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Getting Pre-Qualified
Should you talk to a mortgage professional before house hunting?
Absolutely! Even if you haven't so much as picked out houses to visit yet, it's important to see your mortgage counselor first. Why? What can we do for you if you haven't even seen your first house or negotiated a price, and don't know yet how much you want to borrow?
When we pre-qualify you, we help you determine how much of a monthly mortgage payment you can afford, and how much we can arrange for you to borrow. We do this by considering your income and debts, your employment and residence situations, your available funds for downpayment and required reserves, and most importantly, your goals and what's comfortable for you. It's short and to the point, and we keep the paperwork to a minimum! 
Once you qualify, we can give you what's called a Pre-Qualification Letter (your real estate agent might call it a "pre-qual"), which says that we are working with you to find the best loan to meet your needs. It will also say that we've reviewed your credit report and that the pre-qual is based on the information provided by you.
When you find a house that catches your eye, and you decide to make an offer, being pre-qualified for a mortgage will do a couple of things. First, it lets you know how much you can offer. Your real estate agent will help you decide on an appropriate offer, but being pre-qualified gives you the confidence to know you can follow through.
But wait! You may want to be APPROVED to submit an offer!
Depending on the current state of the housing market and what sellers and listing agents are expecting, a pre-qual may not be enough. You may need an Approval or loan commitment. This involves more than just an opinion.
More importantly, to a home seller, your being approved is like walking into their house with a suitcase full of cash to make the deal! They won't have to wonder if they're wasting their time because you'll never qualify for a mortgage to finance the amount you're offering for the home. You have the clout of a buyer ready to close the deal right now!
You can always use the mortgage calculators available on our site to get an idea of how much mortgage you can afford -- but it's important to meet with our mortgage counselors. For one thing, you need a Pre-Qualification discussion! For another thing, we may be able to find a different mortgage program that better fits your needs.
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How much House can I Afford?
Deciding how much house you can afford is a personal decision. Many factors come into play. How much can I borrow? How much can I put toward my down payment? What size monthly payment can I afford?
There are no black and white answers to these questions. Its a matter of give and take. If you plan on a 30 year mortgage, you can probably make a lower down payment (or perhaps no down payment at all) and still manage the monthly payments. If, on the other hand, you plan on a 15 year mortgage, you may want to make a larger down payment to keep your monthly payments in line with what you can afford.
 How large a down payment can I make?
Many buyers look at their cash on hand as their only source for their down payment. This simply is not the case. One way to fund or partially fund a down payment is by using a gift. Parents, grandparents and other family members are often eager to help by making a cash gift toward the purchase of your home.
There are also down payment assistance charities that can help you (this option is going away by the end of September, 2008 per new housing legislation). And, of course, if you are selling a home, the equity you've built up can be applied to your down payment.
But these are not your only options. We can help you explore all your down payment options, including low down payment and 100% mortgage financing options that might be right for you.
What size monthly payment can I afford?
When determining what size monthly payment you can afford, you'll want to consider what other monthly expenses you have. Tangible expenses such as car payments, day care and utility bills, all play a role in how large a monthly payment you can afford.
There are also the intangible expenses or lifestyle expenses that you'll want to consider. Things such as dining out, travel and when you buy your next car can effect how much you can afford. Are you willing to curtail or delay some of these expenses in order to afford a larger monthly payment?
How much can I borrow?
This is a question you'll want to get answered before you begin your home search. This is something that were here to help you with. My mortgage calculators will help you see how your down payment, monthly payment and the amount you borrow are all interrelated.
We can answer any questions you may have about the mortgage process. But the best way we can help is by getting you pre-qualified and then approved for a mortgage loan. To get started, simply complete the form below to let us know a good time to contact you. We look forward to helping you buy your dream home.
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Debt to Income Ratio
Your debt to income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met. It is a ratio of some or all of your monthly obligations to your gross monthly income.
Debt limit
There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are only guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit. And with the advent of automated underwriting debt ratios have been as high as 60 or more.
Understanding the qualifying ratio
Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like car loans, child support and monthly credit card payments.
