Taking The First Step Towards Home Ownership
The Big Question Is: Are You Ready To Buy?
There are quite a few considerations to face when looking to purchase a house. Whether this is your first house or second or an investment property, you need to be ready. Are you ready?
First time buyers: Let’s look at the whole picture. You feel you are ready to purchase your first house.
- Have you looked into your credit history lately?
- Do you have outstanding unpaid debt that may cause you to not be approved for a mortgage?
- Is there a bankruptcy or vehicle repossession in your history?
- How much money have you saved?
- Which community would you like to live in or near?
- What style house suits you?
- Can you manage a household?
We can easily see that the first step is to be sure your credit is in order. Be sure you have established credit. Good credit.
Any outstanding debt includes student loans, revolving debt which are credit cards, and installment loans for vehicles, motorcycles, tools for your trade…you get the idea…are shown on your credit report with a monthly credit history indicating whether you pay on time or pay late. If paid late the report will usually tell how many times over 30 days, over 60 days and over 90 days you have been late with a particular payment.
Lenders making decisions on whether to give you a mortgage do not want to see late payments. After all, if you are constantly late paying a monthly credit card debt of $25 you will be casting doubt in the minds of these lenders on your ability to repay your monthly mortgage payment. Just because you eventually paid the account does not give evidence to the lender on your ability to repay your debt. There is a reason for everything and the reason there is a due date on that credit card debt is to measure your ability to pay loans back in a timely manner. It’s your credit history and it is important to your overall fiscal health.
When you pay late, your credit score will drop. Your credit scores are decided by a mathematical algorithm created by Fair Issac Corporation to determine the risk a lender will face when lending to a particular individual. It is a tool the banking and mortgage industries rely heavily on when determining whether or not to lend money. Credit scores normally run between 350 and 850, with 850 being the best at this time. Ideally, you want to see your credit scores fall between 680 and 850. However, you can get a first time homebuyer loan with credit scores that are lower, somewhere in the low to mid 600 range depending on the particular loan product being offered.
By the way, that mathematical algorithm takes into consideration the number of outstanding credit accounts on your credit report, whether or not you pay on time and how often you pay late, how much of the total credit limit on credit cards you have used, any public records such as bankruptcies, foreclosures, judgments, child support, vehicle repossessions and determines a credit score for each individual based upon all of the above information gathered.
Knowing your credit is in good standing is your first step towards home ownership. Therefore it is imperative that the twelve months prior to looking for a house you take the time to be sure your rent has been paid on time, that any installment debt such as car payments and students loans have been paid on time and you have paid any revolving (credit card) debt on time. The optimum credit report will show 12 to 24 months of good credit history with no late payments. Please!
Not to complicate all that you have read so far, but if you are planning on using a first time homebuyer program that utilizes government loan products such as FHA (Federal Housing Administration) or VA (Veteran’s Administration) you could get away with 12 months of good credit history with maybe a late payment almost 12 months old and a very good letter of explanation to the underwriter. If you are going to use a conventional Fannie Mae product you may have to show a two year history of no lates or an occasional late that is well over 12 months old with a very good letter of explanation.
I am not advocating approval on any late payment history, but am providing this information from experience with past borrowers. I have seen mortgages get approved with one or two ‘old’ late payments with an acceptable letter of explanation from the borrower.
Basically speaking, if you forgot to mail that payment the one time and it caused you much embarrassment and a late charge, chances are the underwriter will allow that with a letter of explanation. Keep in mind the underwriter will be viewing your complete credit history. She/he will be able to look all the way back to the very beginnings of your credit report and see a pattern. If the pattern shows on time payments and just this one late, you should be fine with getting that loan approved.
Underwriters are not looking for ways to ‘kill’ deals but they do have to answer to the investor who audits the loanafter the loan has closed. This is why underwriters need to support their final decision with documentation. Just be a good sport and write a letter of explanation detailing the circumstances surrounding the issue of the late payment. Sign it, date it and turn it in to your lender.
The bottom line here is: you need good credit to get a loan and to obtain the best interest rate available.
How much money do you have for this transaction? Most first time homebuyers have little money to work with. States do offer first time homebuyer programs that allow for down payment assistance and even closing cost assistance. The interest rate is usually the same as the first mortgage rate and the payment is amortized over 30 years, exactly like the first mortgage payment. It is considered a second mortgage product and takes second place on the lien on your property when recorded and could be paid to the same lender or an entirely different lienholder. You should check with your state to find out all the details. In Connecticut, there is the Connecticut Housing Finance Authority known as CHFA. The rate changes each week and is determined by the sale of bonds to investors. The rate is almost always lower than the current market rate for the conventional 30 year fixed rate product with one point.
