Qualifying For A Home Purchase

By Gustan Cho

Income, credit, and debt to income ratios are the three factors that determine a mortgage loan applicant’s potential whether they qualify for a mortgage loan.  There are many other factors that need to be considered whether or not a mortgage loan applicant qualifies for a mortgage loan.  There are mandatory waiting periods after a bankruptcy and foreclosure that the mortgage loan applicant needs to abide by as well as other federal mortgage lending guidelines.  Just because a mortgage loan applicant has little to no income, bad prior credit, or high debt to income ratios does not mean that the mortgage loan applicant qualifies for a mortgage loan.

Straw Buyer In Home Purchase

A straw buyer is when two or more people conspire to get one person who has strong credit and income to purchase a home under their name because the actual home buyer for the subject property does not qualify for a residential mortgage loan.  This practice is illegal and is classified as mortgage fraud which is a serious felony.  The federal government sees that the use of straw buyers was one of the reasons of the real estate and mortgage meltdown of 2008 and they take cases of straw buyers extremely seriously.  However, many folks do not consider this a crime and take it more like helping out a friend, relative, or family member to become homeowners.  There are many generous folks who help others but, unfortunately, using their name to help a friend, relative, or family member qualify for and close on a mortgage loan may cause some serious consequences for both parties.

Lying On Mortgage Application

A typical straw buyer will lie on a mortgage application and state that the home will be an owner occupant primary residence.  How can they apply for a second property purchase as a primary owner occupant home purchase?  That can be done easy.  If a homeowner currently owns a home and wants to purchase a second home as an owner occupant home, mortgage lenders will allow that if the case scenario makes sense and if they can qualify for both mortgage loans in the debt to income ratio qualifications.  A homeowner who owns a 2,000 square feet home can tell their mortgage lender that their second property purchase is 30% larger than the current home that they own and need a larger home due to their expanding family.  The 30% larger second property purchase will qualify as an owner occupant home.  On the flip side, the second property home buyer can state that they are moving to a much smaller home such as a condominium or a townhome due to being empty nesters and the second property home purchase will qualify as a second home.  However, if the homeowner is moving from a 2,000 square feet home to another 2,000 square feet home 5 miles away, this case scenario will not make sense so the chances are that no matter what, the second property home purchase will not qualify as an owner occupant home purchase.  I am not condoning becoming a straw buyer but trying to deter it and relay the message of the seriousness of mortgage fraud and the consequences.  The risk versus rewards factors is really not worth it.  Federal regulators do crack hard on mortgage fraud cases even though the straw buyer has committed mortgage fraud with the best of intentions to help a friend, relative, or family member.

There are alternatives besides being a straw buyer to help a loved one qualify for a home purchase and we will discuss the various options to go about it.

Little Or No Income Mortgage Loan Applicant

A mortgage loan borrower can still qualify for a residential mortgage loan with no documented income or very little income as long as they can get a non-occupant co-borrower with a FHA loan.  FHA allows non-occupant co-borrowers to be added on the main borrower’s loan application so the main mortgage loan borrower meets the debt to income ratio requirements.  The non-occupant co-borrower needs to be related to the main borrower by law, marriage, or blood.  In-laws, grandparents, grandkids, uncles, aunts, all qualify as non-occupant co-borrowers.  If someone is intending in being a straw buyer due to the main borrower not having income or very income, this option would be a great alternative than putting themselves at risk being a straw buyer for the individual.  When it comes to credit scores, the lower of the middle credit scores of either the main borrower or non-occupant co-borrower will be used.

Home Loan With Bad Credit

A home buyer can qualify for a residential mortgage loan with prior bad credit and open unsatisfied collection accounts without the collection accounts being paid off.  Many home buyers think that just because they were told they could not qualify by their local banker due to low credit scores and prior bad credit that they cannot qualify for a residential mortgage loan with a different mortgage lender with no mortgage lender overlays.  A mortgage lender overlay is mortgage guidelines imposed on top of the minimum federal mortgage lending guidelines set by each individual mortgage lender.  I, myself, represent investors who do not have any mortgage lender overlays and just go off the automated approval findings by Fannie Mae and/or Freddie Mac.

Minimum Credit Scores Required For FHA Loan

Minimum credit scores needed to qualify for a 3.5% down payment home purchase mortgage loan is 580 FICO.  Mortgage loan applicants can qualify with credit scores below 580 FICO, however, a 10% down payment is required for home buyers with credit scores between 530 FICO and 579 FICO.  Most banks and credit unions have their own mortgage lender overlays where they will not accept any mortgage loan applications unless the mortgage loan applicant has a minimum of a 640 FICO credit score.

What If You Are Told By A Bank That You Need To Pay Off Collection Accounts With Balances?

Most banks and credit unions require that mortgage loan applicants pay off their outstanding collection accounts in order for them to be able to qualify for a residential mortgage loan.  Paying off old collection accounts with credit balances is not a federal mortgage lending guideline and is a mortgage lender overlay with that particular mortgage lender.  There are two types of collection accounts:  Medical collection accounts and non-medical collection accounts.  You can have a large collection balance on a medical collection and medical collection balances are exempt in your debt to income ratio income qualifications.  For non-medical collections, 5% of the unpaid collection balance will be used towards your debt to income ratio qualification on unpaid balance collection accounts that have balances of greater than $1,000.  If you have a large collection account, a written payment agreement can be agreed upon and the minimum monthly promised payment agreement will be used towards your debt to income qualification without any seasoning payment history requirements.

Many straw buyers believe that it is better to be a straw buyer than to pay off the outstanding collection account balances but this is not the case.

Waiting Period After Bankruptcy And Foreclosure

If the main home buyer had a recent bankruptcy and/or foreclosure, there is a mandatory waiting period after a bankruptcy, foreclosure, short sale, or deed in lieu of foreclosure in order to qualify for a residential mortgage loan.  There is a two year mandatory waiting period after a bankruptcy in order for a home buyer to qualify for a FHA loan.  There is a 3 year mandatory waiting period after a foreclosure or deed in lieu of foreclosure from the recorded date of the deed in lieu of foreclosure in order to qualify for a FHA loan.  There is a 3 year mandatory waiting period to qualify for a residential mortgage loan from the settlement date reflected on the HUD after a short sale.  There is no way around this except that a home buyer can qualify one year after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale via the new FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program.  To qualify for the FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program, the home buyer needed to have been out of work through an involuntary job termination for at least six months prior to the economic event and the job loss was the catalyst that ignited the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  The mortgage loan applicant needs to have had a 20% reduction of their household income due to the economic event.  The mortgage loan applicant needs to have recovered by the economic event and have a full time job and have had no late payment history since gaining employment and have a record of re-established credit.  The mortgage loan applicant needs to complete a HUD approved housing course and get a signed housing certificate from the HUD approved housing counselor, which is valid for 6 months from the date of the certificate, and cannot apply for a mortgage loan until 30 days after the date of the HUD approved housing certificate signed by the counselor.

Investment Home Mortgage Loan In Lieu Of Being A Straw Buyer

If the actual home buyer cannot qualify for a residential mortgage loan after exploring all available options, the potential straw buyer can see if they can qualify for an investment home mortgage loan and put the necessary 15% down payment and purchase the property as an investment property.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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