Purchasing a home may be the largest financial transaction you will make during your lifetime. And when applying for your mortgage, lenders will scrutinize your credit report. While problems with your credit may not keep you from getting a home, it could make the process more complicated and prevent you from getting the best loan rate.
When considering you for a loan, lenders will look for late payments, overextension, liens, wage garnishments and bankruptcy. Your credit information will be the basis of your mortgage credit score, a statistical analysis that helps lenders determine how much of a risk they’re taking by loaning you the money to purchase your home.
Ideally, before you start shopping for a new home you should check your credit reports with all three major credit bureaus –
Equifax (1-800-685-1111, www.equifax.com)
TransUnion (1-800-916-8800, www.transunion.com)
Experian (formerly TRW; 1-888-397-3742, www.experian.com)
Your credit file generally contains three years of information; no adverse information, with the exception of bankruptcy, can be kept on file for more than seven years.
Even if you’ve had no credit problems in the past, it’s best to check. Sometimes errors can exist without your knowledge.
In addition, it may be helpful to obtain your FICO scores, the mathematical scoring system that identifies your level of future credit risk by comparing the information contained in your credit reports with those of other borrowers.
Essentially the higher the score, the lower the risk – and the better percentage rate you’ll receive on your loan.
By far the easiest way to obtain your FICO score is to go to www.myfico.com, and, for a nominal fee the company will supply your FICO score, plus your Equifax credit report.
If You Find A Credit Problem
Nonprofit credit counseling agencies warn consumers to beware of credit repair organizations that promise to repair negative reports. Only time and good track records can repair negative credit reports.
You can tell the difference between legitimate and non-legitimate services by the fees they charge and the promises they make, according to the nonprofit National Center for Financial Education in San Diego, CA. Nonprofit services charge minimal fees, usually less than $25, and they will work with the client to re-establish credit. Questionable organizations generally charge much higher fees, and they may promise to remove such records as bankruptcies and liens from a negative report.
Accurate information, however, cannot legally be removed from a credit report. Federal law mandates the time periods that accurate negative information must remain on a report. You can, however, correct mistakes on your report. For valid problems, you can provide a written explanation to the mortgage lender explaining what caused the delinquency and what steps were taken to resolve the problems. If your payments have been made on time for a year or more, your credit will probably be satisfactory, according to the Mortgage Bankers Association of America.
To correct errors, call or write the credit bureau and explain the error. The bureau will check with the source of the information and send you an update. The process can take 30 days, according to Experian, one of the nation’s largest credit reporting agencies. If you still disagree with the information you can add a statement to your credit report.
How Much House Can You Afford?
When shopping for a home, it’s important to know exactly how much you can afford each month in mortgage payments. You’ll also have to cover utilities, taxes, insurance and home repair and maintenance expenses – plus still have the funds to cover other regular expenses, such as food, etc. On top of all this, you’ll want to make sure to reserve money for an earnest payment, closing costs, moving expenses and the inevitable cost of improving, decorating or furnishing your new home. Taking a hard look at your finances now can save you from a difficult position of being “house-poor”; in other words, having monthly mortgage and home-related expenses that are so high you have little or no money to put toward other everyday expenses or indulgences.
Gathering Financial Data
Here’s a basic list of documentation needed to get the process started:
- W-2 forms for the past two to three years
- Copies of tax returns for the past two to three years
- One month’s worth of pay stubs
- Three month’s worth of bank statements, and other financial records, such as IRAs, 401(k)s, stock certificates and records of other financial assets
Mortgage companies may ask for additional information. For instance, self-employed home buyers will need to have three years of business records and tax returns. Other papers that may be requested include divorce papers. If you have had a bankruptcy, you’ll need documentation of the bankruptcy proceedings and a letter explaining the circumstances surrounding the bankruptcy. Finally, if you’ve had legal judgments against you, you’ll want to provide a copy of the recorded satisfaction of judgment. If you’re involved in any lawsuits, you’ll need documentation to explain the circumstances.
Get Pre-Qualified, Or Better Yet, Pre-Approved
If you are pre-qualified, that means lenders have looked at your financial situation and determined that, based on your income, assets, past credit history and liabilities, you should qualify for a loan. Lenders will also give you a ballpark figure to let you know approximately how much of a mortgage you can afford.
If you’re pre-approved, it means the lender has taken things a step further by committing to provide you with a loan. You can obtain your pre-approval letter or certificate by consulting mortgage brokers and direct lenders, such as banks, and asking to be pre-approved for a maximum mortgage. Becoming pre-approved generally gives you an advantage in the home-buying market because it gives the seller some assurance that the sale will go through.
How To Shop For A Mortgage
When you’re shopping for a home loan, you need to call a lot of mortgage companies, banks and savings & loans to compare interest rates and services. You need to ask a lot of questions. Here are just a few questions you need to consider in asking:
Question: I’m buying a house and I’m looking for a fixed-interest rate loan/adjustable-rate loan. I’m planning to make a down payment of _______ percent. The house is priced at $___________, and I will need a loan of $____________. Based on today’s rates, what will my interest rate and discount points be if I apply for a loan today and lock in the rate for 60 days?
Answer: Rates and points can change daily. That’s why it is important to get rate quotes from different mortgage companies on the same day. It is also important to compare the companies on an equal basis, which is the reason for requesting a rate lock for 60 days.A written rate lock is a promise that you can have that interest rate for a specified period of time. If you need a longer lock-in period, ask what is available. The longer the lock-in, the higher the discount points will be. One discount point equals 1 percent of the loan amount.
Question: What is your origination fee and/or broker fee?
Answer: The origination fee is paid to a lender for processing the loan application. Typically it is 1 percent of the loan amount.
Question: If I decide to lock my loan at application today, will you provide me with a written lock-in agreement that will confirm the interest rate, discount points, the origination fee and the expiration date of the lock-in?
Answer: Insist for a written lock-in agreement. Don’t rely on verbal locks.
Question: When I apply for a loan, will you provide me with a good faith estimate outlining all of my loan settlement costs before I pay for an appraisal and credit report?
Answer: Although Federal law requires the lender to provide a good faith estimate within three business days after the receipt of an application, you should try to get one at application before you pay for your appraisal and credit report.
Source: Orlando Sentinel: A Guide to Buying and Selling your home