Home Buying by the Numbers – Financing

One of the best things you can do for yourself when looking for a new home, other than remaining realistic, is to acquire financing before even beginning your search for a new home.  Think about the buying power you have when you walk into a car dealership with a check in hand and ready to purchase; the same goes for a home buying situation.  Sellers will like the fact that you are obviously ready to buy, and you will be able to look at homes with confidence since you know what you qualify for financially.  After all, it would be a shame to spend a lot of time looking at houses in the $275,000 range and fall in love with several of them only to later find out that the most financing you can qualify for is more like $200,000.  All the $200,000 homes will probably look pitiful next to the more expensive homes you had already viewed.  It is better to know beforehand and have a realistic expectation of the sort of home you will be able to buy.

HOW IS YOUR CREDIT?

Pull a copy of your credit report long before applying.

When you think about all the data and information that credit reporting agencies need to keep track of you can imagine the many possibilities for errors to occur.  Sometimes similar names can get mixed up, such as John S. Smith’s credit information getting putting onto the credit report of his son, John S. Smith Jr.  Other times there is really no concrete explanation for an error; it just simply happens.  For this reason you should pull copies of your credit report from all three of the reporting agencies (Experian, Equifax, and Transworld) long before ever applying for a mortgage loan.  Don’t simply look at your credit score, although this is a good starting point to see where you stand from a credit perspective.  It is possible, however, to have a somewhat decent credit score with some derogatory information on your credit report, so you need to look at the entire report to figure out if there are any errors which need to be fixed or instead if there are some delinquent accounts on the report which you had forgotten about or chose to ignore for one reason or another.

If there are errors on the report you can contact the creditor and the reporting agency in an attempt to get the accounts removed from your credit report.  The credit reporting agencies are required by law to remove the errors from your credit report for a certain amount of time while they do an investigation, but if they find the accounts are not errors than the accounts will be put right back on your report.  You should know that individual consumers are not the primary customers of the credit reporting agencies, but rather they cater to lending institutions.  You may encounter your fair share of hassles when attempting to get erroneous information removed from your credit report, but it is far better to deal with this long before applying for your mortgage loan instead of waiting for a loan officer to discover the items on your credit report.

What do creditors see when they look at your credit report?

Your credit report is a history of your utilization of credit.  Every credit account you have opened using your social security number is on your credit report, with the exception of accounts, which have been, closed and inactive for over seven years.  Some of your monthly bills aren’t on there, such as utilities and such, but these accounts can indeed wind up on your credit report if they go unpaid.  Each account has different details on it.  The credit report lists what type of credit account something is, such as a revolving account like a credit card or instead an account which is fixed, such a car loan or personal loan.  The report lists when the account was opened, what the monthly payment is, any available credit, and if the account was ever late.  If a credit account was at one time late the report will state how many times it was late, and how delinquent the account was.  For example, an account might be listed as having been sixty days late two times during the life of the account.  Take heed: this means that one late payment, even if it is only thirty days late, will effect not only your credit score but also how creditors view your potential to pay as scheduled.  Based on several factors you are assigned a credit score.  Some lenders look at solely the credit report, while others look at the credit report as a whole.  You can rest assured that if you have failed to pay your bills in the recent past then this will be glaringly obvious to anyone who pulls a copy of your credit report.

Fix what needs to be fixed before applying for a mortgage.

Very few people have absolutely perfect credit, so lending institutions really do not expect to see a spotless report from every applicant.  If, however, your credit report is peppered with unpaid accounts and maxxed-out credit cards then you need to take care of these sorts of things before applying for a mortgage loan.  Some lenders will indeed approve a mortgage loan for people with these sorts of credit issues, but they will approve it contingent upon the items being taken care of.  So even though the loan is approved it will sit in a sort of limbo until the accounts are all brought to a current status.  It is far better to go ahead and bring the items current before ever applying.  Ideally you should bring them current and then give the credit reporting agencies a couple of months to update everything in your report since this sort of updating is not instantaneous.  First you need to wait for the lender to report the updates to the reporting agency, and it also takes time for the reporting agency to update your profile with the correct information.  You can see why it is best to do these things long before applying for a loan.  It is so much better to know what is lingering on your credit report before asking a lender to give you a bunch of money for a house.

Dredging up the past can be annoying and expensive.

Maybe while you were in college you went a little crazy with credit cards, or perhaps you had a medical emergency years ago, which you never paid and then forgot about.  Things do not magically disappear off your credit report until they reach a certain length of time, normally around seven years or so.  That means that even if the creditors have long given up hope of ever having received payment the truth is that the debt is probably still owned by a separate collection agency.  Some credit agencies buy bad debt from lending institutions for pennies on the dollar and then sit back and wait for someone to get just into the same situation you might be in: needing to clear up your credit report before trying to get a mortgage loan.