For example:
With a 28/36 qualifying ratio:
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Gross monthly income of $3,500 x .28 = $980 can be applied to housing
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Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 qualifying ratio:
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Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
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Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
Simply guidelines
Remember these are just guidelines. We'd be happy to pre-qualify you to determine how large a mortgage loan you can afford. We look forward to helping you buy your dream home.
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My Down Payment
The amount you have available for a down payment will affect what types of loans for which you can qualify. Down payments typically range from 3 to 20 percent of the sales price for the property.
Tips for Accumulating a Down Payment
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Save
Look for ways to reduce your monthly expenditures to save toward a down-payment. You could enroll for an automatic savings plan at your bank to have a portion of your payroll automatically transferred into savings. Most people save a couple of years for their down payment.
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Borrow the down payment from your retirement plan
Check the provisions of your retirement plan. You can borrow funds from a 401(k) plan for a down payment or make a withdrawal from an Individual Retirement Account. Be sure you understand the tax consequences, repayment terms and/or possible early withdrawal penalties.
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Move
You may be able to save additional funds if you can move into less expensive housing.
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Reduce other higher interest rate debt
Paying off credit cards will initially reduce your savings, but the money you will save from higher interest rates will pay-off in the long run.
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Make a deal with the seller
In some circumstances, it is appropriate to ask the seller to carry a second-mortgage to cover your down payment. Typically, you will pay a slightly higher rate for this second mortgage.
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Sell some investments
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Get a second job and save your earnings
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Skip a year's vacation
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Gift from Family
Parents and other family members are often anxious to help children buy their first home and may have the means to give you a gift of money for a portion or all of your down payment. |
Alternative Sources
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Housing Finance Agencies
These agencies offer special loan programs to low- and moderate-income buyers, buyers interested in rehabilitating a home in a targeted area, and other groups as defined by the agency. Working through a housing finance agency, you can receive a below market interest rate, down payment assistance and other incentives.
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The primary mission of Housing Finance Agencies is to boost home ownership in targeted areas, among first-time buyers and those with little money for down payments. Most of these non-profit agencies were funded with state government seed money and now operate independently.
Click here for a list of Housing Finance Agencies. |
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Documenting Your Down Payment
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs.
Acceptable Down Payment & Closing Costs Sources
- Cash in a bank account
- Mutual funds / stocks / IRA / 401K
- Proceeds from the sale of another property
- Gift from an immediate relative
Click here to learn more about verifying your down payment, closing costs, income and debt. |
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Gifts as Down Payment
 Down payment funding alternatives
For many buyers, especially first-time buyers, saving up the funds for the down payment can be a seemingly insurmountable hurdle to home ownership. This doesnt have to be the case. As your mortgage broker, I can help you find creative ways to come up with your down payment.
Using a gift for your down payment
One way to fund a down payment is by using a gift. For many loan programs, a gift may be used for a portion or all of the required down payment. Money given as a gift for a down payment can't come from anyone. Family members are the usual source. And sometimes an employer may also be acceptable. If this is an option open to you, please let me know. I can help you determine which loan programs accept gift funds for down payments and who may give the gift. I'll also supply the gift letter that the person giving the gift is required to sign. The gift letter states that the funds are a gift and will not be paid back.
Down payment assistance charities
If a willing and able family member is not available, buyers now have the option of turning to a non-profit for down payment assistance.
Caution should be taken when searching for a down payment assistance charity (aka down payment assistance program). There are many reputable organizations providing buyer assistance, but there are dubious ones as well. You may want to research the charity with the Home Gift Providers Association (HGPA) (http://www.downpaymentalliance.org/) before making a commitment.
Generally, a down payment assistance charity will give the buyer money for a down payment that does not have to be repaid. The seller will contribute an equal sum to the charity at closing or soon after. The seller will also pay an administration fee to the charity. Sounds good, right?
This can be a good option for buyers who dont have other means of securing a down payment. However, you should be aware that this means of funding the down payment may inflate the selling price of the house. You'll want to consult with your real estate professional about how such a program may affect the selling price.
