I’d like to buy a home | first time buyer advice
If you are a first-time homebuyer and have never applied for a mortgage, you should understand that being totally prepared takes advance planning. The biggest mistake for many first-time homebuyers is waiting until they start looking for a home before getting their financial house in order.
(1) Ensure that you have a credit history. Your credit history is usually the most important single factor in determining whether your loan is approved and at what interest rate. If you pay for everything in cash or with a debit card, that doesn’t help establish your creditworthiness. You need to get credit, even if it has to be by using a secured or high interest rate card and making payments on time.
(2) Check your credit report for errors, oversights. Credit reports often contain errors that can lower the credit score derived from it (which is what lenders look at). Check your report for inaccurate information and get mistakes corrected BEFORE you apply for a mortgage. You need to check all three credit reporting companies—Equifax, Experian and TransUnion—to see if your report contains inaccuracies or oversights. Common errors that can hurt your scores include: not clearing a balance when a loan has been paid off, listing accounts you’re not responsible for or failing to include a credit account.
You are entitled to one free report from each of the agencies every twelve months. To obtain one, go to annualcreditreport.com or call 877-322-8228. If you find an error, you need to dispute (correct) it. A fact sheet at the Federal Trade Commission web site, www.FTC.gov/bcp/edu/pubs/consumer/credit/cre21.htm tells how to dispute errors. If there are errors, deal with them immediately. The credit reporting companies will charge you if you want to see your credit score, not just your report. An alternative is to see a mortgage specialist, who can run your credit report for you, let you know your scores, and advise you about how to increase them.
(3) Keep credit lines open to optimize your credit score. Closing open credit lines usually hurts, not helps, your credit score. It’s the relationship between your available credit and what you owe, along with how long you have been managing that credit, that largely determines your score. Consolidating several credit cards into one shows up as a “maxxed-out” card. But having lots of available credit and using a small percentage of it scores higher. If you do close an account, make sure it is not one with a long (and valuable) credit history. The longer you have a good credit history with a creditor, the better your score.
(4) Put off any major purchase until after you are in their new home. Getting a new car loan will significantly and unfavorably alter your debt ratios. Further, the new loan will not have a payment history, so it will also lower your credit score. You can damage your credit score just by going out to shop. Each time a store runs your credit, it affects your score.
(5) Get a bank account. You should expect to be asked to show the source of funds for closing costs, prepaids and escrows, reserves and any downpayment. To do this, you will need a visible trail for the money. Mattress money and unexplained large deposits invariably raise questions about the source of the funds. A gift from a parent or relative is viewed as a loan (though some programs do allow for gifts) unless the funds have been in your bank account for at least three months.
(6) Postpone switching jobs or making a career change until after you settle. Lenders double check loan applications before settlement to verify that you are still working at the job you listed on the application. Purchasers who quit their jobs before settlement in anticipation of finding employment closer to their new home could wind up losing the house. © 2007, Real Estate Information Services, Capitol Assets & Choice Finance®
Contributing writer & Loan Officer for Maryland, Virginia, D.C.
Eric Strasser, 301-996-5001