Know Your Credit Score
Tip No. 1: Pull your credit score
Before shopping for a home, you need to know your exact credit score and determine whether any wrong information has affected it. According to Joel Ohman, a certified financial planner, around one-third of consumers have errors on their credit report and simply by pulling it, you can rectify those mistakes. Ohman says depending on the flub, this could cause your score to spring 25 to 50 points.
You should see this adjustment reflected in your credit score before you apply for a home loan. Cunningham advises allowing at least 3 months time to check your credit report before applying for a mortgage. This allows for the time it takes to deal with the credit bureau, provide documentation, and then to see your score updated. Consider subscribing to an online credit-score monitoring service for at least six months before you start applying for mortgages. This will give you a crystal-clear sense of how different actions affect your score and how quickly your repair efforts register. One big surprise: Large credit-card balances can hurt your credit score temporarily, even if you pay them off on time.
Tip No. 2: Pay down your debt
Before you take on a mortgage, you need to show lenders you can manage credit responsibly. About 30 percent of your credit score is based on your available credit, which can be figured by taking the total of your credit card balances divided by your total credit card limits. As you start paying down your debt and continue to do so over time, you are going to see your credit scores bounce.
But if you are saving up for a bigger down payment or to do a cash-in refinance, you may not have the spare dollars to completely wash away your liabilities. If this is the case, then try to get as close as possible to the recommended level. Typically experts suggest consumers use 20 percent or less of their available credit.
Tip No. 3: Target credit accounts that matter most to lenders.
Lenders are scrutinizing credit reports more carefully than ever, so it's important to target the accounts they'll be most concerned about. Major credit cards are by far the most important. But be sure not to forget about store credit cards, even those you rarely use. It's easy to forget to pay a bill on a card you only use once in a while, but mortgage lenders will expect them to be up-to-date before moving forward. Also, expect payments for doctor's fees, utility bills, and home equity lines of credit to be scrutinized, as well.
Your Credit Score Can Cost or Save You Thousands. Know Where You Stand.
Tip No. 4: Piggy-back on good credit -- married couples can start anew when buying a home.
Another strategy to enhance your scores is to utilize the good credit of a significant other, a relative, or a very good friend, says Cunningham. Get added to a credit card as a joint account holder, and as payments continue to be made on time, your credit scores will increase. For example, if a husband with good credit adds his wife to his account, his history will be imported into her credit file and in effect, raise her score.
Cunningham says another way is to use a secure credit card, a credit line that requires a cash collateral deposit. This means you put a $1,000 in cash down for a credit card and then you can charge up to exactly that amount on the card. The purpose is to have the issuing lender reward you for using the card and report back to the credit agencies. Just confirm before arranging for the secure card that your lender is going to report your payment history to the credit bureau.
Tip No. 5: Attempt to increase your existing credit limits, but don't open new accounts.
Most mortgage brokers say you should stay financially static during the application process and avoid starting an new credit lines. But your score can actually benefit from increasing your credit limits, part of the equation that determines your percentage of available credit. If you have been a responsible owner of a credit card, you may consider asking the issuer if they will raise your credit card limit.
However, this should not be confused with opening new credit cards and lines of credit, which could have an adverse effect on your credit. "Someone opening five or six credit cards at one time may have a budget problem," says Ohman. "In the short term, it could be seen as a negative."
Opening up credit -- such as applying for multiple credit cards, a car lease, store cards-- around the time you apply for a home loan can compromise your position as a borrower.
Tip No. 5: Don't continue to pay bills late -- especially your mortgage payment.
Forgo the defeatist mentality, because starting to pay your bills on time can start to correct your dismal credit score. About 35 percent of your credit score is based on whether you pay your bills on time. You just have to meet the minimum by the due date.
For those who are already homeowners, paying bills on time also includes your current mortgage payment. Scott Gamm, founder of a money management website, says that bankruptcies and foreclosures can cause your credit score to drop 150 to 200 points and that this discrepancy will be a fixture on your credit report for the next seven to ten years.
Why use a Buyer's Agent when purchasing Real Estate
Purchasing a home is an exciting time in one’s life. It is also a time to make informed choices. Buying a home is much more than selecting a home from a website. Buyers need to become informed on many aspects of a home purchase such as buyer representation, market conditions, financing, and inspections.