CHFA offers a little price break for specific groups of employed potential borrowers. For example, active military personnel are given a rate one-eighth below that of the regular CHFA homebuyer program. Check with your state to see what benefits they offer in regards to first time homebuyers.
With down payment assistance potential borrowers who have not saved much money to purchase their first home can qualify for that program and even for assistance with their closing costs. As mentioned above, the interest rate is pretty much the same as the first mortgage rate. The buyer would be getting all the money for the transaction from the first time homebuyer program in their state. There are other methods to obtaining money for your purchase.
Once in a while a family member will gift money to the buyer. The money can cover the entire down payment and/or all closing costs for some of the programs such as the RD, FHA product or VA product. The money is considered a gift and is not expected to be repaid. The buyer has to show a detailed paper trail on any gift money received. This requires a gift letter signed by the borrowers and the donors of the gift money. It usually requires a copy of the gift money check and proof the donor has the funds available in an account that can be verified. And finally, upon receipt of the gift check, the borrower must show the money has been deposited into a checking or savings account where it will be verified. Proof of funds is mandatory.
Another method of getting money to help with your transaction involves working with a reputable real estate agent. A buyer may be able to get the seller to contribute towards their closing costs. In some instances the loan program may only allow up to a 3% contribution by the seller while some products will allow up to a 6% contribution. As part of the offer to purchase, the buyer’s real estate agent requests the seller contribute a determined amount of money towards the buyer’s total closing costs including prepaid items. That language must be present in the purchase offer.
The most ideal situation is having 10 to 20 percent down payment saved up. It puts you, the borrower, in a much better position financially. And because you will show an ability to save money over a period of time, you look good to the underwriter. You have just proved you have control over your money.
One last place to find much needed money to help you finance your home purchase is the housing department in cities and towns. There are grants available from time to time that help potential buyers with down payment. This money may not be required to be repaid if the buyer agrees to stay in the house for a specific length of time. You really need to do the footwork here and go to your town hall and ask questions. You may be able to get the information you need if the town or city has a website. I would also check with any state agencies as well. And do not forget about churches and civic groups. Every once in a while you will find some money that is available to help first time buyers. There may be a requirement for the use of that money. Some public agencies are trying to build up specific neighborhoods offering incentives to buy there.
As with all good things, there are restrictions to some first time homebuyer programs. There may be income limits and sales price limits. To know for sure you need to check with your state, city or town. Your lender should know this if you have already engaged one to work with you. If your lender tries to sway you away from a first time homebuyer program ask why. Normally, these programs do not pay lenders much in compensation for the work that is required so it’s only human nature that some lenders will try to persuade their customers to look at other programs. In the end, do what is best for you. You will only get one chance at a loan product for this purchase and learning after you’ve closed on your house that you could have received the lower interest rate if you had only listened to the little voice in your head will only produce malicious intentions towards your lender that you most likely cannot act on. If you are afraid to hurt your lender’s feelings, get a second opinion. You just may find a better deal.
Pick A Lender
It’s time to choose a loan officer to qualify you for a specific loan amount and mortgage product.
This person is vital to your offer on a house being accepted by a seller. The loan officer will run a credit report and review your income and debt and determine how much house you can actually afford. The loan officer will then create what is called a Pre Approval letter for you to use when you make an offer on a house. This letter will accompany the offer you make to a seller.
There are two ways to qualify a buyer. First, there is the prequalification process. This is rather simple and not thorough enough for most offers. A prequalification may or may not involve a credit report being pulled by your lender, and usually the only criteria used is a verbal comment from the buyer as to the household income. The second method is far superior.
A Pre Approval involves a three merged credit report from the three major credit agencies: TransUnion, Equifax and Experian. Then, a comprehensive interview between the buyer and the loan officer takes place. This results in an application without a property which can be run through an underwriting software to get a status on the buyer’s loan application. Ideally the results will indicate the buyer is approvable. This is only a Pre Approval, but handled carefully is the most accurate method of determining whether a buyer will be approved for the loan sought following an appraisal of the property and verification of income and money needed to close on the purchase transaction, and other conditions set forth by underwriting.
There is a myriad of mortgage products to pick from. I always want my customers to utilize the first time homebuyer product if possible. This product will usually have income limits and sales price limits. There are no prepayment penalties and the buyer can at times borrower money for down payment at the same low rate. Each state is different so you need to be sure your loan officer is familiar with your state’s first time homebuyer programs. If he/she is not you need to find someone who is because this is the largest purchase you will have made in your life at this time and you need to know your lender is putting you in the best possible product available.
If your credit is good and you have a stable job history and can show an ability to repay your mortgage, beware of any lender who tries to place you in a loan product that is not fixed and has a prepayment penalty attached to it. This may be a loan you want to avoid.
It’s good to be informed.