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HOME FINANCING:
Your Most Critical Aspect
To Buy A House
What Should YOU
Expect Here?
SUMMARY
Of This PAGE
Your home financing is the most critical aspect to buy a house.
Nowadays no offer to buy a house will be accepted without proof of funds.
The vast majority of homebuyers will need a mortgage loan to buy their home.
Here are top elements needed to secure a mortgage: good credit score; low DTI, down payment funds or a DPA, proof of income (last two years), FHA insured Loan, VA loan guaranty & more
There are a few more critical aspects and we are going explore the most important ones with details on how they might affect you AND, still more import how you can handle them for ‘your home buying advantage!’
Just follow me here that we soon will get to know many more – each topic of most importance to attain your mortgage loan.
Building Good Credit
If you are among the most of us that will be financing the purchase of your home, we have a lot of ground to cover here.
It almost goes without saying, that to get a home mortgage loan, you must have an established good credit.
It is almost counterintuitive but you need to establish a credit record to tell the world that you exist and that you are ‘credit worthy!’
You need some kind of purchase that you have made on credit with companies that report to credit bureaus.
There are three major credit bureaus: Equifax®, Transunion® and Experian®.
These are the three which dominate the financing market and certainly dictate if you will attain a mortgage loan OR not!
If you are thinking about buying a house, you need to have had established a good credit record in these credit bureaus beforehand.
OR start one now! Here are some home buzz tips on how to start your credit or rebuild it when things have gone awry
How To Start Your Credit Records
At the beginning, when you have no credit, most the time you will be declined credit because …well, because you have no ‘credit record!’ And that’s is a fact! HUMBUG!
You are denied credit because the lenders do not have anything to evaluate you credit worthiness. You do not have a ‘credit record.’
You are unknown to the world of credit.
The same is true for those who, at one point, had credit but lost because your finance life went off the tracks because of bankruptcy or foreclosure.
No shame! Bad things happen to good people: There have been at least two US Presidents who were bankrupt!
Pick up your chin and let’s restart again - there is a brand new house for you at the end of the tunnel for you to enjoy with your family!
So, here are some ideas that can get you started or rebuild your credit journey.
Gas stations usually are very accommodating to extend credit to people who are beginning their credit journey.
Use it to fuel and save that cash to pay the bill when becomes due – pay it in full, every time!
HOME BUZZ TIP: Here’s one of my most valuable tips that I have for anybody willing to start a credit record.
It is to use a ‘well established tactic’ of Secured Line Credit!
Yet it is not well known, neither it is not as often used as it should.
There are many credit card companies which cater to those beginning the credit record journey.
It is called ‘secure line of credit’ because you send them a certain amount of money and they give you credit card up to that amount.
Now, mind you that these are nationally known credit card companies with impeccable reputation. Which is virtually zero possibility of you losing your money.
You can use the card anywhere and it looks the same as any other credit card. No one will ever know the difference!
Some companies will accept start as low as $250.00. But definitely with $500 there are to choose from.
In any case the card company start to report to the credit bureaus as soon as they receive your first payment.
After three consecutive – on time, please – payments, it is time for you to apply for credit to a major chain.
Do NOT apply to any company which is not a national brand!
Probably 3 of those will suffice. Apply for one and use it for a small purchase. Make the first payment and wait another 30 days and apply for the second …and so on.
HOME BUZZ TIP: Debt-to-credit rule
There is also a rule called ‘debt-to-credit’ ratio which says that you should not use more than 30% of a given line of credit. If you go beyond that your ‘credit scores’ will suffer.
So, do respect that rule – both now AND in the future.
That $500 line of credit would afford you no more than $150 max use every month… the $250 no more than $80!
You have to start somewhere!
However, I will be completely surprised if around the 120 days mark after your first payment, you do not start to receive offers to apply to major credit cards …UNSECURED!!!
Choose the two which are promising and or offer the highest (unsecured!!!) line of credit.
HOME BUZZ TIP: Do NOT apply to more than 2 (okay, three) and even so, always wait until the previous once start to report to the credit bureaus …around 60 to 90 days or so!
Congratulations! Now you are known to world of credit!
…And you are well in your way to build your credit record
HOME BUZZ TIP: AND please always follow this ‘rule:’ ‘pay early; worst case scenario, on time!’
HOME BUZZ TIP: By way theses tips also apply to those who are stating over after a hardship period – like after foreclosure and or bankruptcy.
Best of luck in building your good credit records!
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Types of Line Of Credit
A good credit is so recognized with a mix of line of trades plus when it is seasoned by the time – the longer you have a line of credit the better it is in the eyes of the mortgage lender when it is time for you to apply for a mortgage loan.
You need to have established credit with a couple (or more) major retailers and at least a couple of credit cards
If you have ever bought a car from a dealer who reports to the credit bureaus you are have a great advantage here.