The buyer services I provide will assist you in making sound real estate decision
It is in your best interest to select an experience agent, you feel comfortable working with, which will be an advocate for you. This relationship is referred to as “Buyer’s Agency”.
When a buyer’s agent works as an advocate for you, the agent owes you full fiduciary duties including:
Loyalty
Confidentiality
Disclosure
Reasonable Care and Diligence
Obedience
Accounting
A buyer’s agent will consult and advise you of the market, available properties, financing suggestions, negotiating assistance, property values, and other matters. The buyer’s agent can also disclose any information known about the seller’s motivation, urgency and other facts and property’s sale history unless it is confidential based on prior or current agency relationship with the seller.
Another strategy to enhance your scores is to utilize the good credit of a significant other, a relative, or a very good friend, says Cunningham. Get added to a credit card as a joint account holder, and as payments continue to be made on time, your credit scores will increase. For example, if a husband with good credit adds his wife to his account, his history will be imported into her credit file and in effect, raise her score. Cunningham says another way is to use a secure credit card, a credit line that requires a cash collateral deposit. This means you put a $1,000 in cash down for a credit card and then you can charge up to exactly that amount on the card. The purpose is to have the issuing lender reward you for using the card and report back to the credit agencies. Just confirm before arranging for the secure card that your lender is going to report your payment history to the credit bureau. Tip No. 5: Attempt to increase your existing credit limits, but don't open new accounts. Most mortgage brokers say you should stay financially static during the application process and avoid starting an new credit lines. But your score can actually benefit from increasing your credit limits, part of the equation that determines your percentage of available credit. If you have been a responsible owner of a credit card, you may consider asking the issuer if they will raise your credit card limit. However, this should not be confused with opening new credit cards and lines of credit, which could have an adverse effect on your credit. "Someone opening five or six credit cards at one time may have a budget problem," says Ohman. "In the short term, it could be seen as a negative." Opening up credit -- such as applying for multiple credit cards, a car lease, store cards-- around the time you apply for a home loan can compromise your position as a borrower. Tip No. 5: Don't continue to pay bills late -- especially your mortgage payment. Forgo the defeatist mentality, because starting to pay your bills on time can start to correct your dismal credit score. About 35 percent of your credit score is based on whether you pay your bills on time. You just have to meet the minimum by the due date. For those who are already homeowners, paying bills on time also includes your current mortgage payment. Scott Gamm, founder of a money management website, says that bankruptcies and foreclosures can cause your credit score to drop 150 to 200 points and that this discrepancy will be a fixture on your credit report for the next seven to ten years. |
What is a Home Mortgage Loan?
A mortgage is nothing more than a loan that you obtain to close the gap between the cash you have for a down payment and the purchase price of the home.
You have a certain amount of money. The home costs a certain (larger) amount of money. The home mortgage loan covers the distance between the two.
It's important to start thinking in these "distance" terms, because a lot can happen to the economy during the life of your home mortgage loan. How much these factors affect your mortgage depends on the type of mortgage loan you choose.
The Major Types of Home Loans
Let's start with the biggest difference between home loans … fixed-rate vs. adjustable-rate. With a fixed-rate mortgage loan, your interest rate will never change, regardless of what the economy does. On the contrary, adjustable-rate mortgages (ARMs) have interest rates that adjust periodically during the life of the loan.
Terminology note: Adjustable-rate mortgage are also referred to as having a "variable rate." But the more common usage is adjustable-rate mortgage, or the acronym ARM.
Fixed-Rate Mortgage Loan
A fixed-rate mortgage is a mortgage where the interest rate stays the same over the life of the loan. As a result, your monthly mortgage payment does not change.
Certainty is the primary benefit of a fixed-rate mortgage loan. You always know what your interest rate will be, regardless of what the economy does.
A fixed rate loan can have different terms such as 10 years, 15 years, 20 years, 30 years. Certainly as the term increases your principle and interest payment is lower but you will be paying back more interest.
Adjustable-Rate Mortgage (ARM) Loan
These days, most adjustable-rate mortgages start off with a fixed rate for an initial period of time, usually 3, 5 or 7 years. During this introductory period, the interstate rate is fixed and will not change. After the introduction period, however, the loan converts to an adjustable-rate.
