The most important step in getting into that new home is going to be qualifying for a mortgage. You may have already heard that the current housing meltdown has made it difficult for anyone to get a home loan. This is particularly true for first time home buyers. Getting a home loan is tougher than it has been for decades. Having said that, there are some steps you can take to increase your chances of success. As a 20+ year veteran of the mortgage industry, I have helped scores of people get the nod from the bank and get their home loan approved. This article will guide you through the 4 most important steps you need to take to make sure your loan gets the “Approved” stamp on it.
1. Know your credit.
Lenders are particularly interested in your credit worthiness in today’s lending environment. Your credit score must be at least 640 to get a mortgage in most cases. The first thing you need to do if you haven’t done so yet, is get a copy of your credit report. There are a few places to get your credit score, DO NOT fall for the free credit score bait and switch tactic. There are plenty of spins on the free credit score offers that will end up costing you plenty and in ways you may not realize until you have signed up for a year long contract for some unwanted service that is tied to that free credit score offer. The best way for you to get to know your credit is to visit www.annualcreditreport.com This website is powered by the three major repositories, Transunion, Equifax and Experian. When you go here you will be getting your credit report in compliance with the Fair Credit Reporting Act. The “big Three” are required to give you a free copy of your credit report once a year. NOTE: the credit report is free, NOT the credit score. You need to pay a paltry sum for your score and once you pay that one time small fee, you are not tied in to any other nonsense.
2. Tune up your credit file
An overwhelmingly large percentage of credit reports contain erroneous information. Paid off accounts still showing balances, collection accounts that have been paid and account balances that are higher than actual are just some of the errors commonly found on credit reports. This is one of the biggest reasons the Fair Credit Reporting Act came into effect. One of the great features about the service at www.annualcreditreport.com is that if you find any discrepancies on your report, you can dispute the information right online and have it corrected before you start the formal process of applying for your home loan. Disputes take about 30-45 days to be resolved, make sure to do a little research on disputing credit inaccuracies before you start this process. Beware of credit repair scams, they are usually illegal and ineffective. You can only correct inaccurate information, not remove accurately reported bad credit. You can also look at factors that could lower your credit score, such as too many recent inquiries, high credit balances in relationship to available credit. These are two aspects of your credit over which you have some control and could make a difference in your FICO score . Taking these steps can be the difference between “Approved” or “Denied” on your loan request.
3. Find out if you can afford to buy a home.
Buying a home will have a considerable impact on your budget. My decades of experience have shown that seldom do first time home buyers take the time to take full stock of what they are getting themselves into, largely I believe, due to the lack of guidance on how to go about the budgeting process. I highly recommend that you go through a HUD approved home buyer counseling session. You can do this online through a couple places, one I highly recommend is the Consumer Credit Counseling Service’s program for first time home buyers. There is a nominal cost for this and it is worth 100 times the cost. Visit the HUD website for links to this agency in your local area. Ability to repay is one of the fundamental requirements of qualifying for a home loan, make sure you find out first where you stand in this area.
4. Save your down payment and closing costs money
Having sufficient funds for the down payment and closing costs is another aspect of your home loan application that will be scrutinized carefully. The funds must be in your account for at least three months or you must establish a clear paper trail to document how those funds got into your account. THE FUNDS MUST BE YOUR OWN. Documenting down payments is one of the biggest stumbling blocks when getting your home loan. Oftentimes the home buyers feel that “the lender shouldn’t care where the money came from as long as you have it.” Not being able to prove that the funds are yours is definite reason for denial of the loan. Some programs give a little latitude if the funds come from a HUD approved agency that funds down payments through special programs. I would recommend that you have the funds in your account for three months before you can use them to buy a house. Any unusual movement of funds in and out of your accounts will have to be explained “to the satisfaction of the underwriter” before they will approve your loan. Generally speaking, if you have to explain it, that is a red flag for the underwriter so be cautious and discuss any transfer, deposit or withdrawal of funds from your account with your lender so you are clear on the requirements. Yes, it is your money and you are entitled to do with it as you wish, as is the lender with their money, they can choose to lend it to you or not, it is their decision.
The above four steps are the cornerstones of getting your home loan approved. Needless to say they are not all inclusive but a great set of fundamentals you need to keep in mind to make sure you get your first time home buyer mortgage.