Financing

Getting Your Finances in Order

When should you start getting your finances in order to buy a house?  As soon as you start thinking it's time to buy!  This involves gathering the financial documents lenders will need, obtaining a copy of your credit report, determining how much money you’ll need to have saved and how much money you’ll need to borrow, and learning about different types of loans.

Financial Records

Having your financial records in order will help you and your lender determine what you can afford and how much you need to borrow.  Now is the time to gather and make copies of these important documents:

• Paycheck Stubs for this month 
• Bank Statements for the past two months-all pages of all accounts
• W-2’s for the last two years
• Tax Records for the last two years
• Asset Account statements for the most recent period (401K, stock & bond accounts)
• Divorce Settlement Agreement
• Alimony and/or Child Support documentation (cancelled checks, bank statements)

Your Credit Report

As part of the loan application process, your lender will run your credit report.  However, it’s a good idea to obtain a copy of your credit report several months before you apply for a loan.  This way you have a chance to resolve any problems or errors before the bank runs it.  Resolving credit issues before applying for a loan will save you time and will raise your credit score.  Many people are surprised to learn that their credit report contains errors or inaccurate information. If this is the case with your credit report, you'll need to contact the reporting agency or creditor to resolve the issue.  This can be a slow process, so make sure to give yourself time to clear up the mistake before applying for a loan.

U.S. Federal law ensures that you have access to a free credit report at www.annualcreditreport.com, or you can obtain your credit report from any of the many credit report firms.  Checking your own credit report won't affect your score, whether you run it through the free service or one that charges a fee. However, AnnualCreditReport.com only provides your credit report for free; there is a fee for credit scores whether you use AnnualCreditReport.com or one of the other credit report firms.

The credit report will list all your long-term debts (credit cards, mortgage payments, automobile and student loans, etc), as well as your payment history. The bank will be looking at your credit score, your positive history and any negative history such as late payments, bankruptcies, foreclosures, judgments and liens. If any information is incorrect on your credit report, take steps to fix it now! 

Late Mortgage Payments

Mortgage payments are the most critical account on your credit history. Less than 12 months history leaves your credit report kind of thin, good history boosts your overall rating, and any 'lates' really hurt your credit rating, even if it's on rental property. So, you can logically conclude that a mortgage lender will be looking at your mortgage rating very closely with regard to mortgages you already have. Mortgage 'lates' stay on your credit report for seven years.

Late payments
For most people, negative credit history will most likely be related to late payments to a creditor. If you were late one month in making a payment on your credit card, but otherwise have a good payment history, chances are most lenders won't be too concerned. But if you have a history of late payments you'll need to document the reasons why. A slow payment history won't necessarily keep you from getting a loan, but you might have to pay a higher interest rate.

Bankruptcies

It’s no surprise that a bankruptcy on your credit report is not a good thing, however that doesn't mean you can't obtain a loan. Even though a bankruptcy stays on your credit report for seven to ten years, most lenders will give you excellent terms if it has been 36 months since the bankruptcy was discharged, you have reestablished good credit, have a good credit score and have stable and adequate income.  Also, lenders will often consider the circumstances surrounding a bankruptcy (family illness, injury, etc.).

Foreclosures

A foreclosure is one of the most credit-damaging events that can ever appear in your credit history. Foreclosure won't ruin your credit rating forever, it on your credit report will lower your credit score until you're able to re-establish good credit — and that takes time. Foreclosures stay on your credit report for at least seven years. After that, the foreclosure can only be removed from your credit report, which is your official credit history, after you send a written request to the three major credit reporting bureaus. However, if good credit has been reestablished, you will most likely be able to qualify for a home loan with decent interest rates about 24 to 72 months after a foreclosure.

Judgments & Liens

Although liens and judgments don’t always necessarily damage your credit score, they can really impair your ability to borrow money.  Many liens and/or judgments may have priority over a new mortgage and most lenders won’t take that chance.  To get a loan, you will have to pay off any liens or judgments on your credit report, prove that you have paid them, or otherwise prove that you have been released from the liability.

The Down Payment

Saving funds for a down payment should be part of an overall program to get your finances in order prior to shopping for a home. This includes examining your spending habits and setting a budget you can live with. Remember, too, that in addition to funds for the down payment, you will also need money for closing costs

How down payment much is required?