When you contact these creditors they will be more than happy to take your money, but be aware that if they offer you to settle for a lesser amount than what the debt is for this arrangement will be reflected on your credit report.  Accepting lesser amounts for old debt is regular practice for collection agencies, and most of the time having “settled for less than original amount” listed on your credit report doesn’t cause too much grief.  If your credit is already a bit shaky, though, and if the debt isn’t too extensive, then it is probably best to go ahead and pay the full amount.  Even though the debt will still show up on your credit report as having been delinquent at some stage it will be listed as eventually paid, and that is better than nothing.

Your employment status is important.

You may have just landed the perfect job with a fat paycheck, but most lenders are more concerned with your employment history for the last two years.  That means if you were worked at a clothing store in the mall through college and then upon graduation a few months ago landed a choice IT job you will still need to give reference information for the mall job.  Mortgage lenders want to make sure that you have a consistent history of steady employment.  Any gap in employment in the last two years will have to be explained.  If you took six months off from work to “find yourself” then you may instead find that you aren’t able to get a mortgage loan from some lenders.

Some people who are self-employed run into problems when they apply for mortgage loans too.  As long as you have income verification, preferably income tax forms that you filed in the previous years, there should not be much of a problem.  If, however, you have been self-employed for only a few months and have yet to file a tax return statement then you will probably have to go with a sub-prime lender and pay a higher interest rate.  It may be better for you to wait until you have had two years of consistent income before applying for a mortgage loan in order to get the best rates.  That may seem like a long time to wait, but the money you will save in lower interest rates will probably make the wait well worth it.

Trust your mortgage consultant only to a certain extent.

When you apply for a mortgage loan you will probably be assigned to a mortgage consultant.  Their job is to find the very best mortgage product for you and to assist you when you are ready to apply for the loan.  Mortgage consultants are very knowledgeable about mortgage loan products, but on the other hand they are also supposed to follow certain suggestions of the company they represent.  Even if something like an adjustable rate mortgage doesn’t particularly suit you a mortgage consultant may still attempt to make it sound like your best option in order to fill a quota.  Your best option is to take everything your mortgage consultant says with a grain of salt.  Use them as a good resource, but make sure that you make the final decision yourself, based on what it best for your particular situation.  Here is one more thing to consider when dealing with your mortgage consultant: some consultants are paid a salary and some are paid a commission.  It would not be rude of you to ask if your consultant makes a commission off every loan they secure, and this can give you a good idea of if the consultant is trying to simply push your loan through to make some more money, or if they are genuinely trying to help you.

This is not to say, of course, that every mortgage consultant who works for commission is out to push loans through regardless of the best scenario for the borrower.  Instead, use this knowledge as an extra bit of information, which you can keep in the back of your mind.  If your consultant seems pushy and doesn’t really listen to what you say you might add this to the fact that he or she is working on commission and use this to decide that you need a different consultant.  If you decide to switch your consultant it is as easy as asking to speak to a manager and then telling the manager that you would like to work with someone else.  If you find the replacement consultant as pushy as the first then it may be time to move on to a different lender.

What in the world is an underwriter?

While going through the mortgage loan application process you may hear the term “underwriter” thrown around quite a bit by your mortgage consultant.  They may tell you that your loan still needs to go through underwriting, and you might be apprehensive about asking for some clarification since they use the term so nonchalantly as though you will automatically understand what they are talking about.  Here is some clarification for you: underwriting is the term used for the process by which your credit is reviewed along with your assets and employment history.  More and more, lenders are using computerized underwriting services to make their decisions for them, but every mortgage lending institution has human underwriters who are available to review applications.  Although their main responsibility is to accomplish a final review on mortgage loan packages before going to closing, underwriters also have the responsibility to review a file if the application is denied by the computerized system but the applicant demands a second review.

This is referred to as “manual underwriting.”  Some lenders will charge an extra fee for the manpower involved with manual underwriting, but the more reputable lenders will only charge this fee if the application remains denied after the review.  So what can human underwriters see that the computerized underwriting system cannot? Sometimes a computer underwriting system will automatically deny an application because of some delinquent accounts, but a human underwriter can talk with the applicant and find out that maybe these accounts were a result of a divorce and the applicant has legal documents, which state they are not liable for the accounts.  This is the sort of situation, which is best handled by a human underwriter.  If you are preparing to submit a mortgage loan application and you have circumstances, which you think might merit a human underwriter, then you should let your mortgage consultant know beforehand.  This way the consultant can either send the file directly to a human underwriter, or instead make a note on your file that a human underwriter if denied through the computerized system should review the application.