Mortgage approval could be easier than you think

Kenneth R. Harney on Jul 28, 2017

WASHINGTON – So what does it take to get approved for a mortgage to buy a house this summer, whether you’re a first-timer, planning to move up or downsize? Maybe not all that you think.

For most people, the key requirement is that you’ve got the right package of stuff – acceptable credit score, down payment, financial reserves, debt-to-income ratio – to get an acceptable grade from the automated underwriting systems or “black boxes” installed at the dominant investors in the market, Fannie Mae and Freddie Mac.

Though the intricate webs of algorithms and big data spun inside Fannie’s and Freddie’s black boxes are kept under tight security, we do get monthly read-outs on some of the characteristics of loans they’re approving.

For example, in June the average FICO credit score for home purchase loans at Fannie and Freddie was 754. That’s a big reach for millions of would-be buyers. It’s well above the national average FICO score of 700 and considerably higher than what was typical during much of the previous two decades. (FICO scores range from 300 to 850, with higher scores indicating lower risk of default.)

But that’s not the whole picture. According to data newly compiled by Ellie Mae, a mortgage origination software and analytics firm that tracks loan characteristics, substantial percentages of applications are receiving approvals from Fannie and Freddie with lower FICO scores than you might imagine. Nearly 13 percent of their approved loans in June had scores between 650 and 699. Scores like these are typical of consumers who have moderate dings in their national credit bureau files or are recovering from credit woes suffered during the Great recession but are now bouncing back. Another 4.3 percent of loans approved had even lower FICOs, ranging from the low 500′s to 649.

Mortgages backed by the Federal Housing Administration (FHA) closed in June spanned an even broader range of scores. FHA’s average score for home purchase loans was 683, but more than one out of four (26 percent) of its borrowers had scores from 550 to 649. Just under 2 percent had scores FHA considers the rock bottom it will allow – 500 to 549 – indicating serious derogatory items in applicants’ credit files, possibly even previous mortgage defaults or foreclosures. Note that FHA uses its own proprietary underwriting system, known as TOTAL, which often yields more generous decisions on approvals than Fannie’s or Freddie’s.

Debt-to-income (DTI) ratios are another major factor hard-wired into the black boxes – and can be deal-breakers in mortgage applications that otherwise look pretty good. DTI refers to the ratio of your monthly credit-related expenses – including current rent, mortgage payments, credit cards, student loans and the like – compared with your monthly gross income. If you have $6,000 in income and $2,500 in total debt payments, your DTI is 42 percent.

Fannie’s and Freddie’s average DTIs look strict, but there’s actually more wiggle room for mortgage applicants this summer than any time in recent years. The average DTI for Fannie and Freddie during June was 39 percent. FHA, which tends to be more forgiving on debt matters, had average DTIs in June of 43 percent. But Fannie, Freddie and FHA recognize that even solid, creditworthy applicants can be carrying high debt loads in the current economy, and they are open to higher DTIs than the monthly statistics suggest. In an important policy change taking effect this month, Fannie raised its permissible maximum DTI to 50 percent. A study released last week by the Urban Institute predicts that this change alone could open the mortgage door to 95,000 additional home buyers. That’s potentially a big splash.

Freddie Mac has had flexibility on DTIs built into its underwriting system for years and also can go to 50 percent, ideally for borrowers with compensating factors such as a higher down payment or high bank reserves. FHA is by far the most liberal of the three on DTI, funding loans with total debt loads in excess of 55 percent.

Down payment requirements also are super low at the moment. Fannie and Freddie both have programs that permit just 3 percent down, and some lenders using those programs have cut that to 1 percent or even zero. FHA’s minimum down is 3.5 percent.

Bottom line- Get rid of preconceived notions you may have about how tough it is to get approved. Standards are more flexible and not as tough as you probably thought. At the very least, check them out.

Tax overhaul plans in summertime slow motion

Kenneth R. Harney on Jul 14, 2017

WASHINGTON – If you’re a tax-savvy home owner, buyer or investor, you might be wondering- Hey, what’s going on with that big tax code overhaul bill the Trump administration and Republicans in Congress have been promising to deliver?

There’s been plenty of news about health care legislation – the other blockbuster Republican campaign plank – but hardly a peep lately about a tax bill that could have far-reaching effects on real estate and other segments of the economy. Among the potential real estate changes that have surfaced- An end to home owner write-offs of state and local taxes; a doubling of the standard deduction, thereby watering down the mortgage interest deduction; severe limitations or an end to tax-deferred exchanging. Plus there have been questions about how any tax overhaul plan would treat the most generous lump-sum tax code benefit available to home owners- Exclusion of up to $250,000 or $500,000 tax-free from capital gains on home sales, depending on whether they file singly or jointly. Some analysts say that benefit, which is projected to cost the Treasury $166 billion in uncollected tax revenues between 2016 and 2020, could be reined in.

This is important stuff to millions of owners and buyers of real estate, so where’s the legislative “reform” package Republicans have promised, cutting tax rates for individuals and corporations and simplifying returns for just about everybody? Does this have enough life in it to pass this year? Or is it shriveling away in the summer political heat?

Here are a couple of things you should know- The tax overhaul efforts on Capitol Hill and at the White House are alive and active but are mainly occurring behind closed doors. There have been no public hearings, no introductions of draft language, no markups of bills. In fact – and this may surprise you – there is no “tax bill” per se that you can look at, even though we are halfway through 2017.

