There's a BIG change in USDA underwriting that will become effective May 1, 2014. It will reduce the Qualifying Purchase Price by as much as 75%. Here's how that works:
As of that date, borrowers with FICO mid-scores below 680 must meet 29/41 Ratio requirements. Tightening the ratio requirements is good for the program, which has suffered losses since the housing downturn, but it's not good news for borrowers whose credit scores fall below 680.
The front ratio of 29% means that the mortgage payment (consisting of Principal and Interest, Homeowners Insurance, Property Taxes, Mortgage Insurance and HOA monthly fees) cannot exceed 29% of the borrower's gross monthly income.
The back ratio of 41% includes all monthly obligations that report to the credit bureaus--mortgage, car payments, credit card and installment loan payments, etc.
The real kicker for most buyers is that front-end ratio.
Let's consider a couple earning $3,500. per month, and a credit score under the 680 threshold. The maximum total payment for the purchase is 21% of that number, or $735.00. Subtract property taxes, insurance, mortgage insurance and HOA fees. Let's say those items total $235.
We have $500. left for Principle and Interest payments. At 4.25%, that gives them a purchase price under $100,000. as the max for which they can qualify. (Remember that there is a 2% Upfront Mortgage Insurance Premium added to the 100% loan.)
At or above a score of 680, the buyer can have ratios of 33/44.
The same couple with that $3,500. monthly income has $1,155. to work with on the front ratio, so they can qualify for more house.
How much more? Believe it or not, 75% more. Let's say that Taxes, Insurance, MI and HOA come to $275. That gives us $880 for P/I. At the same interest rate, the buyers with the same income, but higher FICO qualify for a purchase of $175,000.
So what does that mean to you as a REALTOR?
- If your target market is the first time struggling homebuyer, you need a new business model.
- If you're working with buyers currently whose FICO score is between 620 and 679, share this blog post, and get them going NOW. You have six weeks to get them into a house.
- You might want to team up with your lender to provide classes or Lunch & Learns. Teach your prospects how to improve their scores by paying attention to their Credit and Payment History.
