CREDIT & SAVINGS
Lenders measure your willingness to pay your mortgage by looking at how you’ve paid your rent, your car loan and other debts in the past. Additionally, in most loan programs, at least a portion of the down payment must come from your own funds. This demonstrates to the lender that your home is an investment that is important to you.
LENDING CONSIDERATIONS
How closely does your financial condition (income, assets, credit) need to match the loan criteria? Approval guidelines are only guidelines. Although your financial condition may be weak in one area, other strengths can compensate for that weakness.
Check your credit reports.
The goal is to get the lowest interest rate on your loan and to do so your credit has to be as clean as possible. Pull a copies of your credit report by visiting annualcreditreport.com. The most common credit scoring formula, FICO, ranges from a low of 300 to a high of 850. Anything over 740 is considered excellent. If you find errors, gather documents supporting the correct information, draft a dispute letter and mail the pieces (return receipt requested) to each credit bureau. Also, contact the creditors reporting the erroneous information and alert them to your findings. The credit bureaus have 30 days to respond to your dispute.
Cease major credit-related activities.
The closer you get to submitting an application for a home loan, the fewer big purchases, credit additions and life changes you should be making. It’s in your best interest to keep your credit profile strong and quiet when you begin the home buying process.
Reduce what you owe.
Before you take on a mortgage, stop carrying a balance on your credit cards, charge only small amounts and pay early. While income doesn’t factor into your credit score, it will be taken into consideration by a mortgage lender. In some instances, your debt-to-income ratio may limit the types of mortgages you may qualify for.
Give yourself time to improve credit weaknesses.
Make sure your credit and overall financial health as strong as it can be. Ensure that your income tax is paid and you have no IRS liens. The same goes for back alimony or child support. When it comes to divorces and separations, lenders will need to see the separation decree. It can affect the lending process if you don’t have all the right paperwork.
Start saving and be purposeful in limiting your spending budget.
Taking on a mortgage is more than just establishing a credit profile that lenders find acceptable. Owning a home comes with more financial responsibilities, so its time to get used to living on a stricter budget. The down payment and closing costs are two obvious expenses for which prospective home buyers should start saving. You may be able to get away with making a down payment of 10 percent or less, but it will require that you to pay for private mortgage insurance. Additionally, make room in your budget for things such as home repairs, renovations, landscaping and furnishings, such as window coverings.
BUYER PROTECTION
You don’t want to finally get into a home and then really struggle financially.
Here are several additional considerations in preparing your credit and savings to obtain your next mortgage.
Some people may not have much of a credit history. With little to no credit, there’s no way for a lender to tell if you’ll be a reliable mortgagor. If this applies to you, you can build a credit history by documenting your payments to the telephone, gas, and electric company, as well as to your landlord.
Depending upon your loan, your cash can come from several sources: your own savings, a gift from a relative, a sales concession from the seller, a grant from a community agency or employer, or from the lender. The source of this money must be carefully documented through bank statements indicating that the funds do, in fact, exist, and through gift letters.