Zero down mortgage loans
Service persons and veterans can qualify for a VA Loan that requires no down payment. VA Loans are guaranteed by the U.S. Department of Veterans Affairs. In addition to no down payment, these loans usually offer a competitive fixed interest rate and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
There are also private sector alternatives that offer 100% financing of the home purchase price. Fannie Mae has just created a program specifically for this purpose. Let me help you find the down payment and mortgage alternative that's right for you.
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You've finally found the home of your dreams. There's just one thing standing between you and your new house:
The down payment.
Many home buyers today opt to use funds from their employers 401(K) program to come up with the down payment on a house. Ordinarily, you can't take money from your 401(K) plan unless you retire, leave the company or become disabled, but many company plans permit certain hardship withdrawals when there is an immediate and heavy financial need, including the purchase of the employee's principal residence.
The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid in the year of withdrawal. And while hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Check with your employers human resources department if you're not sure if your 401(K) plan allows hardship withdrawal.
Another approach may be to borrow against your 401(K) often as much as 50 percent of your account balance. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back and plans can give you anywhere from five to 30 years to pay back your loan.
There are risks involved in borrowing from your 401(K). If you lose your job or leave your employer, you must pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan and subjected to the same taxes and penalties. And while 401(K) accounts can usually be rolled over into a new employers 401(K) without penalties, loans from a 401K cannot be rolled over.
In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. And you'll be replacing pretax money with after-tax money.
Some lenders will count the money you borrowed from your 401(K) as an additional debt that will go along with your car payments, student loans and credit cards. While it may seem unfair since you are borrowing your own money, most lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties or borrow against it.
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Documenting Assets
Verifying the Required Cash for Your Down Payment and
Closing Costs, Assets, Income and Debts
A critical step in the mortgage loan application process is to verify the sources for your down payment, closing costs and assets, as well as documenting income and debts. This is one step among many that our lenders use to determine your qualifications as a borrower.
Down Payment & Closing Costs
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs. Discuss with us, your Mortgage Advice Counselors the acceptable methods for doing so.
Acceptable Down Payment & Closing Costs Sources
- Cash in a bank account (checking, savings, CDs or money market)
- Mutual funds / stocks / IRA / 401K
- Proceeds from the sale of another property
- Gift from an immediate relative
Assets
Collect information about your personal assets that add to your net worth and help to prove your credit worthiness.
Common Assets Considered in a Mortgage Loan Application
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Stocks, bonds, mutual funds, 401K and retirement accounts
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Life insurance
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Personal property estimate - cars, boats, antiques, jewelry, etc.
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Other real estate or property
Income and Employment
The lender will want to confirm your current gross income and have evidence of stable employment. Documentation requirements vary depending upon a number of factors - including the source of income (hourly, salary, salary + bonuses, salary + commission, commission, self-employed, etc.).
Debts
Your lender will want to review a list of all your current debts. This along with your credit report will provide the lender with a snapshot of your obligations. The underwriter will want to confirm that you will not be overextended when the mortgage payment is added to your current debt load.
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Staying Approved
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The Last Minute Credit Check
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Did You Know?
Your mortgage lender may run a second credit report just prior to closing. Red flags that appear in this credit report can disqualify you for the mortgage loan. | |
Your actions after receiving lender approval for a mortgage loan can disqualify you for the loan. A mortgage loan is conditionally approved, with the lender reserving the right to re-verify credit, income, assets and employment at anytime. The lender may cancel the loan if there are any adverse changes to your qualification status.
Debt-to-Income Ratio
Your debt-to-income ratio is the amount you spend on debt divided by your gross monthly income. Debt items include mortgage payments (including principal, interest, insurance, tax & hoa/condo fee), car payments, credit card payments, student loans, child support payments, etc.
The lender considers debt-to-income ratio when approving you for a mortgage loan. Only a certain percentage of your income can be used for your mortgage payment, which includes taxes and insurance; and a somewhat higher percent for the mortgage payment plus the rest of your debt. Anything you do to negatively affect your debt-to-income ratio may change an "approval" to a "disqualification."
