Mortgage qualification dos and don'ts
Higher credit requirements put many at disadvantage
By Bernice Ross, Tuesday, October 13, 2009.
DEAR BERNICE: We have been saving up to buy our first home. We have a number of credit cards, some with no balance. My brother thinks it would be smart to get rid of those cards that have no balance. He claims it will make it easier for us to qualify for our loan. Is that a good idea? --Amanda S.
DEAR AMANDA: To protect yourself and to determine how much you can qualify for in terms of a loan, order a copy of your credit report. There are three primary credit reporting bureaus: Equifax, Experian and TransUnion (AnnualCreditReport.com is a service created and sponsored by these three bureaus). The law entitles you to have a free copy of your report once per year from each credit bureau.
Be sure to obtain a report from each agency. Some experts suggest that you pull a report from one agency every four months. This allows you to spot problems more quickly than checking all three bureaus at the same time each year.
It's important to note that the reports may not contain the same information. For example, one of the agencies may report a delinquency that does not appear on the other two agencies' reports. Also, credit reports are notorious for having errors. Something may have been entered into the database at Experian incorrectly that was correctly reported at Equifax and TransUnion, as an example.
The second option is to seek out a mortgage professional and become preapproved for your loan prior to making an offer on any property. A "preapproval" means that the lender has checked your credit, your employment, and is prepared to make you a loan provided the property appraises at the purchase price and that there are no title insurance issues. The lender will order a copy of your credit report.
In most cases, this is something that you would pay for as part of your normal transaction costs. Lenders cannot use the report(s) that you pull. Going to a lender first allows you to cope with any issues that you may have on your report before applying for a loan.
Your credit report will have what is known as your "FICO" score from the Fair Isaac Corp. This score is based upon a number of factors including payment history, the amount of debt you are carrying, and the type of credit you have obtained. FICO scores range from 350 (poor) to 850 (excellent.) Your credit score determines how much lenders are willing to loan to you.
If your score is above 760, you will probably be able to qualify for some of the best loans with among the lowest interest rates. If your score is below 620, you may have a hard time qualifying for some loans in today's environment. ...CONTINUED
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Submitted by Alexis Eldorrado on October 13, 2009 - 1:22pm.
These are all excellent and valid points regarding a lender’s perception of your credit used to determine your FICO score, and especially since mortgages are getting more difficult to obtain. Here in the Chicago real estate market, not only do you need excellent credit, but for a conventional loan on a condo, you need a 20% downpayment.
Years ago, anyone buying any piece of real estate needed a 20% downpayment and a clean credit report. Any charged-off debts had to be paidoff and shown as such on your credit report before you could get approved. This was pre-FICO and there were still foreclosures but nothing like the crisis numbers we have today.
The Chicago condo market, at least for buildings that qualify, and Chicago homes are now funded heavily by FHA loans, allowing borrowers to purchase with a 3.5% downpayment presuming you have good credit.
Every point Bernice Ross makes in this article is very useful information. Especially the awareness that if your lender reduces your credit limit, your credit used to credit available ratios can change drastically affecting your ability to get a mortgage. A good reason in itself to keep the plastic in your wallet. For those with good credit lines but who carry a zero balance, one of the theories is to still charge something and pay it off in full monthly to show that you can handle credit. And Bernice gives more good advice when she states to not purchase anything big on credit before your closing.
Ms. Ross’ suggestion to get a preapproval letter from a qualified lender is especially important in this market. Almost all sellers are asking for a preapproval letter upon presentation of an Offer to Purchase.
With good credit, an experienced and reputable lender can still use creative strategies to get you into a property. The upside of all of this is that for those who have been financially responsible, the market is wide open with great values.
It is an excellent time to buy. Not only are prices low, low, low, but so are rates. It makes for an excellent combination for buyers, especially first time buyers who are also capitalizing on the $8,000 tax credit for buying and closing on a property before November 30, 2009.
Alexis Eldorrado
Managing Broker
Eldorrado Chicago Real Estate LLC
150 N. Michigan Avenue, Suite 2800
Chicago, IL 60601
773-588-7777
Alexis@Eldorrado.com
www.Eldorrado.com