Creative Home Buying Options Abound!

Learn which ones may be right for you

by Bob Melone, radius loan officer

Over the last few years, you’ve likely heard that mortgage lending guidelines have undergone some tightening. It may even seem like getting approved for a mortgage without flawless credit and less than 20% down is next to impossible, and that “creative financing” options went out of style in 2005 along with Jessica and Nick.

People

Honestly, nothing could be further from the truth. In the next few installments of our radius blog, I’ll be discussing the many creative mortgage options available, which allow for fixed rates, low down payments and flexible credit scores.  

Today, I’d like to focus on the granddaddy of creative financing options: the Federal Housing Administration’s (FHA) 203(k) rehabilitation program. The FHA 203(k) rehab program allows buyers to finance almost any improvements they’d like when purchasing a home with as little as 3.5% down (based on the home’s purchase price and rehab amount). Meanwhile, renovation work can start right after the closing.

Before addressing specifics of the program, though, consider this scenario. If you’re currently in the market to purchase a new home or you’ve bought one before, you likely know it well:

You see a hot, new listing for a home that’s just hit the market. Looking at the pictures and description online, everything looks flawless: the size and style of the home, the bedroom count, the neighborhood… it’s all perfect! You’re sure it’s an ideal fit for you and your family. You promptly set up an appointment, the agent opens the front door and… UGH!! The linoleum in the kitchen is peeling and the lime green cabinets are straight out of a Brady Bunch episode. They’re so outdated even Alice wouldn’t want to use them!

Kitchen

You’re heartbroken. But once reality sets in, you know the house could, in fact, be perfect. That is, with a new kitchen, updates to the bathrooms, a roof that could use some repair, the removal of an old shag carpet that needs to be pulled up so the hardwood floors underneath can be refinished, and the possible addition of a deck off the back.

All those renovations and more are possible through FHA’s 203(k) rehab program, which allows for the following (and much more):

  • Additions for increasing living area or a garage
  • Finishing basements
  • Satisfying Title 5 requirements
  • Making any structural repairs
  • Remediating health issues (i.e., mold)
  • Updating kitchens and baths
  • Completely replacing utilities (electrical, plumbing, etc.)

Single-family homes, condominiums and 2-4 unit homes are all eligible under the FHA 203(k) rehab program. You can even use it to renovate your current home! Meanwhile, our 203(k) program allows for flexible credit qualifying and credit scores as low as 640.

Maximum loan amounts, which are also quite generous, vary from county to county and the type of property you plan to buy. For example, the maximum loan amount for a single-family home in Norfolk County is $523,750, while the maximum loan limit for a four-family home in Norfolk County is over $1,000,000! To find the complete list of maximum FHA loan limits, follow this link.

Simply put, the FHA 203(k) program is a great way to turn today’s reality into tomorrow’s dream. So if you’re planning to buy a home that needs some work, or plan to do renovations on your current home, please feel free to call me with questions. I’m more than happy to answer them and would love to help.

Have a great day!

When you’re buying a home, zip your wallet!

by Bob Melone, radius loan officer

A few weeks ago, I came across an article on The Boston Herald ’s website discussing credit updates that lenders perform prior to a buyer’s closing. In the mortgage industry, we call this a Loan Review Report (LRR). The LRR is an update to the borrower’s credit report, which shows whether a borrower has applied for new credit or increased balances (and payments) on existing debts. This check typically occurs three to five days prior to a closing.

Though the article is a bit over-dramatic at times (like when it compares a lender pulling an LRR to NSA’s phone surveillance) its overall message is spot on: Potential home buyers should not apply for or obtain new credit at any time during the home buying process! That’s because increased debt can push a loan from being approved to declined, even after a clean mortgage commitment is issued.

When reviewing a loan application, mortgage lenders carefully review a potential borrower’s debt-to-income ratio, which is the percentage of monthly income that goes toward paying their mortgage, bills and other expenses, like car and student loans. While maximum debt-to-income ratios depend on a borrower’s income and the overall strength of their application, lenders generally like to see that no more than one-third of a borrower’s income goes toward monthly debt and expenses.

While an LRR can potentially increase a buyer’s debt ratio, so can the rising mortgage rates we’ve seen in recent weeks. Together, these two factors can create a perfect storm of stress and anxiety in the days before a closing. As a result, not incurring new debt, which has always been important, is now more vital than ever.

Unfortunately, borrowers often don’t know that adding new debt after an initial loan approval can negatively impact their final eligibility to acquire a new loan. Many people think that once the P&S is signed, they’re free to make new purchases like buying furniture or a new car, and that’s where they can get into trouble.

At radius, we make a concerted effort to remind borrowers about the risk of incurring new debt throughout the loan application process. It’s a message that can’t be underscored enough!

If acquiring new credit can’t be avoided, borrowers should talk with their mortgage lender first to avoid any potential pitfalls.

Applying for a home loan is generally stressful for everyone, even for experienced borrowers with low debt-to-income ratios and stellar credit ratings. That’s why it makes sense to do everything in your power to minimize pitfalls.

The bottom line is this: After home buyers apply for a home loan, they should keep their wallets closed! Don’t apply for or obtain new credit, or make any large purchases. It’s an easy way to maintain your borrowing profile and work toward starting life in your new home.