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7 Must-Do’s Before Shopping for a Mortgage

By | Mortgage

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Owning your own house is a hallmark of independence as well as a major investment. It is one of the most exciting milestones in your life. However, shopping for a mortgage is decidedly less invigorating. You have your credit score to think about and whether you even qualify. It can be a lot of work, so start early. Take care of the following before you start shopping for a mortgage.

1. Your Credit Score

The first step is your credit score. How high or low it is will have a big effect on the mortgage you receive. In general, a higher number translates into lower payments. According to the Seattle Times, getting a mortgage when your credit score is less than 660 (or for some lenders, less than 680) means that you are going to need to put more money down and you could have to pay additional fees. In general, to get the best rate, you will need a credit score of more than 750.

2. Qualifying for Credit

Further, you may need a minimum credit score to even qualify for a home loan. “While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum,” says former U.S. Department of Housing and Urban Development official Vicki Bott. In other words, it doesn’t matter how much money you make, how little you owe or how much you can put down — you could still be denied a mortgage.

3. Deciding on a Mortgage Budget

Would-be homeowners should also decide on a budget. Any loan from the Federal Housing Administration will require that your mortgage payment not exceed 31 percent of your income except under specific circumstances — and even that could be on the high side. The Credit Union National Association advises that your mortgage payment not be more than 28 percent of your gross pay, and Dave Ramsey suggests a maximum of 25 percent of your take-home pay. Being more conservative with your budget means that you have extra cash available for the type of expenses homeowners have to endure, such as a new roof or maintaining your furnace.

4. Pay Off Debt

One top suggestion is to pay off any debts you have before you begin the mortgage application process. Credit card debt can be a real hindrance to getting approved, but other debts play a role as well. Car loans, medical bills and student loans can eat away at your monthly cash flow. Aside from impacting your credit score, it may also play into the amount that the bank is willing to approve and the amount of payment you can comfortably make each month. You will need to keep debt payments in mind as you decide on a budget. Making a plan to pay them off before applying for a mortgage means one less thing to think about.

5. Save Money

Remember that buying a home requires certain upfront costs. You will need to cover closing costs as well as a down payment. Many conventional loans are going to require 20 percent down. Even if you have enough in your bank account to cover that lump sum payment, will you have enough left over to weather a storm if a worst-case scenario happens and you lose your job or the home requires extensive work before you have time to rebuild your savings? These are important issues to consider.

6. Credit Report Review

Before you attempt to purchase a home, you should also have someone review your credit report. This way, you can identify any potential issues BEFORE you begin applying for loans. At Ovation Credit Services, we review your report to see if there’s anything affecting your score before you start the mortgage process and can advise you on the next steps to take to improve your odds of getting the best home loan rates and terms possible.



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7. Credit Repair Is Possible

If your credit report needs some work or you aren’t happy with the interest rates and terms your credit score will garner you, remember that credit repair is possible. Working with an established company like Ovation helps ensure that you aren’t penalized for debts that have already been paid or settled. We can also help you identify areas you could target to improve your credit score.

It’s tough to take a hard look at whether you can actually afford to buy a house and what your price range really gets you. Having an outside party take a look at your credit report gives you a more objective perspective into what lenders like to see and the factors that play into your credit score as well as the impact your credit score has on the terms and interest rate you receive for your mortgage.

Sources:

HGTV: What to Know Before Buying Your First Home
http://www.hgtv.com/design/real-estate/what-to-know-before-buying-your-first-home

Dave Ramsey: 5 Must-Dos Before You Buy a Home
https://www.daveramsey.com/blog/5-must-dos-before-buy-home

Seattle Times: 6 Must-Dos Before Buying a Home
http://www.seattletimes.com/business/6-must-dos-before-buying-a-home/

U.S. News & World Report: 7 Things to Always Do Before Buying a Home
http://money.usnews.com/money/blogs/my-money/2014/06/25/7-things-to-always-do-before-buying-a-home

How Credit Scores Impact Mortgage Loans

By | Credit Repair, Credit Scores, Home Buying, Loan, Mortgage, Your Credit

Credit Scores Impact Mortgage Loans

Are you working towards financing a home? You probably know how your credit rating will impact your loan qualification. You pretty much need the minimum credit rating for FHA home loans, which is a 580 FICO score. If you cannot qualify for FHA insurance, you will be hard-pressed to find any lender until you fix your credit.

