The earlier you can start planning for the home loan approval process the better. Knowing how much you need to save for a down payment and having a target credit score can not only help you get approved but can save you a lot of money over the life of the mortgage. Being more prepared can lead to lower interest rates, no mortgage insurance, and a less stressful qualification process.
Evaluate and Monitor Your Credit
One of the more important things you can do to prepare you and your family for getting approved for a mortgage is to get take ownership of your credit. This involves monitoring your credit with a close eye and understanding what factors will have the most impact, then taking action to improve your score as much as possible. When it comes to your home mortgage the benefits of a good credit score include:
The possibility of securing lower interest rates
More home loan options
The possibility paying less or even no mortgage insurance
The ability to qualify for a higher mortgage amount
Tools to Help You Monitor Your Credit
There are a lot of great free tools available to help you monitor your credit. There is a myth that using these tools actually counts as a credit check and therefore will have a negative impact on your score, however, that is a just a myth. Using any of these tools will not affect your score.
CreditKarma.com - This site allows you to track your credit using TransUnion and Equifax. It will let you know where you stand on each major factor and offer suggestions for increasing your score.
Use Your Credit Card Account - Many credit cards will now include a credit monitoring service. These services will usually give you an updated FICO score every month depending on the service.
Mint.com - Not only is this a handy money management tool but it will also track your credit score and offer suggestions on how to increase your score.
Steps to take to increase your credit score
Once you have a way to track your credit score then you need to know what things you can do increase your score. When you are looking forward to securing a home loan a score of 740 can save you a lot of money over the lifespan of the mortgage. Using your credit monitoring tool you should be able to see what is affecting your score. In general, here are some things you can do that will have a positive impact:
Make on-time payments
Use your credit
Ideally, pay off balances every month
Keep balances below 29% of your overall credit limit
Contact lenders and ask for a credit limit increase on your existing credit cards (this will lower the percentage of your existing credit to overall credit limit)
Do not close any accounts
Do not open any new accounts
Gather proof of assets
The lenders are going to want to be confident you are going to be able to afford the mortgage for the life of the loan. Depending on your situation and the type of loan you are seeking the lenders might require different information from you. Here are a few items that are common requests and you should be ready to provide.
Proof of employment
If self employed then a business license, certificate of good standing, and business tax returns may be required
2 years of tax returns
Current bank statements
Statements from retirement accounts
If earnest money was put down then a copy of the earnest check and proof of it clearing your bank
Quick Tip: Make sure you do not make any large purchases close to your closing date if your debt-to-income ratio is even close to the lender’s threshold. They will monitor your credit and balances right up to the closing date.
Home Loan Options
It is important to shop for a mortgage just like you are shopping for a house and understand the different types of mortgages available. In most cases home buyers will have several options to choose from. It is important to work with your mortgage program and find out the pros and cons of each option. Here are some typical programs that can help first time home buyers secure a mortgage.
1% Down Payment Programs
Believe it or not there are 1% down payment options. One example is the Equity Boost Program in which the there is a payment assistance grant of 2% that does NOT need to be repaid. This gives you, the borrower, 3% down payment at closing. For this program there is typically a minimum credit score of around 700. There are also other factors such as a maximum debt-to-income ratio (typically around 43%) that is taken into account. When shopping for a home loan ask your mortgage broker if they offer the Equity Boost Program.
FHA loans can be a great option for first time home owners because they offer low down payment options and the ability to qualify for a mortgage with lower credit scores. A down payment of 3.5% and a score of 580 will typically get you qualified for an FHA loan. This can be a good option for young people who do not have established credit yet and are not able to put a lot of money down. The downside is that you will pay mortgage insurance for the life of the loan.
One of the advantages of a Conventional loan is that when your equity reaches 20% of the value of your home you can cancel the mortgage insurance, reducing your monthly payments by hundreds of dollars in most cases. Conventional loans can also be earned with only a 3% down payment. Because these loans do not require mortgage insurance after you reach 20% equity they require a higher credit score in most cases.
VA Home Loans
If you are eligible for a VA loan then this could be a great option to secure a home loan with little or no money down. These loans typically require a lower credit score (620) and around 41% debt-to-income ratio.
Hopefully this information will give you an overview of what to expect when thinking about buying your first home. The earlier you get organized, the more prepared you are, and the more information you gather will help you throughout the process. If you are looking for a home loan and have any additional questions regarding a home loan then feel free to contact Brian Quigley.