The Trump administration’s tax plan released in April consisted of just a one-page handout, and there have been no significant details since then. The House Ways and Means Committee is working off a “blueprint” of proposals dating back to mid-2016 but hasn’t yet released an actual bill for 2017. And Senate Finance Committee Republicans have not yet produced even rough conceptual drafts of what they want to do, at least not for public consumption. The chairman of the committee, Sen. Orrin Hatch (R-Utah), only recently assigned members specific areas of the tax code to consider for possible changes. So it doesn’t appear that the Senate is all that far along in the process either.

Treasury Secretary Steven Mnuchin predicted that a comprehensive tax bill would be ready by August. He has since revised that to “this year.” House Speaker Paul Ryan (R-Wisc.) agrees. Nobody can give you a definitive answer on these predictions, but the odds against it grow longer every day. Even though shaking up the tax code is important, other, more immediate major issues coming before Congress stand in its way. They include a must-do budget resolution for the next fiscal year, a revised debt ceiling, appropriations bills and, of course, health care.

Any or all of these could eat up substantial time and political oxygen. Add in the fact that Congress doesn’t have a lot of scheduled work days in Washington – by one count less than 60 days from mid-July through December – and you begin to see the squeeze taking shape.

Even more important- Comprehensive tax code reform is always a minefield. It’s one of the toughest and most divisive exercises any Congress can attempt. That’s why the last time it happened successfully was back in 1986. A narrow-bore tax bill that doesn’t touch as many sensitive nerves but cuts corporate and individual tax rates would have a better shot at passage this year, but even that would likely require revenue-raising provisions in order to pass – and raising revenue, aka increasing taxes on somebody or another, is anathema to most Republicans and many Democrats.

So where does this leave home owner and investor tax breaks? Safe from any radical changes for the time being. But even if a wide-ranging overhaul doesn’t pan out in 2017, you can bet it will be high on the agenda next January. Then again, 2018 is a congressional election year. Incumbents don’t like to run on the message- Vote for me – I took away some of your cherished real estate tax benefits.

So all bets might be off.

CFPB cracks down on ‘credit-repair’ companies

Kenneth R. Harney on Jul 7, 2017

WASHINGTON – You’ve almost certainly seen or heard pitches for “credit repair” services promising to clean up your credit problems, reduce your debt, or even raise your credit scores by 100 points or more.

Come-ons like these can be especially seductive for people seeking to buy a home and apply for a mortgage who have negative items in their credit reports. In order to qualify for a loan, they’re told, they need to make their credit look better – mainly by neutralizing the bad stuff in their files at the national credit bureaus, whether it’s accurate or not. But mortgage and credit industry experts warn that repair services can be far more harmful to home buyers than they suspect – even get them rejected on the spot.

Two new legal settlements from the Consumer Financial Protection Bureau – involving more than $2 million in penalties against credit repair companies – offer mortgage applicants sobering reminders about what to avoid if you feel you need help with your credit.

The CFPB alleged that the companies – Prime Credit LLC, IMC Capital LLC, Commercial Credit Consultants and Park View Law, along with several executives of the firms – charged home mortgage seekers and other clients illegal advance fees, misled customers about what they could actually do for them, and failed to adequately disclose the limits on their advertised “money back guarantees.” The companies “attracted thousands of customers through sales calls and their websites,” the bureau said, “at times targeting consumers who had recently sought to obtain a mortgage loan” or refinancing. The bureau alleged violations of the Consumer Financial Protection Act and the Telemarketing Sales Rule. The defendants neither admitted nor denied the bureau’s allegations but agreed to the settlement.

Under federal law, credit repair companies are prohibited from requesting or requiring payments upfront until they can document that they have achieved actual improvements to a client’s credit report or score. Up until then, consumers shouldn’t have to pay a cent. The companies involved in the new settlements allegedly sought to evade this requirement by requiring payment of a sliding series of fees – an initial “consultation” charge typically costing $59.95, hundreds of dollars for a “set-up fee” and monthly fees of $89.99.

For typical clients, according to the CFPB, the companies sent “dispute letters” to the national credit bureaus challenging “much of the negative information” in clients’ credit reports, “even if that information was accurate and not obsolete.” The companies then allegedly failed to follow up to see whether the credit bureaus identified the challenged items as being in dispute by the consumer, and never determined whether they had raised clients’ credit scores.

Among other alleged violations of federal law, according to the government, the credit repair companies’ “money back guarantees” were misleading- They were worthless until clients had paid for at least six months’ worth of services.

The repair companies’ targeting of home loan applicants and refinancers came as no surprise to mortgage lenders like Joe Petrowsky, president of Right Trac Financial Group Inc. in Manchester, Connecticut. “People see those cockamamie advertisements” saying they can wipe their credit problems away “and they get hooked,” he told me. “We run into the damage they do every week.” Would-be home buyers pay hundreds of dollars to credit repair companies to dispute debts in their credit reports only to discover that not only have their credit scores not increased but they can’t qualify for a mortgage at all.

“You can’t get a mortgage with outstanding disputes” on your credit files, said Petrowsky. “Not one. It’s got to be zero.” Yet flooding the credit bureaus with dispute letters is a standard technique of credit repair companies.

Thomas Conwell III, president and CEO of Michigan-based Credit Technologies Inc., a company that provides mortgage credit reports and scores for lenders nationwide, says consumers need to know that “there is nothing any credit repair company can do that consumers can’t do for themselves faster and at no cost.” They can order free copies of their credit reports online at www.annualcreditreport.com, contact the credit bureaus if they spot erroneous information, get them corrected by creditors, and work with loan officers on ways to improve their credit before applying for a mortgage.

The takeaway here for mortgage seekers- Be aware of the potential downsides of dealing with “we can fix your credit” outfits. And never pay any credit repair fees up front. That’s the first sign that you’re probably dealing with scammers.