned in most credit conversations, however, the contents of the credit score are equally important. Some items on your credit report including foreclosures, short sales, bankruptcy, etc. It is advised to consult with your lender about current agency guidelines in regards to the delays created by these red flags.
Capacity is basically your ability to repay the loan. The primary equation used to determine your capacity is your Debt to income ratio, also known as “DTI”. There are two numbers within your DTI. your front end ratio and your back end ratio. the front end ratio is your total monthly income divided by your housing payment for the loan you are applying. Your back end ratio is your total monthly debt obligation plus the proposed housing payment for the loan,
There are two things being considered here in relation to “Cash’ also referred to as assets. 1. Cash the borrower can bring to the closing. 2. cash the borrower has available to be used as reserves. It can be in a bank account or in another type of account that is easily liquifiable like a stock trading account, life insurance ,401k/retirement account. This can also be in the form of Gift Funds from a close friend or family member. It is advised to consult with your lender about current agency guidelines for the proper procedure of documenting gift funds.
Collateral refers to the subject property that the loan is for. During the underwriting process of closing a home loan, the property will need to have an appraisal done. The appraisal is an inspection of the property where the value is assessed in relation to other similar homes in the area. The rule of thumb for collateral is that the property has to be in a condition suitable for the loan program. Another very important factor about collateral appraisal is that the value expressed in the appraisal is equal to or higher to the purchase price. If the value is below the purchase price the buyer either hs to bring the difference in cash to the closing, or there has to be a negotiation to drop the price to at or below the appraised price.
These concepts are elaborated on in the Ebook, “Understanding the 4C’s The Basics of Qualifying for a Home Loan” by Tom Mackrola. Available for download on tommybagaloans.com
Down payment assistance program options through IHDA ACCESS PROGRAMS
The Illinois Housing Development Authority has announced that on February 1, 2018 the At Home Illinois down payment assistance program will be replaced by the Access Programs. there are 3 types of programs to choose from and they offer up to 10,000.00 towards down payment assistance.
Access 4% forgivable
This program offers assistance amount up to 4% of purchase price up to $6k max forgivable over a term of 10 years. There is no monthly repayment Assistance is forgiven pro-rate on a monthly basis
Example : if 6,000 , it will be forgiven @ 50.00 /month
Access 5% Deferred
The assistance amount is 5% of the purchase price UP to 7500 maximum The repayment for the assistance amount is a 0% interest. Full amount due at maturity date or upon “repayment event. Can be repaid at any time.
Access 10% repayable
Assistance amount is 10% of the purchase price. Up to 10,000 maximum for a term of 10 years. the repayment is done 0% interest monthly payment -dpa amount / 120 months. For example if 10,000, payable at 83.33/month
Pro Tip :Remember 10/10/10 if you’re not sure, the answer is probably 10. 10% max da percentage, $10k max amount 10 year term
The access programs have expanded eligibility requirements to qualify them previous first time and non first time homebuyers allowed.
For these programs, both first time homebuyers and non first time homebuyers are eligible but lenders must disclose borrower status
Geographically, there is no county specific requirement .all Illinois counties are eligible across all 3 Access programs.
New construction is also allowed.
Transparently Disclosed as Ihda 2nd mortgages
There is nothing mysterious about the programs. When used, each down payment assistance program takes the position of a second mortgage and that mortgage is disclosed according to trid guide lines.
The programs have Minimum credit score of 640 mid score. The credit score for all loan types must be 640 no exceptions. The debt to income back end ratio must be 45%. no exceptions
Pre-purchase counseling is required on all programs pre purchase counseling must be completed before closing Ihda will accept certificates before closing. Ihda will accept certificates completed before closing up to one ear from the completion date.
There is no exception, quick fix or waiver that can be provided for pre-purchase counseling. Most mortgage insurance companies offer pre purchase training online if the borrower in unable to attend a course in person.
1st home Illinois
1st home Illinois will remain intact. For more information on 1st Home Illinois please refer to the earlier post about IDHA 1st homs illinois 7500 down payment assistance program here.
Currently there is a lot of marketing in the home loan industry promoting buying a house with a 580 credit score. While it is possible to get approved for a mortgage with a 580 credit score, there are many benefits to applying for a loan after having a 620 credit score.
In a recent interview, Chuck Poulin, Branch manager of Inlanta mortgage says “a 580 can get you in the stadium to see the game, but its not the best seat in the house. Its like sitting far in the outfield behind a pole which obstructs your view. I work to get clients better seats in the game, by helping them understand the benefits of improving their credit situation. The benefit is much more apparent after the borrower is at 620”.
