But there are steps a home buyers can
take to find the right mortgage, and qualify for it. Here are seven:
1. Improve your credit
score: A credit score below 620, as measured by the
Minneapolis company FICO, will knock most potential buyers out of the running
for a mortgage. And even if you can qualify for a loan, lenders reserve their
best interest rates for borrowers with the highest credit scores — typically
740 and above. If a bad credit score pushes up your interest rate by even one
percentage point, you could end up paying $85,000 more over the life of a
$400,000 loan, according to Tracy Becker, president of North Shore Advisory, a
Westchester credit repair company.
To see where you stand, start by
checking your credit report, which is available free at annualcreditreport.com,
preferably at least six months before you’re ready to shop for a home. You can
get a free report once every 12 months from each of the three credit reporting
companies — Experian, TransUnion, and Equifax. Make sure there are no mistakes
on the report — for example, if you see incorrect reports of outstanding
balances or late payments, you should dispute them with the credit reporting
company.
Matthew Gratalo of Real Estate Mortgage
Network in River Edge gave an example of a client named Smith; his credit
reports were full of problems, including a foreclosure and a bankruptcy, that
belonged to another Smith.
These reports are the basis for the
credit score created by FICO. The score, which ranges from 300 to 850, is used
by lenders to determine whether you’re eligible for a loan, and at what
interest rate. You can get a copy of the score for $15.95 at myfico.com.
Your credit score can be badly damaged
by even seemingly minor problems, like late payments on credit cards, or a $50
unpaid medical bill, or a cellphone bill that goes to a collection agency.
If your credit profile is ugly, there
are ways to beautify it, though it may take some time. One key step is to make
sure to pay your bills on time. Set up e-mail or text reminders from the credit
card company to let you know when a payment is due. Pay down your debt as much
as you can. Don’t close unused credit cards, but don’t open new cards, either.
“You may not be a great buyer today,
but you have the ability to change that dramatically,” said Al Engel, executive
vice president at Valley National Bancorp in Wayne, N.J.
2. Decide what type of loan
is best for you: Fixed mortgages offer the
security of knowing your rate will never rise; since rates are near or at
record lows, there’s a pretty good argument to be made for locking them in now.
On the other hand, an adjustable offers even lower rates and might work if you
expect to move within a few years.
A 30-year loan will keep monthly
payments lower, but if you can swing it, a 15-year will have a lower interest
rate and will save you tens of thousands of dollars over the life of the
mortgage. For example, a $300,000 loan at 3.7% for 30 years adds up to
$497,466. Choose a 15-year loan at 3% instead, and you’ll save more than
$120,000.
If you have less than 20% down, you
have the choice of a Federal Housing Administration mortgage or a conventional
mortgage with private mortgage insurance. FHA loans allow down payments as low
as 3.5% but carry an upfront fee of 1.5% of the mortgage amount, plus an annual
fee of 1.15%, according to Keith Gumbinger of HSH.com, a Pompton Plains, N.J.
company that tracks the mortgage market.
Private mortgage insurance is cheaper,
typically costing less than 1% a year and varies according to the borrower’s
credit score and down payment. Another advantage of PMI is that it is canceled
eventually — once the home owner has 20% equity in the property. But to get a
conventional loan with PMI, you’ll probably need to have 10% down and a better
credit score than the FHA requires, lenders say.
3. Shop around: Check with several lenders, not just the one recommended by your real
estate agent. Compare interest rates and closing costs like fees for the
application, appraisals, and so on. These costs generally run around 2% of the
loan amount, according to Gumbinger.
To check on the lender’s reputation,
call the state Department of Banking and Insurance at 800-446-7467, though the
department regulates only state-chartered, not federally chartered, banks.
There are fewer “bad actors” in the
market to watch out for, after the shakeout of the mortgage industry during the
housing bust, Gumbinger said.
Michael Moskowitz, president of Equity
Now, a mortgage lender, encourages home buyers to ask mortgage companies for
the names of previous customers and check on their experience. “You need to
make sure you’re dealing with someone reputable,” he said.
4. Get a preapproval: Lenders will give prequalification letters — informal estimates of how
much house you can afford. But you should go further and get a preapproval
letter, which is a tentative commitment from a lender. To get one, you’ll have
to show the lender documentation of your income, assets, and debts. Though a
preapproval is not binding on either the lender or the home buyer, it’s a way
of showing sellers and real estate agents that you’re a serious buyer.
A preapproval letter and a copy of your
credit score — assuming it’s 740 or above — can be a strong argument in your
favor if you’re competing with another buyer for a home, Becker said. Sellers
sometimes accept lower offers from more qualified buyers who are able to show
they can actually close on the deal.
5. Be prepared to show lots
of paperwork: Fannie Mae and Freddie Mac, the
government entities that guarantee loans, are forcing lenders to demand much
more documentation these days, including pay stubs, tax returns, and bank
statements — “anything that can prove you are the borrower you claim you are,”
Gumbinger said. And they will ask for fresh documents, like pay stubs, just
before the closing, to make sure nothing has changed.
“We’ve got to be able to touch, feel,
and see the source of income to repay the loan,” Engel, of Valley National,
said.
Because of these tighter documentation
standards, Gratalo recommends that you start saving pay stubs, bank statements,
canceled rent checks, and other paperwork several months before you even start
shopping for a house or a mortgage.
6. Consider locking it in: Many lenders will offer borrowers the chance to lock in their mortgage
rate free for up to 45 days, and some will lock in for up to 60 days, either
free or for a small fee. Gumbinger advises buyers to seriously consider locking
in the rate, especially now, since there’s not much room for rates to fall.
“The odds don’t favor significantly
lower interest rates,” he said. He recommends a 60-day lock-in, which should be
long enough for most closings.
7. Don’t mess it up at the
last minute: Once you have your loan approval and
make an offer on a home, don’t throw the whole deal into doubt by making moves
that will change your credit profile. Don’t quit your job or take out a big car
loan, for example. Don’t apply for a new credit card, even if the merchant
offers you 10% off if you do.
The lender will recheck your employment
status and credit profile just before the closing. REALTOR® and lenders say
closings are routinely delayed when a buyer decides to lease a new car or apply
for a new credit card after being approved for a mortgage.
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