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The perception is that the lending guidelines have become significantly tighter in the past few months and things have changed. In reality, they really haven’t changed that much; lenders are just reverting back to more traditional standards for qualifying buyers. Savvy buyers who manage their credit, know how much they can afford and have saved money for the down payment, reserves and closing costs, will not have a problem getting a home loan.
In today’s lending environment buyers will improve their chances of qualifying by following a few simple rules:
Budget:
- Know how much you can afford and stick to a budget.
- Your success with a lender will improve if you are realistic about your expectations in terms of a budget and the loan itself.
- Talk to a tax professional to help determine any tax benefit that may help offset an increase in your monthly housing expenses for the new mortgage; you may be able to claim more than 9-deductions!
- Be sure to figure property taxes and homeowner’s insurance into your monthly payments. You can choose to pay your property taxes and insurance separately from your mortgage. Annual property taxes run approximately 01.25% of the purchase price. Insurance will run from $1,000 to $2,000 per year.
- There are numerous mortgage calculators on the Internet and one on the Arcadia Homes website at www.arcadiacompanies.com. Use the mortgage calculators to figure out what house payment you can manage comfortably.
Credit Worthiness:
- Know your credit score and how to manage it; keep your score above 720.
- Pull a free credit report from all three credit reporting agencies once a year at www.freecreditreport.com or www.annualcreditreport.com. There is a small fee to obtain your credit score but that critical piece of information is well worth the cost.
- Keep your credit card balances at 40% or lower of the maximum limit.
- Pay all bills on time and make certain you do not go 30-days past due on any credit cards, home loans, car loans, etc. A 30-day late notice on your credit report could make the difference between getting loan approved or not.
- Do not let doctor’s bills and co-pays accidentally go past due and get turned over to Collections – this shows up on your credit report. For that matter, anyone can turn you into the credit reporting agencies for not paying on time.
- Pay off credit accounts as soon as possible and keep the credit line. This shows you are able to manage credit well.
- “Opt out”. This will keep the credit agencies from giving your information to creditors who want to solicit your business – this helps your credit score! Go to www.optout.com -- it’s easy and fast.
- Do not let car dealerships, your current lender, or anyone pull your credit report without your permission. The number of times your credit report is pulled within a year affects your score. When you are shopping for a home loan, there is a two week window of time during which multiple reports can be pulled and not affect your credit score. Be very clear about this if you are working with a loan Broker who is shopping around for you. Too often, multiple credit reports are pulled and your credit score goes lower, making those premium rates and loan programs unattainable.
- If your credit score is under 720, ask your lender to run a credit analysis for you and give you instructions on what you can do to improve your score. Typically, this will include paying down or paying off certain revolving credit cards. In addition, you may need to send the paperwork to the credit reporting agencies to remove incorrect or inaccurate information from your credit report. This will improve your score.
Your Own Funds:
- Today the buyer must be willing to put up at least some of their own funds. The days of 100% financing are gone for now unless it is a conforming loan of $417,000 or less and your score is over 720, and even then only select lenders will be willing to do 100% financing – not all. If you come in with your own funds, it makes the lender take you more seriously and work harder at getting you a loan.
- If you are planning to borrow some or all of your down payment, or you will be receiving gift money, it is important to understand what portion of this money can be applied toward the down payment. The lender will want you to use some of your own funds toward the down payment. They may not allow you to borrow any portion of the down payment. Before funds can be considered yours, they must be in an account under your name for at least three months.
- Closing costs are usually around 1-1/2% of purchase price. Some of these can be paid by the Seller (if you negotiate this at the time of contract) or financed. However, do plan to pay the recurring closings costs, most lenders will not allow credits to go toward recurring closing costs such as pro-rated principal and interest.
- You will need some reserves; the reserve amount depends upon your lender, your loan program and your credit score. It can range from two months reserves to six months reserves. One month of reserves is equal to one month of your principal, interest, property taxes and homeowner insurance payment (PITI). Reserves are a pool of money that you can pull from to make payments in the event of a job loss or illness resulting in a loss of income. The lender likes to see this money in savings; however, some lenders will also consider retirement accounts – check with your lender.
Staying Loan Approved:
- This is a critical fact that many buyers never think about: Your loan approval is based on your current credit worthiness. If this changes, even as late as the day before your loan funds, you could loose your loan!
- Do not use any of your revolving credit cards after loan approval – unless you are certain they will be paid back at least 30-days prior to closing your house.
- Do not take the funds intended for your closing and move them to another account or use them. Leave them exactly where the lender can see them if they check – and they do check.
- Only use money from your checking account – not your savings.
- Do not make any major purchases such as a car that require your savings or additional credit.
- Do not open up any new credit accounts at all – wait until after your home has closed escrow; this includes co-signing for loans or revolving credit.
- Do not pay anything late.
- Inform your lender of any job status change. This includes promotions, lay-offs or job changes.
- Ask your lender for tips on what to do and what not to do during the escrow period. This will help you meet their expectations and have a happy outcome.
The loan process can be easy or hard – it is really up to you - starting with how well informed and prepared you are. Be sure to read the article on “What Should I Ask a Mortgage Lender”. <-Back to list of articles
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