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A Call Before Closing?
Your mortgage lender will do a telephone verification of employment just prior to closing. They must be able to independently verify the number as your employer's. |
Avoid Red Flags
A red flag is any inquiry made regarding your credit worthiness. If you decide to purchase a big ticket item - like a car, boat or furniture - prior to closing, you're at risk of having a red flag show up on your credit report.
Keep Your Money Where It Is
The balances of your liquid assets are considered when approving you for a mortgage loan. These liquid assets may include checking accounts, savings accounts, certificates of deposit, money market accounts, retirement accounts, stock and mutual funds.
Avoid changes to the balances of these accounts. Do not close accounts. Do not change banks. A large withdrawal or deposit to any of these accounts will trigger a red flag for your mortgage lender. If a red flag is triggered, you may be asked to produce a paper trail tracking large withdrawals and/or deposits.
Employment Status
For most employees a change of jobs to one of equal or higher pay will not trigger a red flag. However, commissioned sales people should not change jobs prior to closing on their mortgage loan.
Salaried Employees
If your income is strictly salary than you should not have a problem changing to another job of equal or greater income. If, however, your income includes salary and bonuses, commissions and/or overtime, and you need any of the three beyond salary to qualify you should not change jobs prior to closing.
Hourly Employees
If your income is based solely on a 40-hour work week without overtime, than changing to a job with equal or greater hourly pay should not be a problem. However, if your income qualification is dependent upon overtime pay, do not change jobs prior to closing.
Commissioned Employees
If your income is from commission or a substantial portion of your income (25% or more) is from commission, then you should not change jobs prior to closing. Typically, mortgage lenders average your commissions over the last two year period to determine income. Changing employers eliminates the two-year commission history and places uncertainty on your income status.
Talk to Your Mortgage Consultant
Do not make any changes to your financial and employment status without first talking to us, your mortgage advice consultants. |
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When Should I Refinance
What does it cost to refinance? What are the benefits? When should I do it?
The simple answer is whenever you can save money!
Ever heard the old rule of thumb, you should only refinance if your new interest rate is at least two points lower? That may have been true years ago, but with zero point or zero cost options, it's never the wrong time to think about a new loan! Refinancing has a number of benefits that often make it worth the up-front expenditure many times over.
When you refinance, you might be able to lower your interest rate and monthly payment -- sometimes significantly. You might also be able to "cash out" some of the built-up equity in your home, which you can use to consolidate debt, make improvements or repairs, make investments -- whatever! With lower rates and balances, you might also be able to build up your equity faster with a new, shorter-term mortgage.
All these benefits do cost something, though. When you refinance, you pay for some of the same things you paid for when you obtained your original mortgage. These might include settlement costs and other fees, such as an appraisal, lender's title insurance, underwriting fees, and so on.
You might have to pay a penalty if you refinance your previous mortgage too quickly. That depends on the terms of your existing mortgage. These penalties are illegal in some places, and more often than not when they're there apply only for the first year or two. We'll help you figure it out.
You might pay points to get a more favorable interest rate. If you pay points "up front" (one point = 1% of the loan amount) on your loan amount to "buy down" your rate, your savings for the life of the new mortgage can be significant. You should be aware that the IRS has recently said that points paid for the purpose of refinancing your mortgage cannot be deducted in their entirety in the year you pay them, unless the refinanced loan is primarily for home improvements. Consult your tax professional before deducting points you pay on your new mortgage from your federal income taxes.
Speaking of taxes, if you lower your interest rate, naturally you will be lowering the amount of mortgage interest payments you can deduct from your federal income taxes. This is another cost that some borrowers consider. We can help you do the math!
Ultimately, for most of our customers the amount of up-front costs to refinance are made up very quickly in monthly savings. We'll work with you to determine what program is best for you, considering your goals, cash on hand, how likely you are to sell your home in the near future, and what effect refinancing might have on your taxes.
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Refinancing Options
 Which refinancing option is best for you?
