Gene Elzenberger

FHA First-Time Buyer Tax Credit

In an effort to boost the sagging real estate market and overall economy, first-time home buyers are being offered a limited time tax credit when purchasing a primary residence.

The highlights of the tax credit are:

•· The tax credit is available for first-time home buyers only.

•· The maximum credit amount is $7,500.

•· The credit is available for homes purchased on or after April 9, 2008 and before
July 1, 2009.

•· Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

•· The tax credit works like an interest-free loan and must be repaid over a 15-year period.

Due to the volume of questions that can be generated with the above, I would recommend clicking on the below link for answers to frequently asked questions: http://www.federalhousingtaxcredit.com/faq.php

Loan considerations for a first time buyer

Lending guidelines are changing on a daily basis for every type of loan: conventional, FHA, VA & commercial. Nevertheless, there are still very attractive first-time home buyer options available. If you are or will be a first-time buyer, it is critical to speak with a loan officer before looking at homes. It is a crushing feeling to view a home, picture making it your own and then find out that you cannot qualify to purchase it. A loan officer will pull credit, analyze debt-to-income ratios, review assets and income and determine what you can afford.

Presuming a pre-qualification occurs, the loan officer will then be able to provide an array of loan options. Presently, FHA loans are the predominant loan for first-time home buyers as they offer flexibility with down payment, income and assets. In 2009, FHA loans will require a 3.5% down payment; however, such funds can be a gift from friend or family member. Additionally, pending on where the home is purchased, many cities still offer down payment monies to assist borrowers with little or nothing down. There is even a program that permits someone to purchase a home for as little as $100. Please keep in mind that when a borrower does not make a down payment, their interest rate will likely be higher, since it the loan will have greater perceived risk.

Conventional loans are very comparable to FHA loans in loan terms and fees. They can be more restrictive with down payment options, debt ratios and alternative forms of credit. But, they require less paperwork than FHA loans, which typically means a smoother underwriting process. Furthermore, they do not require an up-front mortgage insurance premium like FHA loans ---- although, their monthly premiums are higher than FHA. FHA, conventional and VA loans are in the low 6% range on 30 year fixed mortgages with no prepayment penalties. These rates, coupled with lower prices make it an opportune time to purchase real estate.

Overall, there are pros and cons to each option. As a first-time buyer start thinking through such factors as: what payment you would be comfortable in making, how much money you can put down, establishing a contingency plan for a job loss, how much you would like saved for unexpected expenses and if you were relocated or forced to sell how would handle the situation?

How can you improve your FICO score?

To improve one's credit score, it's critical to understand the factors influencing a credit score. The factors that contribute to a FICO score and the weighted percentages for each are as follows:

• 35% - timeliness of payments
• 30% - the ratio of used debt to allowable debt for consumer credit
• 15% - length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
• 10% - types of credit used
• 10% - recent credit inquiries and recent new credit

The greatest driver behind a score is making timely payments on all accounts. Scores will be adversely affected for any payment that is 30 days late or more. Being late on a mortgage payment will not only crush one's score, but will also make qualifying for a new home loan extremely challenging. Collections and past due accounts are obviously bad; however, paying off old collections can actually hurt FICOs in the short term. Many collections report from years past. If that collection is paid off, the account activity date is brought current, which could initially drive down the score.

A common misconception is that having one's credit pulled is the worst thing you can do to your scores. While it's wise to keep credit pulls to a minimum, keeping the proportion of monthly debt to allowable debt at low ratios is far more critical in improving one's score. For example, if a borrower has a credit card with a maximum limit of $15,000 and they owe $14,000, the proportion is almost 100% and the borrower is close to being maxed out. Getting the ratio below 50% would help and below 35% would be optimal. For revolving debt, I recommend borrowers contacting their credit card companies every six months to request increased maximum limits. It is vital not to use this new allowable debt, rather, use it as a means to always keep the proportions in check. Additionally, many borrowers will spread out their credit debt over a few cards to keep the ratios below 35% on all of the cards. Or, if liquid funds are available, it could make sense to pay down the debt.

Another method of improving FICOs is to establish credit history over prolonged periods of time. By doing so, the scoring formula treats longer credit history as a means of proving that a borrower can be extended credit, but do not put themselves into a compromising situation. Many borrowers will keep inactive credit cards open, instead of closing them, in order to increase credit history. Most lenders like to see at least four lines of credit on a report (called tradelines) that are open with at least two years of history. Of these tradelines, it's ideal to have balance between the types of accounts: mortgages, installment loans, revolving debt. Too much revolving debt, such as credit cards, can adversely impact scores as it can make the borrower to appear to be over-extending themselves.

How does your FICO score impact your interest rate on your loan?

Low credit scores are deemed greater risk for lenders since the likelihood for defaulting on the loan increases. As such, lower FICO scores translate into higher interest rates. Mortgage lenders will group credit scores in a range, usually in 20 or 40 point increments, with interest rates progressively getting better for each higher interval. For example, a borrower with a middle credit score between 660 - 680 will have a higher interest rate (presuming all other variables being equal) compared to one with a 680 - 700 score. Typically, when a borrower has a 750+ credit, they will be able to secure the best possible rate, assuming their income, assets, collateral and down payment are acceptable.

For qualifying, underwriters use the middle credit score pulled from the three bureaus versus an average of the three. For instance, a borrower with scores of 702, 717 and 749 would have a 717 FICO compared to an average score of 722. If there is more than one borrower on the loan, the lender will use the lowest middle score of all borrowers versus the middle score of the primary wage earner, like many lenders used to do. Often times, a husband and wife will have drastically different scores. When that occurs, it is best to qualify off of only the person with the good credit. However, if a spouse or partner is left off of the loan (they can still go on title though), none of their income or assets can be used to help qualify. Therefore, the sole qualifying person must have ample liquid assets, as well as gross monthly income to stay below the lender's allowable debt-to-income ratio.

What is a FICO score?

FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States. An individual's credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan. FICO scores are generally used for obtaining mortgages, car loans or consumer credit. The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion. Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula. FICO scores range from 300 - 850, with higher scores being considered less risky. For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent. Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing.

The factors that contribute to a FICO score and the weighted percentages for each are as follows:

• 35% - timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
• 30% - the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
• 15% - length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
• 10% - types of credit used (installment, revolving, mortgage)
• 10% - recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)