Poulin, a 21 year mortgage industry veteran and expert personality cohost on the real estate revealed radio show on Chicago’s Am 560 radio closes millions of dollars in loans per year and has seen the benefits of borrowers improving thier credit score first hand.
The interest rate offered for the borrowers loan is typically going to be higher with a 580-619
Easier underwriting Less turbulence in the closing process
While technically a loan can be approved and closed between 580-619, the underwriting is much more involved. Most files with that credit score range require a manual underwriting process. This difference in process is more involved, requires more documentation and additional review.
options tend to shrink under 620
While you can technically get approved at 580, it is typically not the competitive interest rate. Borrowers who have a score under 620 can experience higher interest rates than those over 620. There are also less loan programs available for those under 620 Also most down payment assistance programs are not available.
Requires more documentation and the process tends to be longer
Most loans under 620 tend to have a need to be manually underwritten. This is a different process of underwriting that tends to include the request for more documentation and extensive explanation about anything that the underwriter needs more clarification on. This variance in procedure for processing and underwriting the loan can take a longer time to close. This delay in closing can cause uncertainty and anxiety for the buyer, the seller, and all of the professionals involved in the transaction.
Red Flags can delay your ability to qualify regardless of the credit score
Regardless pf the credt score, the contents of the credit report also need to be taken into consideration. “Red Flags” on the credit report can be a “show stopper”, that delay the process of getting a loan. These red flags include Bankruptcy, short sale/ deed in lieu of foreclosure, foreclosure, chapter 7 or chapter 13 bankruptcy. Collections. The delay caused by these redflags can delay the ability to qualify for up to 7 years depending on which red flag it is. (Please check with your lender or agency guidelines for most up to date rules regarding this issue.) Many of these issues are a big factor that are bringing the score below 620. Since these need to resolved prior to getting a loan, the resolution of the issues will most likely have a positive impact on the credit score which is very likely to boost the borrowers score to 620+once the issues are resolved.
Many lenders market the 580 credit score programs as an option because technically it is an “option.” However in my experience it has been more so a motivator to get the applicants to get motivated to do a transaction. Many times these applicants resolve the credit issues they have prior to officially applying and end up being over 620 anyways. Never say never because there are some situations where people get approved for loans with a 580 score, but many borrowers have an easier time getting approved with more favorable terms and options once they raise the credit score over 620.
Many people contact me in regards to down payment assistance. A great solution for first time home buyers in Chicagoland is the IDHA 1st HOME ILLINOIS Program.
The 1st Home Illinois mortgage is a 30 year fixed rate mortgage program. The interest rate for the mortgage will remain the same for the entire term of the loan. A $7,500 down payment assistance grant is available for those who qualify for the 1st HomeIllinois Program.
The borrower’s contribution is limited to $1,000 or 1 percent of the purchase price, whichever is greater. As a result , for as little as $1,000 out of pocket, a qualified borrower can purchase a new home using this program.
The 1st HomeIllinois Program Offers a $7,500 cash grant for down payment and closing costs on a fixed rate 30 year mortgage. The program provides a competitive interest rate and can be used with FHA, VA, USDA or Conventional loan products.
The program has a few requirements about the property. The property type can be either a 1 or 2 unit property. The property must be located in Boone, Cook, DeKalb, Fulton, Kane, Marion, McHenry, St. Clair, Will or Winnebago counties. The property must be an existing residential dwelling as new construction is excluded from this program/
The buyer must either be a First-time homebuyer or someone who has not owned a home in the last three years who can contribute at least $1,000 or 1 percent of the purchase price, whichever amount is greater. To qualify for the program the borrower must meet the income, purchase price limits and credit score requirements. The 1st home Illinois program is intended for properties being purchased by buyers who plan on living in the home as their primary residence.
the borrower is also required to complete homeownership counseling either online or in-person.
The Illinois Housing Development Authority program is a great option for someone who is looking to get a $7500 grant towards down payment assistance. This grant can help a borrower with the purchase of their first home. The process requires more documentation than does a loan that is not using the IDHA funds. It is important to align with a lender who has closed loans using this product. I have closed IDHA deals and have learned alot about this resource along the way. I am happy to help you utilize this program in the purchase of your first home.
Contact Tom Mackrola @ Inlanta Mortgage for more information about the IDHA 1stHomeIllinois 7500 down payment assistance grant program @ 312-561-7484 or [email protected]