Overall, the interest rate on this type of home loan is lower than a traditional fixed-rate mortgage. The downside is that you can never predict the interest rate it will adjust to after the introductory period. So in this regard, you can think of the initial period as a reward for the uncertainty of the adjustable period. You will start off with a lower interest rate than a regular fixed-rate loan, but you have the uncertainty of the adjustment phase.
FHA Mortgage Program
Let's start with a basic definition of this program, just so we are all on the same page. An FHA loan is simply a mortgage loan that's insured by the Federal Housing Administration (FHA). The program is available to home buyers (and, more recently, homeowners) who meet certain qualifications / guidelines. There are limits to how much you can borrow through an FHA home loan, but even so they are typically big enough to cover a modest home purchase.
The Federal Housing Administration (FHA) is a government program created in 1934 to make home financing available to more American families. Today, it's part of the Department of Housing and Urban Development (HUD). Basically, they insure home loans made by private lenders. With this government backing, lenders are more willing to offer mortgages to people they wouldn't normally qualify, due to credit problems or other factors.
Note the distinction here. The FHA does not actually make home loans — rather, it insures loans that are made by traditional lenders. If the borrower / homeowner ends up defaulting (missing payments) on the mortgage down the road, the lender knows it will be paid from the FHA's insurance fund.
So to restate our definition: An FHA loan is basically a mortgage loan made by a private lender that is insured by the Federal Housing Administration.
How active is the FHA program? Very active. As a component of HUD, the organization has insured more than 34 million mortgage loans since 1934. That equates to more than 450,000 loans insured each year since 1934. That's a lot of homeowners who have the FHA to thank, whether they realize it or not.
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The Benefits of These Loans
According to the FHA's official website, the major advantages of an FHA loan include (A) an easier qualification process for borrowers, (B) a lower down payment out of pocket, and — for those borrowers with bad credit or small cash reserves — (C) a greater chance of qualifying for the loan in the first place.
The VA Home Loan Program For Military Veterans
The federal government offers many benefits to men and women who serve their country.
One of those benefits is the VA home loan program. The VA home loan can be used to purchase a new home or refinance an existing one and is available to all honorably discharged veterans and active duty military.
The Department of Veterans Affairs (VA) does not actually lend out money but they guarantee or insure the funds that are loaned to you by a VA approved financial institution. You can go to any bank or mortgage company that participates in the VA loan program to apply.
The VA home loan offers several advantages over a conventional home loan. One of the most significant benefits is that VA loans do not require a down-payment. As of January 1st, 2006 you can buy a home for up to $417,000 with no down-payment.
You pay the same market rate whether you are making a 10% down-payment or $0 down-payment. In addition, you will find that in most cases the VA interest rate is comparable with or even lower than conventional loan rates.
Another great benefit of the VA home loan program involves the loan closing cost. While VA does not require the veteran to make a down-payment, there are still loan closing cost as with any home loan program that the borrower incurs. Closing cost usually average 3-5% of the loan amount.
VA, however allows the seller to pay all of your loan closing cost up to 6% of the loan amount. Compare this to a 3% maximum seller contribution for most conventional loans. So with a VA home loan it is possible for a veteran to buy a home for up to $417,000 with no down-payment and without having to pay any closing cost. Talk about using the power of other people's money to increase your net worth!
VA home loan participants also enjoy the luxury of not having to pay mortgage insurance. In contrast, with a standard conventional loan you will have to pay mortgage insurance if you put down less than 20% as a down-payment. Mortgage insurance can add a significant amount to your monthly payment so not having to pay this is really a plus to borrowers who use their VA loan benefit.
The Department of Veterans Affairs does charge a "VA funding fee" to all non-exempt users of the va home loan program. The VA funding fee is currently 2.15% of the loan amount for first time VA loan users and 3.3% for subsequent users who do not make a down-payment.
This fee is added to the loan amount so the veteran borrower does not have to pay it out of pocket at closing. If you are a veteran with a VA rated disability and are receiving a monthly benefit then, in most cases, you will be exempt from having to pay the VA funding fee.
If you are eligible for a VA loan and are in the market for a new home that is within the VA lending limits then the VA loan should be your 1st choice when considering your financing options. It offers tremendous benefits over a conventional loan and can make you a homeowner with zero or little outlay of cash.
