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Opinion: Misconceptions about mortgage lending today

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There have been quite a few changes in the mortgage industry over the last 10 years. After the Great Recession and mortgage meltdown of 2008, there were a lot of lending practices that were tightened up or altogether shut down. Most of these were for good reason and began to put the mortgage industry back in line with where it had been before 1999, with sound underwriting guidelines that included documentation on the borrower’s income, debt, assets and a credit profile to show they had the ability to repay the loan. These changes have put the mortgage industry back on much firmer footing.

With that said, a lot of potential borrowers think their credit is not strong enough or they don’t have the down payment necessary to buy a home. But that’s a misconception about today’s mortgage lending environment. Here’s why.

Let’s start with credit scores. Your credit score is a number, roughly between 300 and 850, that summarizes a consumer’s creditworthiness. Most mortgage lenders will use a credit report that pulls from all three credit reporting agencies: Equifax, TransUnion and Experian. Each of these reporting agencies provides a score, and the lender uses the one in the middle for an applicant’s loan file.

A higher score, of course, indicates an increased ability for the borrower to repay the loan.

The best credit scores for a mortgage loan are 740 or higher, but that’s geared more toward conventional financing with a 20% down payment. Borrowers can still put as little as 5% down on a conventional loan, or even 3% with some select programs through Fannie Mae and Freddie Mac that may have income restrictions. A higher score typically gives the borrower not only a better rate but also a lower lender-required mortgage insurance rate if putting less than 20% down.

Many borrowers do not have credit scores above the 740 threshold or the down payment necessary to secure the best rates. Thankfully, they don’t have to. There are loan programs tailored for lower scores that can still provide a surprisingly good rate.

FHA loans
The Federal Housing Administration gives borrowers the advantage of just needing 3.5% for a down payment and scores that can go as low as 580. Your income, work history and debt-to-income ratio are factors, as well. FHA loans have a reputation as a first-time homebuyer program, but that’s not the case. It’s available to everyone, so it could be a very viable and affordable way to purchase a home.

The loan limit for FHA financing in southwest Missouri is $314,827, so with just a 3.5% down payment you could be looking at a home with a sales price of $326,245 or less. Borrowers could potentially go higher but would have to put more money down to keep the loan amount at $326,245. Another bonus, FHA rates are typically less – sometimes 0.25% to 0.375% less than a conventional loan. Overall, it’s a solid loan program that can help borrowers with lower credit scores and higher debt-to-income ratios.

Rural Development loans
The U.S. Department of Agriculture provides a great loan program that, once again, is not just for first-time homebuyers. Borrowers can put zero down and have credit scores as low as 620 or even the possibility of a “no score,” which likely means the borrower has never been listed on a credit account or hasn’t used any credit in quite a while. There are income and property area restrictions, basically outside of Springfield and Joplin city limits. Contact a reputable licensed and experienced lender for details about that. Rural Development loans have attractively low rates, as well, and could be a great option for borrowers looking in and around Nixa, Ozark, Strafford, Willard and Republic.

VA loans
Veterans Administration loans are a great resource for qualified veterans that require no down payment and credit scores as low as 600 based on job history and debt-to-income ratios. Financing for up to 100% of a home loan is available for veterans, active duty, reserves and surviving spouses of veterans, and rates are often the lowest of the group. Seek out a reputable mortgage officer for exact qualifications, but for veterans it’s one of the best programs available.

These loan programs offer great benefits and could be a much better solution for borrowers than simply saying, “I need a bigger down payment” or “I don’t think my credit score is high enough.”

Michael Frerking is the senior vice president and director of residential lending at Guaranty Bank. He can be reached at mfrerking@gbankmo.com.

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