There are many implications that your credit rating can have on your prospective home loan, such as whether you actually qualify for the mortgage, how low of an interest rate you will get and what type of lender will work with you.
Now, there’s also an unspoken factor: how much your mortgage will cost in total.

How Your Mortgage Could Cost More

When you apply for home financing with a bad credit score, it is unlikely that a major bank will approve you. Since it is the major banks that get the best borrowing rates in the first place, your alternatives will be more costly. In the worst case scenario, only a private lender would consider you.

You might be somewhere in the middle and can get a home loan through a financial institution that accommodates bad credit borrowers. There are many reputable lenders in this area, but you still face the issue of a higher interest rate. This is because the banks know you are a higher risk.

Tip: Get your mortgage through a highly legitimate financial institute that works with bad credit borrowers while also offering traditional home loans. That way, you can repair your credit while holding the costlier loan and refinance under the same lender after your credit score improves.

Your credit score does not have to hold you back from a mortgage. You just need to make sure it’s not unexpectedly costing you extra.

What Will Your Credit Score Cost You?

When applying for a home loan, your decided interest rate is mainly calculated based on your credit score. So if you were to apply for a mortgage right now, what would this mean to you?

It all depends on where you live …

Let’s use Manhattan, New York as an example, seeing as how even a one-bedroom will easily set you back $400,000 or more.

Say you are buying an apartment for $400,000 and you give the minimum of 10 percent down. This leaves you with a $360,000 principal to finance through a mortgage provider. Let’s say the mortgage will run for 30 years and it’s a fixed-rate loan.

Below shows your total interest cost for the lifetime of the mortgage. These calculations come from MyFICO.com’s Loan Savings Calculator, which estimates your interest rate based on your FICO score range.

  • 620 to 639 FICO score: $319,418 total interest (4.793% APR)
  • 640 to 659 FICO score: $277,706 total interest (4.252% APR)
  • 660 to 679 FICO score: $245,727 total interest (3.825% APR)
  • 680 to 699 FICO score: $230,167 total interest (3.613% APR)
  • 700 to 759 FICO score: $217,414 total interest (3.437% APR)
  • 760 to 850 FICO score: $201,683 total interest (3.217% APR)

To put it into context, you are looking at saving $117,735 over 30 years by financing with perfect credit instead of below-average credit. From another perspective: your monthly payment will be about $327 less!

How to Make Your Mortgage Cost Less

There are some tricks that can help you qualify for a more affordable mortgage. Four simple ways to do this include:

1. Refinance Your Mortgage After You Buy

Your mortgage payments go through on time for half a decade, and suddenly the huge debt does not keep your credit score suppressed. The result could be seeing your credit rating go up by a considerable amount since when you first qualified for the mortgage. If this is the case, you could refinance the mortgage to lower your interest rate and ultimately make the rest of the mortgage term cheaper for you.

2. Rent-to-Own the Place First

If you are repairing your credit, but you want your new home now, you could try to buy through a rent-to-own agreement. You will be able to guarantee the seller gets the asking price as long as you follow through with financing at the end of the term. While the rent-to-own contract will set you back a little in equity, the much lower interest rate will create much more savings.

3. Wait a Little Before Buying

While this is not the most exciting solution, sometimes it makes a lot of sense. Say you have a bad debt in collections from six years ago. If that’s the case, waiting roughly a year will cause the negative item to leave your credit report and thus it will not hold back your FICO score. The end result could be a huge boost in your credit rating, or at least enough to score you a better interest rate.

4. Purchase Under Owner Financing

If you want your new home now, but rent-to-own will not work, you might be able to purchase via owner financing. This means the seller holds the mortgage for you for so long (usually 1 to 3 years), and then you can get your mortgage and make a balloon payment to buy it out. You can use the in-between time to repair your credit and this will help you secure a good interest rate. In the meantime, you will be paying on the home under the current mortgage conditions and your bad credit status will not cost you more.

Owner financing is really the only cost-effective and sound way to approach buying a home with bad credit. Otherwise, you could be throwing well over $100,000 out the window. That’s a lot of extra money to pay, especially if you are actually eyeing a one-bedroom apartment.

To conclude, get your credit repaired before applying for a mortgage because the cost of doing so is minuscule in comparison to what you will save on interest payments.

Sources:

  • http://www.fha.com/fha_credit_requirements
  • http://www.myfico.com/crediteducation/calculators/loanrates.aspx
  • http://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp

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