For most people, purchasing a home is the single largest financial transaction of their life. Prepared buyers are the ones who are ready to act when finding and negotiating for their dream home. When the time comes to purchase a home, you will need a plan in place, to help make the transaction flow as smooth as possible. A good plan should begin months in advance of visiting a mortgage company. Here are some insights and tips that can help you to prepare for and gain a competitive advantage over other home buyers.
First, you need to understand where you stand in relation to your credit status. It is important to obtain recent credit reports from all three credit bureaus and your applicable credit scores to understand where you are at. It is best to get your free annual credit reports. Click here
If you would like to regularly monitor your progress, acquiring a monthly subscription from a reliable service will be beneficial. Click here
IMPORTANT TIP: Many people make the mistake of going straight to the mortgage company to pull their credit reports. This may be a premature move and will create a hard inquiry on your credit reports, resulting in a lower credit score. Make sure you first check the credit reports yourself and verify them for accuracy. A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate.
Another reason to not rush into pulling your credit through a mortgage broker early, is if you have collection accounts on your reports, you should be aware that creditors will be notified that you are shopping for a mortgage. In some cases, this may work against you as creditors may be less willing to negotiate on settling any outstanding debt. They will know that you will probably need to clear the debt in order to close on a mortgage. By checking your own credit reports first, you can avoid creditor notification and still have the opportunity to present a pay for delete offer or hire a reputable credit repair company to help you with credit improvement. Allow enough time, usually several months, for the credit repair process to be effective. Dispute letters must be developed and sent to the credit bureaus challenging any inaccuracies. The credit bureaus have up to 30 days to respond to disputes. In some cases, several rounds of letters must be sent out on your behalf.
IMPORTANT TIP: When hiring a credit repair company it is most prudent to hire a pay for deletion service. This way your goal of clearing up your credit are truly aligned with the pay for delete credit repair agency. You both will want to improve your credit as quickly as possible and you only pay for results, reducing your risk. Credit repair agencies that charge a monthly subscription service have no real incentive to move quickly and usually pace their work. Instead, they prefer you to pay them a monthly fee for 6-18 months, whether you actually receive any results or not.
Next, it is extremely important that all required payments are made on time. A recent late payment can have a very significant negative effect on credit scores. Lenders want to see timeliness on prospective borrowers credit reports. The more recentness of a late payment will impact the credit scores to a greater degree. Many prospective buyers have hurt themselves by making late payments, which may result in the borrower being declined or receiving higher interest rates on their loan.
When looking at your credit reports pay careful attention to the credit utilization rate. If you have a credit limit of $1,000 on a credit card and have a balance of $840, the utilization rate would be 84%. This is very high utilization rate and will lower credit scores. Accounts with high utilization rates would be a priority area to concentrate on, paying down the existing debt, as much as possible, can increase credit scores.
IMPORTANT TIP: It is optimal to keep your utilization rate below 30% of your credit limit. If funds are available, paying down to 10% or below of your credit limit will help credit scores. Lenders want to see that borrowers can manage their debt. Maintaining low credit card balances demonstrates responsible borrowing and helps scores.
Lenders do not like to see lots of credit inquiries or too many new accounts. This indicates to them that the person is planning on taking on a lot of debt. However, some consumers do not have enough credit accounts. Ideally, a prospective borrower should have an established installment loan and a credit card or two, which show on-time payment trends for at least a year. Being added to a relative's credit card account as an authorized user can also help to add length of credit history and be beneficial to the borrower.
IMPORTANT TIP: If you haven't already established enough credit, there are opportunities to open secured credit card accounts and credit builder loans, which operate as savings vehicles, while building credit. Credit builder loans report as on-time payments and the funds are returned to the consumer at a future date, usually after one year. These funds can be a great source of savings that can be used towards a home purchase.
Debt to income ratios (DTI) are an important part of the loan approval process. This ratio compares the minimum monthly payments on all debt to the gross monthly income. For instance, if you had monthly debt obligations of $2,000, while earning $5,000 per month, then the DTI would be 40%. This would be on the high side, as usually, Federal Housing Administration (FHA) prefers a maximum of 43% and conventional loan lenders prefer not to exceed 41% for the overall debt to income ratio. Lenders generally view a lower DTI as favorable and a ratio of 35% or less, shows that you will most likely have money left over for savings or spending after you have paid your bills.
IMPORTANT TIP: In order to keep your DTI ratio stable for approval, try to avoid making any large purchases, such as a car, right before trying to close on a home. Potentially, an increase in your DTI could disqualify you for a mortgage or put you in the position of not being able to buy as much of a home.
FHA loans provide great assistance to many first time home buyers by offering mortgage loans with lower down payments. For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent. A score of 640 is usually the benchmark required by most lenders to obtain a better interest rate. Getting your scores up to the 640 mark could be well worth the time and effort. The 640 mark will make you eligible for lower interest rates and monthly savings.
If your credit score is below 580, however, you aren't necessarily excluded from FHA loan eligibility. Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan. So, if you're planning to buy a house, and your credit score doesn't meet the minimum, you should weigh the advantages and disadvantages of putting down a larger down payment or using some of those funds to try and improve your credit score first.
You might just find that hiring a reputable pay for delete credit repair company, might be one of the smartest decisions you can make and it can pay for itself many times over. By having improved credit reports, you can save money upfront, and each and every month on your mortgage payments.