Financing for Purchasing a Home & What Not To Do When Getting A loan15 May Monica Breckenridge
A very important aspect of buying a house is financing. The average person needs to obtain a mortgage in order to purchase a home and getting a mortgage these days isn't as easy as it used to be! The human element of issuing credit has been removed from credit transactions, so the approval or denial of a mortgage is determined by your credit score. Your credit score is determined by the information that is in your credit report. Therefore, you need to know what's in your credit report and what your credit score is. Knowing this information helps in several ways. If your credit score falls short of the approval requirements, you will have an idea of what you'll need to do to raise your score. If you have great credit and a high score, you will have some negotiating power when it comes time to determine interest rates and points.
You are entitled to free copies of your credit report annually from all three credit bureau reporting agencies (Equifax, Experian and TransUnion). Actually obtaining your credit score generally costs a fee, however, you can have a lender pull your credit report and tell you your credit score for free. Most conventional lenders look for a credit score of 720 or higher. In today's economy, there aren't many people with scores that high. If you don't qualify for a conventional loan, you can apply for an FHA loan. While FHA has their own credit score requirement of 580 or higher, many lenders add their own requirements to FHA financing and actually require a score of 660 or higher.
If your credit is strong enough to qualify you for a mortgage, the next thing to figure out is how much of a mortgage can you realistically afford. An industry rule of thumb says you can afford a mortgage that is 2-1/2 times your annual salary, but this rule of thumb doesn't take into consideration your monthly debt and living expenses. To better determine what you can afford, you can use an online mortgage calculator. These calculators take into consideration your income and your monthly debt payments to give you a more realistic mortgage amount for your budget.
Once you know the amount of the mortgage you can afford, the next thing to determine is how much cash you have available for a down payment. Most conventional loans require 20% of the purchase price as a down payment to avoid private mortgage insurance. If you don't have 20%, you can put as little as 5% down if you agree to have private mortgage insurance added to your loan. If you qualify for FHA financing, you may only have to put down 3-1/2% of the purchase price. Depending on how much cash you have to put down will also determine how much of a mortgage you can afford. As you can see, it's important to know if you can obtain a mortgage, how much of a mortgage you can afford and how much you can afford for a down payment. Knowing the answers will help you determine what price range you need to be looking in.
If you are confident you will qualify for a mortgage, it's time to find yourself a reputable loan officer and an experience buyer's agent. You want to pick a lender and a real estate agent who will work for you and take your interests to heart. Once you select a lender, tell them you want to be pre-approved. Don't mistake getting pre-approved with pre-qualified. A pre-qualification is simply a brief review of your finances to determine an estimated mortgage amount you can afford. A pre-approval from your lender is a formal approval based on your actual income, debt and credit history.
Once you have been approved for your mortgage, you don't want to do anything to change your credit report or your financial situation.Therefore, avoid doing any of the following:
•Don't apply for new credit. Inquiries affect your score and will have to be explained to your lender.
•Don't incur more debt. This means don't increase your credit card balances or credit lines and don't take out any new loans. It will affect negatively affect your debt to asset ratio. We have seen buyers purchase new cars or appliances for their new home. Do not do this without consulting with your lender first.
•Keep accounts current and make payments on time.
•Don't pay off collections or charge off accounts, don't close any credit card accounts and don't consolidate debt into one or two credit cards.
•Don't make any large deposits other than your standard payroll as all deposits will have to be explained.
•Don't make any large cash purchases as it will lower the amount of verified funds in your bank accounts.
•Don't change jobs without talking with your loan officer first.