The amount required for a down payment is usually determined as a percentage of the overall purchase price of the home and varies depending on the lender, the type of financing and amount of money being lent. Typically with conventional loans, the required down payment is 20%.  U.S. Government financing programs require minimal down payments.  The Dept of Veterans Affairs (VA) requires no down payment, and Federal Housing Administration (FHA) requires only 3%.  However, typically, if your down payment is less than 20%, lenders will require that you carry Private Mortgage Insurance (PMI), which protects the lender in case of loan default.  FHA loans with less than a 20% down payment require PMI; VA loans do not.

Gifts
Many lenders, including VA and FHA, will allow you to use gift funds for the down payment--as well as for related closing costs. The gift may come from family, friends, or other sources, but the lenders usually require a "gift letter" stating the gift doesn't have to be repaid.

Earnest money
Buyers are usually required to deposit earnest money  (usually 1-3% of the price the buyer is offering) with the seller when they make the offer. If the offer is accepted, the earnest money is then credited toward the down payment.

Closing Costs

In addition to the down payment, you will also need money for closing costs, fees associated with the loan.  These charges include items such as title insurance, escrow fees, loan origination, appraisal, inspections, recording fees, etc. Closing costs can run into the thousands of dollars, and lenders are required to provide you with a good faith estimate of your closing costs.

Although closing cost are associated with the loan, some closing costs are the seller’s responsibility.  In addition, the fees can be negotiated with the seller. For example, you may agree to pay the full asking price in exchange for the seller paying part or all the allowable closing costs.

Typical buyer’s closing costs include:

• The down payment
• Inspection fees
• Appraisal
• Loan fees (points, application fee, credit report)
• Title insurance
• Escrow fees
• Recording fees
• Prepaid interest on the loan
• Property taxes (for taxes due after the closing date)
• Funding tax and insurance impound accounts 
• Homeowner’s insurance
• Mortgage insurance, if needed

Typical seller’s closing costs include:

• Broker's commission
• Transfer taxes
• Documentary Stamps on the Deed
• Escrow fees
• Title insurance
• Property taxes (prorated to transfer date)
• Any liens on the property

Negotiable closing costs include:

• Inspections (pest, whole house, etc)
• Buyer’s closing costs
• Escrow and Title fees

How Much Can You Afford?

Understanding how much you can afford is one of the most important factors of home buying. How much you can afford will affect the size house you can buy, the neighborhood, and to some degree, the type of financing you’ll choose. 

What factors are important to lenders?
Lenders will look at more than just your income to determine the amount they will loan you.  Lending institutions will use several criteria including:

• Your gross monthly income
• Your credit history
• Your total monthly debt
• The amount of money you have available for a down payment and closing costs
• Your assets
• The type of mortgage you are interested in
• Current interest rates

Two important ratios lenders use
Lenders use your financial information to figure out two very important debt-to-income ratios (DTI), the front ratio and the back ratio.  Sometimes the front ratio is referred to as the housing expense ratio and the back ratio is referred to as the total debt ratio.

• front ratio:  the total amount you are paying each month for housing expenses (rent or mortgage plus taxes, homeowners insurance, and association fees if applicable) in comparison to your gross monthly income. 
• back ratio:  the total amount you are paying each month for housing expenses plus all recurring debt payments (credit card payments, car loans, student loan, child support, alimony, and legal judgments, in comparison to your gross monthly income

Generally, conventional loan guidelines are a 28/36 ratio; FHA limits are 31/43; and VA limits are 41/41. 

Down payments make a difference
If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent ratio.

Loan Programs
Many local governments have special loan programs designed to help first-time homebuyers. Loans may be available at reduced interest rates, or with little or no down payments. Contact me for more information about First Time Home Buyer programs!
 

Loan Types
Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for 30-year loans because they have lower monthly payments than 15-year loans. There are significant differences between different loans, so, as a real estate agent who is also a mortgage broker, I will make sure we discuss the pros and cons of the various loan programs before you make a decision.

 If you have questions about loans or need help with information on your credit report, click Contact Me or call 916-792-0262.