There aren't quite as many loan programs as there are borrowers, but it seems like it sometimes! We'll work with you to qualify you for the best loan program to fit your needs. But there are some general considerations you can have in mind in advance.
Are you refinancing primarily to lower your rate and monthly payments? Then your best option might be a low fixed-rate loan. Maybe you have a fixed-rate mortgage now with a higher rate, or maybe you have an ARM -- adjustable rate mortgage -- where the interest rate varies. Even if it's low now, unlike your ARM, when you qualify for a fixed-rate mortgage you lock that low rate in for the life of your loan. This is especially a good idea if you don't think you'll be moving within the next five years or so. On the other hand, if you do see yourself moving within the next few years, an ARM with a low initial rate might be the best way to lower your monthly payment.
Are you refinancing primarily to cash out some home equity? Maybe you want to pay for home improvements, pay your child's college tuition bill, take your dream vacation, whatever. Then you'll want to qualify for a loan for more than the balance remaining on your current mortgage. If you've had your current mortgage for a number of years and/or have a mortgage whose interest rate is higher, you may be able to do this without increasing your monthly payment.
You want to cash out some equity to consolidate other debt? Good idea! If you have the equity in your home to make it work, paying off other debt with higher interest rates than the interest rate on your mortgage -- for example, credit cards, home equity loans, car loans, some student loans -- means you can save possibly hundreds of dollars a month.
Do you want to build up home equity more quickly, and pay off your mortgage sooner? Consider refinancing with a shorter-term loan, such as a 15-year mortgage. Your payments will be higher than with a longer-term loan, but in exchange, you will pay substantially less interest and will build up equity more quickly. If you have had your current 30-year mortgage for a number of years and the loan balance is relatively low, you may be able to do this without increasing your monthly payment -- you may even be able to save! For example, let's say years ago you took out a $150,000 30-year mortgage at eight percent. Your payment is about $1,100, exclusive of taxes, insurance and so on. If your balance today is down to $130,000, you might take out a 15-year mortgage at six percent and have an almost identical monthly payment. This is a great option for people whose main goal is not to save money on their monthly payment but rather want to build up equity and pay off their home more quickly.
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Financing Closing Costs
 Should you consider financing closing costs, escrow reserves, or other cash needed at closing?
If you've built up some equity in your home, when you refinance, you may be able to "cash out" some of that equity to pay off credit cards or other revolving debt, improve your home, help pay for college, or anything else you can think of. The same is true of refinancing costs: If you have enough equity in your home, you may be able to roll some of the cash due at closing into your loan.
Some of the "cash needed to close" as it's sometimes called includes settlement costs and fees, prepaid interest, escrow reserves, state or local government charges, or even extra funds needed to pay off your existing mortgage. Some or all of those costs can sometimes be financed as part of your new mortgage loan.
But you have to be careful. It's not always the case that you can borrow up to 100 percent of your home's value. Many loan programs are based on what's called a "loan-to-value" ratio. You may qualify for a very advantageous refinanced mortgage if you borrow no more than 80 percent of your home's value, but may not qualify for the same terms if you borrow 90 percent. We can help you qualify for refinance loan programs for as much as 100 percent* of your home's value, but the lower your loan-to-value ratio (that is, the less you borrow), the better terms you'll generally receive.
The bottom line is that in many cases you can reduce your up-front costs for refinancing your mortgage in exchange for higher monthly payments for the life of the loan. But whether, and to what extent, you can do this depends on the value of your home and the amount of your new mortgage, and what options you decide are best for you.
If you've had your current mortgage for a few years, chances are you've built up enough equity to finance cash needed to close and still have a smaller loan balance than your original -- and a balance that will qualify you for a favorable mortgage program tied to your loan-to-value ratio. We can do the calulations to help you decide!
Many people find that it's advantageous to pay the cash needed at closing from checking, savings or money market accounts or from other assets. This is because the less you borrow on the new refinanced loan, the lower your monthly payment will be. But we'll work with you to see if there is an advantageous refinancing program for you based on your ability and willingness to pay closing costs and other fees and the amount you wish to borrow.
