To FHA or Not to FHA, That is the Question

I left off with my clients considering an FHA loan only because of the lack of credit on hubby's part. I did leave out a critical piece of the puzzle yesterday.

The reason hubby's credit score is critical is because the Mrs. is currently a stay-at-home Mom with the new baby. While her credit score is beyond excellent, she has no current income. We have to use hubby's income to qualify for a loan, but without a credit score it's a moot point -- income without credit doesn't help, credit without income is meaningless. You need both to qualify for a mortgage loan (save that FHA option).

Enter Mom & Dad. Mom & Dad are willing to co-sign on the loan. What does that mean? That means that Mom & Dad essentially become co-borrowers. I have to evaluate them and their finances just as I have done for my clients. Now, with Mom & Dad on the loan there's another wrinkle. Now we're going to have to face the issue of occupancy.

Primary residence loans (loans for properties you are going to live in) have the best interest rates. Rates for second homes are a bit higher, and when you get a loan for an investment property not only are the rates a bit higher still, but there are stricter guidelines you must meet. Obviously we wanted to get a primary residence loan -- I mean, my clients really are going to live in the house. To do this, hubby is off the loan (without the credit score (even with the income) more questions are raised than answered), the wife is now the primary borrower with her parents as co-borrowers. We're looking at a limited range of loan options that will allow a non-occupant co-borrower (parents) and we're waiting to get a computer-generated basic approval based on our file parameters to be sure it's a go. As it turns out, an income-less primary borrower won't fly -- even with exceptionally strong co-borrowers. Shoot. There goes the primary residence status.

So now we have to move the parents to the primary borrower position and look at the other types of occupancy. Since Mom & Dad already have a second home they can't buy another [now, that is something that doesn't quite gel in my mind, as my idea is that you can have as many "second" homes as you want -- a condo in Hawaii, an apartment in Paris, Brazil, and a weekend house in Tahoe, but according to lenders that's not the case] so we are forced into the investment property route. Luckily everything in their scenario (loan amount, credit scores, down payment...) worked into the tighter investment property loan guidelines. Unfortunately it does mean a higher rate (almost half a percent higher, for those wondering).

But it will work; they can get a loan and buy a house. My clients can buy their new home within their preferred time frame, work to build hubby's credit back up and then, assuming the numbers work down the line, refinance, take Mom & Dad off the loan and add hubby. In the meantime, they'll have a loan they're comfortable making the payments on and will be able to keep it for as long (or short) as they choose.