So what can you, as a homebuyer, do to increase your chances of getting a mortgage? There are several factors that need to be taken into consideration when looking for a mortgage:
1) Your FICO® scores
Being pre-approved for a loan is almost a necessity in today's tough lending environment. Before spending a lot of time looking at homes, you will want to sit down with your mortgage broker or lender, have them pull your credit reports and verify your FICO® scores. They will also be able to counsel you on any red flags that may appear.
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The free credit report that you are entitled to receive each year is primarily used for monitoring errors and identity theft. Those reports will not give you your FICO® scores. You must pay for that information.
The term "FICO®" is derived from the name of the company that originated the credit scoring system - the Fair Isaac Corporation. Began in 1958 as a way to provide banks with a guideline to creditworthiness, today it has become the primary indicator that lenders use.
If your FICO® score is 700 or above, you are generally considered to be a good credit risk. There are steps you can take to improve your score - and some of them may surprise you. Feel free to contact me for further details.
2) Your Income
With unemployment numbers rising, lenders are extremely nervous about over-extending your ability to pay. Be prepared to document any income that you receive. Stated income loans are gone - a thing of the past. The order of the day is paperwork, paperwork and more paperwork...
3) Your Down Payment
As recently as a year ago, it was still possible to buy a home with virtually no money down - particularly if you had excellent credit. Those days are gone. The best you can do now is to apply for an FHA loan that allows you to put as little as 3.5% down. FHA also allows you to use the $8000 first time homebuyer tax credit towards closing costs or towards your down payment over and above the 3.5%. However, the details are still being worked out.
There may be some special programs available through individual lenders, but generally expect to have at least 10% of your purchase price saved.
If you put less than 20% down, the lender will require you to buy mortgage insurance. Mortgage insurance does not insure you - it insures the lender in the event that you default on your loan.
Besides your down payment, you will need additional funds to cover closing costs. Closing costs include a home inspection, title insurance, termite inspection, transfer stamps, loan application fee etc... All of the lender's fees are estimated on the Truth-In-Lending Statement that you receive at the time you make your loan application.
4) The Appraisal
Once you, the borrower, have passed the lender's litmus test for paying back the loan, you have one more hurdle to cross. The property itself must also pass muster. In the event that you quit making your payments and the lender must take the property back, they need to be assured that the property is worth at least what you are paying for it.
It may seem to the consumer that lenders are using the appraisal as an excuse not to make the loan. However, in the event of a foreclosure, lenders will lose tens of thousands of dollars. And the Federal Government has just added one more layer of complexity: lenders are required to order their appraisals from an outside vendor. The object is to prevent the lender from having any influence on the appraiser's findings.
If you are able to navigate through all these major obstacles in obtaining a mortgage, you will be clear to close on your home purchase.
When it comes to mortgages, every individual situation is unique and requires the guidance of an expert. Let me help you navigate the home-buying process. Please contact me with any questions you may have or to schedule an appointment.
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