We want to make the best loan for you, work for you!
* 100% refinances are not available at this time.
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Eliminating PMI
 Eliminating Private Mortgage
Insurance (PMI)
For loans made after July 1999, lenders are required by federal law to automatically cancel Private Mortgage Insurance (PMI) when the conventional loan balance falls below 78 percent of your purchase price not when you achieve 22 percent equity, which will happen much more quickly with rising property values (Certain "higher risk" loans are excluded). But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent, regardless of the original purchase price.
Keep track of your principal payments. Also keep track of what other homes are selling for in your neighborhood. If your loan is under five years old, chances are you haven't paid down much principal it's been mostly interest. But property values in many parts of the country have gone through the roof lately. And that can earn you 20 percent equity even if you haven't paid down much principal.
When you think you've reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity. A state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report for single family homes) is the best proof there is and most lenders require one before they'll cancel PMI.
You may also have the ability to refinance to elimnate mortgage insurance. Call to see if you and your home qualify. In either case we can help you with the new appraisal.
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I Want a Fixed Rate
Something important brought you to this page and I am willing to bet it was one of the following two items:
1.) You have an Adjustable Rate Mortgage (ARM) and that distresses you. It's getting ready to jump in rate and payment. Or worse, it’s already jumped the full cap limit and you are dreading the next payment.
2.) You notice more homes are listed for sale in your neighborhood than ever before. Perhaps there are one or more bank foreclosures. Prices are being pressured down. Finally, when you do get an appraisal, it comes in lower than the value you need to get the most attractive rate possible. Perhaps it comes in so low you have to bring cash to closing or it prevents you from refinancing at all.
Either of these situations is dreadful all by themselves. Few expected mortgage rates to increase when the Fed dropped the short-term rates. But that’s exactly what they did. That’s the kind of action some say creates a bottom.
What’s striking is many borrowers have no idea how their ARM will adjust when it does come time to change. If this describes you, it is time to shake the sand out of your eyes and get some information and help.
Pick up the phone and call me at 703-622-8218 or email me by clicking here. Consider this a fact finding mission as there is no obligation. I will help you determine the following:
- If your ARM has already changed, we will confirm the new rate and payment and make sure your lender has made no mistakes. ARM miscalculations do occur and there is no reason for you to pay for the error.
- If your ARM hasn't changed yet or even if it has we will help you calculate the Current Projected Rate (CPR). As you get closer to any future change date the CPR becomes an increasingly good estimate of your new rate on the future adjustment date.
- The appraisers we work with are willing to provide us with estimates of property value at no cost to you. This will give you an idea of the value you will be using when you do choose to lock in a lower rate. And if you are lucky to have equity you might also be able to get rid of that high non tax deductible credit card debt.
But you need to start! Whether your ARM adjusts in two or more years or already has jumped in rate the only obligation is to yourself. Call to discover how you can increase your knowledge and secure your future with no obligation. Call NOW!
703-622-8218
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Free Credit Reports
 The information in your credit report has a huge impact on whether or not you qualify for a mortgage loan and what interest rate a lender will offer. Therefore, its important your credit report reflects a positive image of the way you manage your money. If you're getting ready to buy a home, checking your credit report is the best way to ensure you get the loan and interest rate you deserve.
The easiest way to see what's in your credit report is to contact the three national credit reporting agencies Equifax www.equifax.com,
Experian www.experian.com and TransUnion www.transunion.com - and request a copy from each. That's because the three agencies are independent of each other and the information may differ on all three reports. In addition, you may not know which agency your lender will use to check your credit, so its best to verify that all three have correct information about your credit history.
If you've been denied credit, insurance, or employment because of information in your credit report from any of the three agencies, you can obtain a free credit report by contacting the agency within 60 days of receiving a denial notice. In addition, you're entitled to a free copy of your report each year when you certify in writing that (1) you're unemployed and looking for a job within 60 days, (2) you're currently on welfare, or (3) your report contains errors due to fraud. Otherwise, the agencies charge a fee for a copy of your report.
