Trent McDowell Loan office for Prime Lending
Pay your bills and start saving:
Number one: pay your bills on time. There is no single element that can so dramatically impact the success of an application as your credit history. Another thing, of course, is savings. People should have a good disciplined savings pattern. That’s the kind of behavior that’s going to make them a successful homeowner.
Everybody comes into the real estate market with a different perspective and level of experience. The fact that online mortgage applications, new loan products, and rising interest rates are competing for attention these days makes it all the more difficult to give foolproof advice. But some general rules apply to pretty much anybody when it comes to getting the money to buy a home. So here are some of the do’s and don’ts that buyers should consider.
1. Make loan and other debt payments on time, especially over the months leading up to the filing of your mortgage application. It sounds simple, but every 30-, 60- or 90-day delinquency on a loan or credit card will reduce the credit score the lender ends up considering as part of the loan file. That score, in turn, will determine the quality of a loan you get — if you get one at all.
2. If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have, and finally, the payment for an existing mortgage. Because credit scoring systems look at the performance of similar loans first when deciding what type of score to assign, it’s best to follow this order. This will give the most weight to the performance of another mortgage, for example, then the performance of something like an auto loan, which features fixed payments and a fixed rate the way many mortgages do. Lastly, it would evaluate the payment performance of so-called “revolving” loans, like credit cards, which feature variable payments that fluctuate with the outstanding balance.
3. Consider paying off more debt and putting down a smaller amount at closing. The move leaves borrowers with larger mortgages, but it will allow them to replace non tax-deductible, high-interest rate debt with lower-rate mortgage debt that features deductible interest.
4. Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as credit card applications, can hurt a borrower’s credit score, especially if they’re filed in the months prior to the home loan review process.
5. Increase the size of the down payment you’re able to make by saving as much as possible, as often as possible. Don’t put the savings into something volatile, such as an individual stock. But evaluate money market or other accounts that offer reasonable rates of return, automatic payroll deductions or other financial incentives to save.
While these are all great steps to follow, borrowers have to consider what they shouldn’t do as well. Resisting the temptation to splurge or slip-up in the credit arena is at the top of the list.
1. First off, don’t make any big purchases over the next couple of months. Besides the obvious fact that it makes less money available for the down payment, it might require you to get yet another loan. A significant debt such as a $15,000 auto loan will look bad to the mortgage lender’s credit scoring systems. Plus, the human underwriter won’t want to see you adding a couple of hundred dollars per month to your monthly expenses.
2. Don’t try shooting for that six-bedroom house in the Hamptons if it’s going to be too much of a stretch in your current budget. Lenders consider what’s known in the industry as “payment shock” when approving loans. Somebody who goes from a relatively small monthly housing payment to a large one either won’t qualify for a mortgage or will end up having to cover too much loan with too little money.
3. Don’t just get pre-qualified for a mortgage, get pre-approved. To get pre-qualified, a borrower need only submit credit and income/debt information voluntarily to a mortgage broker or lender. The resulting estimate of the maximum mortgage and home that’s affordable is exactly that — an estimate. Before they can get pre-approved, however, home buyers must allow their lenders to pull credit reports, check debt-to-income ratios, and perform other underwriting steps. That puts a borrower much closer to obtaining a loan and locking in a rate and term.
4. Don’t forget what kind of money personality you have when getting a mortgage. By taking out a 30-year fixed rate loan rather than a 15-year mortgage and investing the money saved on monthly payments, you might earn a higher return on your money in the long run. But that approach won’t work for people who spend any extra cash laying around on dinner and a movie twice a week. They can force themselves into saving and accumulating equity faster by going with the shorter term and higher payment.
5. Last but not least, don’t forget that homeownership brings with it many burdens. The cost of defaulting on a loan is much greater than the penalty of missing a rent payment. Too many black marks on the financial history and it will be 23 percent interest credit card mailers that show up in the mailbox rather than the 9.9 percent ones your neighbor receives.
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Trent McDowell Loan office for Prime Lending