In April 2020, JP Morgan Chase announced that it would require all new loans to have a 700 FICO score and place 20% down at the time of closing. Soon after, other major lenders like United Wholesale Mortgage and even Fannie Mae followed suit! This time last year, credit was easy to come by. 650 FICO score and 3% down would get a buyer most anything she wanted. Now, in this age of unemployment and uncertainty, we want to answer, “How do I buy a home after COVID?”
Conventional? – You need a 700 FICO Score
To start, conventional loans are the simplest. These loans have no changes to the usual forms and lending requirements. In fact, because they are so simple, most people we work with do not qualify for them. From the articles we read, most lenders now want to see three things for a conventional loan to go through:
- 700 FICO Score or Higher (Good Credit rating)
- 20% down-payment at the time of purchase.
- Employment documents re-verified the day of sale.
- Asset documentation and income statements from within 60 days of closing date.
Truthfully, over 40% of buyers will meet these criteria. So, for those buyers, we think they will see interest rates within 0.25% of the best rates out there. Further, we think those buyers will not have to pay PMI (more in a minute on that). So, with a 700 FICO Score, you should be able to get some of the best loans available. Therefore, those buyers who can buy under these newer, more restrictive guidelines should be able to get a loan nearly anywhere.
GSE? – Maybe not a 700 FICO Score, but Close
Until at least May 17, 2020, Fannie Mae and Freddie Mac aren’t demanding a 700 FICO Score, but they are looking to see at least 649. Both Fannie and Freddie (which we will call GSE lenders from now on) are offering what they call “loan flexibility” until that date. As we often see in finance, the word flexibility often means anything but flexibility. The GSE lenders now require stricter proof of assets and income, including:
- Evidence of current work
- Evidence of income or accounts receivable within 10 Business Days of closing
- Employment verification that the business is still operating during COVID
- Business website demonstrating activity supporting current business operations
Moreover, GSEs are also making changes to their policies on stocks, stock options, and mutual funds for assets. Now, when a buyer tries to show assets for a home loan that include a financial portfolio, the GSEs will only consider 70% of the value of these stocks and bonds! Fannie Mae thinks we are nowhere near the bottom!
This makes some sense. Fannie Mae reported today that they believe 15% of their loans will enter forbearance in this quarter. So, they are reacting to cut down many of the risks they ordinarily take with home loans at this time. Notwithstanding, Fannie Mae still managed to close over 850,000 properties in the first quarter of 2020.
A Quick Conversation on Why You Should Avoid PMI
The money is still out there for buyers who need it. The trouble with GSEs, however, is that they often require buyers with less-than-ideal FICO scores to pay something called PMI. PMI stands for Private Mortgage Insurance. It is an insurance policy that the borrower will pay to show the bank they aren’t risking much if there is default. PMI makes sure the bank gets paid, and boy it’s expensive. A buyer with a sub-prime FICO score might pay 1% of the value of the home per year in addition to the mortgage payment to secure PMI. We advise trying to wait until your credit score and finances sit you firmly in the conventional loan category.
FHA Updates – Could it Get More Difficult?
At least procedurally, FHA is trying to help buyers and sellers comply with its guidelines during lockdowns. Here, we did see some flexibility from the Federal Housing Finance Authority. Now, they are stating they will:
- Allow desktop appraisals on new construction loans
- Give borrowers/buyers the opportunity to provide documentation (rather than requiring an inspection) to allow draws
- Permit flexibility on demonstrating completion of construction or repairs (as an alternative to the Completion Report)
- Expand the use of power of attorney, remote closings, and remote online notarizations
Altogether, this is quite the step into the 21st century for FHA. Traditionally, FHA was very difficult to deal with. It would require “with my own eyes” and “hands-on” assessments of everything in the transaction. Now, while FHA is still a devil for details, the agency certainly allows a bit more ease of use. This could make things much less frustrating for buyers with a 649-700 FICO score to find a great deal at a great rate.
What if I No Longer Qualify for the Mortgage I Want?
If your FICO score is holding you back from the deal you need right now, there are many ways to improve it. We borrowed some help from the Motley Fool website in helping advise our clients on maximizing their credit score. We don’t wany anyone paying PMI, and we want this solved before our clients apply for a mortgage. Here are some things to do:
- Pay down your cards — If you have a credit card balance in excess of 30% of your credit limits, it can really hurt your score. Try to keep your balances as low as possible by paying (much) more than the minimum. Paying your balance down quickly translates to an improved score. Plus, you’ll get out of debt that much faster!
- 28/36 OR 31/43 — Remember that your maximum loan amount is determined by these two ratios. If you are a conventional buyer, your mortgage shouldn’t be more than 28% of your pre-tax income, with more than 36% of your money going to pay debts. If you are FHA, those numbers are 31 and 43. Try hard to push down your debts so you can move from 31 to 28!
- Don’t open new accounts — New accounts knock your score down because your lender might think you are desperate to get money. If you are seeking to buy a home within a year’s time, avoid going through credit underwriting. Try to pay off debts rather than get new extensions of credit.
Conclusion – FICO Isn’t Everything, But It’s A Lot!
The difference between being FHA and Conventional can be thousands of dollars, annually. While the mortgage you might qualify for is not determined solely by your FICO score, the FICO score is one of several factors that determines your costs. If you do a bit of planning and a little work, you can get a great house for your family at an affordable price… even during COVID. After all, it’s the best time to buy a house in Chicago.