For additional fees, each agency may offer you different report variations, such as:
- A credit report with or without your credit score.
- A three-in-one credit report that lets you see a side-by-side comparison of records, from all three agencies, with or without scores.
- Notification services when your credit history is requested.
- Routine notification changes to your file.
- Subscriptions that allow you to access your report on a regular basis.
New law promotes free credit reports
Now you can get your free credit report regardless of your employment or financial situation. A recent amendment to the federal Fair Credit Reporting Act (FCRA) mandates that each agency provide you with a free copy of your credit report, at your request, once every year, from www.annualcreditreport.com.
Whether you are thinking of buying a home or simply curious about what's in your credit report, its important to correct any errors you discover as soon as possible. You don't want errors in your credit report affecting your eligibility for credit in the future.
Remember that credit is money.
~ Benjamin Franklin
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What is My Credit Score?
Before deciding on what terms lenders will offer you a loan (which they base on their perceived "risk"), they want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. For the first, the underwriter will review your debt-to-income ratio (DTI ratio). For your willingness to pay back the loan, they consult your credit score.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they're named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk).
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the reason they don't consider demographic factors is why they were invented in the first place. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.
Past delinquencies, derogatory payment behavior, current debt level, current balances to high credit, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Different portions of your credit history are given different weights. Thirty-five percent of your FICO score is based on your specific payment history. Thirty percent is your current level of indebtedness. Fifteen percent each is the time your open credit has been in use (ten year old accounts are good, six month old ones aren't as good) and types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is pursuit of new credit -- credit scores requested.
Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
Call us to find out how to establish a non-traditional credit score. It may be easier than you think.
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Your FICO Score
Scoring your Credit - How's your FICO?
In today's increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number. All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:
- Credit History - How long have you had credit?
- Payment History - Do you pay your bills on time?
- Credit Card Balances - How much do you owe on how many accounts?
- Credit Inquiries - How many times have you had your credit checked?
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Each of these, and other items, are assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800, with higher being better. Typical home buyers likely find their scores falling between 600 and 800.
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
What can you do about your FICO score? Unfortunately, not much. Since the score is based on a lifetime of credit history, it is difficult to make a significant change in the number with quick fixes. The most important thing is to know your FICO score and to ensure that your credit history is correct. Conveniently, Fair Isaac has created a web site (www.myFICO.com) that let's you do just that. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available is some helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.
Armed with this information, you will be a more informed consumer and better positioned to obtain the most favorable mortgage available to you. The Mortgage that Works for You!
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How can you improve your credit score?
 It's virtually impossible to change your score in the time between when most people decide to buy a home or refinance their mortgage and when they apply. So the short answer is, you really can't "on the spot." But there are strategies you can live with to make sure when you apply for a loan your score is as high as possible.
Make sure that the information each of the three credit reporting bureaus has on you is consistent and up to date. Order a copy of your credit report about once a year, and dispute any inaccuracies.
Note: Theoretically, if a series of credit reports is requested on your behalf during a limited amount of time, your score goes down until time passes without any inquiries. Changes in the law though have made "consumer-originating" credit report requests not count so much. Also, a series of requests in relation to getting a mortgage or car loan is not treated the same as a number of credit card requests in a limited time. This is because the credit bureaus, and lenders, realize that people request their own credit reports to keep up with what's on them, and smart consumers shop around for the best mortgage and car loans.
Unsolicited credit card solicitations in the mail don't count against your credit report, so don't worry.
The two main components of your credit score are your payment history and the amounts you owe. Bankruptcy filings and foreclosures, which can stay on your credit report for as many as 10 years, can significantly lower your score. It's never a good idea to take on more credit than you can handle.
Late payments work against you. It's extremely important to pay bills on time, even if it's only the monthly payment.
Dont "max out" your credit lines. Since the size of the balance on your open accounts is a factor, lower balances are better.
It's said that by carefully managing your credit, it's possible to add as much as 50 points per year to your score.
For a more in-depthed discussion of credit and the numerous ways to boost your credit score go to 101 Tips for Improving Your Credit Score and order the free report.
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