Proven: (1) Payments have been done timely (2) The number of payments still left do NOT exceed nine (9)
HOME BUZZ TIP: Those small mom-and-pop car dealers – buy-here-pay-here type - ‘customarily’ do NOT report to the credit bureaus. Unfortunately!
Same thing as far as ‘source of income.’ If you are working for the same company for two years or longer that’s a good point in you favor.
If you are a self-employed person, the last two years tax returns will be necessary.
Please take a minute to write us a review: short, sweet, and to the point.
YOUR Opinion Does Matter!
Clearing Up The Confusion:
Credit Records Vs Credit Scores
Please do not mistake “Credit Records” with “Credit Scores:”
Credit records: is a file with all entries about your credit activities on each of the 3 big credit bureaus.
I venture to say that the ‘credit records’ are the ingredients that will make your credit scores sauce!
All lenders of some significance in your life will report your behavior in using the ‘lines of credit’ afforded to you.
Cellular phone companies, department stores, gas station – if you happen to use their cards, most certainly credit cards, banks and credit union will report (mostly, and more so) if you careless with your checks…
A bounced check here and there will be just a hiccup. However, many during the year will definitely be a red flag in your credit records.
I once worked with a young entrepreneur making a fabulous amount of money (over $200,000!) We could not move on the home purchase because he had several parking tickets in the city of Atlanta which he refused to pay and the city put liens on those tickets…
each one for less than $20! Phew!
Time heals everything. It certainly is true with your credit records. Usually after 90 days most lender will be forgiven …they might charge you a higher interest rate, but after payment, whatever issue you had – by and in large, it will not be cause for a mortgage loan denial.
Some entries can stay there in your credit records for quite some time. Foreclosure and bankruptcy chief amongst them.
Home Buzz Tip: A foreclosure stays in your records for seven years; a bankruptcy goes up to 10 years!
During this time, most lenders will NOT extend financing for you to buy another home for a good while.
However, some lenders will start easing restriction after the first year. More so after 3 years for foreclosure and 4 years for a bankruptcy.
Home Buzz Tip: Another import thing to note is that your credit scores will plumet severely.
Credit scores drop by bankruptcy will depend where they were before you filed.
It can be somewhere from 130 to 240 points!
Nobody has ever confirmed it to me but I live under the impression that they ‘intentionally want you credit scores well below 600 after you are discharged. ☹
Home Buzz Tip: Credit is always a function of time… Some three years after foreclosure and one to four years after bankruptcy there will be lenders who are willing to assist your come back to home ownership again.
Albeit you most certainly will be charged a higher interest rate.
So, it is of mighty important that you monitor your credit records careful and diligently.
It is of your highest interest!
FREE Credit Records
Thanks To The Fair Credit Act
Nowadays I am really skeptical about anything I encounter publicized as “FREE.’
I want to know two things:
(1) what’s the catch?
(2) Is it of any value for me?
So, you are excused if you have any of these two questions here too.
Well, finally our government came up with something that is both (1) really FREE and (2) It is extremely valuable to anyone who uses credit all across the Nation!
Congress passed the Fair Credit Act in 1970 and it went in affect in 1971.
One of the provisions is that anyone in the USA has the right to receive a FREE copy of their Credit Records – at least once a year.
Depending on the state that you live in some added additional copies for their constituents.
In Georgia, my home state, we can request a FREE copy of our credit records twice a year!
That’s good enough for me! Thank you very much!
Please click on this link to exercise your rights to attain a copy of your “Credit records” at least once a year – from each of the bureaus – for FREE!
Home Buzz Tip: Some of the bureaus are good in selling you ‘credit monitoring.’
Sign up at your leisure – but probably it will be an overkill!
Credit Scores
There is a proprietary algorithm formula invented by Fair-Isaac Company (FICO®). It is a rather secretive endeavor… But if they would reveal it, we all could use it for profit!
The formula considers several factors like the amount of your combined debt overall; how much you are using of your line of credits (debt-to-credit ratio); how long you’ve had the accounts; timely payments amongst other items
FICO® Scores are the results by applying the FICO® formula to your credit record in each of the credit bureaus.
And that’s your financial situation in one given moment in time: It can go up or it can go down - sometime in a matter of a day or two.
If you apply for credit in several venues at same time, your scores certainly will go down.
HOME BUZZ TIP: Exception made if you ‘shopping’ for a mortgage loan, you can apply to some 5 or 6 lenders in a space of 6 weeks or so. Lenders came to understand that you are shopping for ‘better rates and terms.’ So, they cut you a slack.
PRO HOME BUZZ EXAMPLE
A word for the wise: Buying a house is NOT an ‘impulse buying’ thing. Accordingly, during the year preceding your home purchase, please refrain from applying for credit of any sort!
I once worked with a buyer who was very much in the midst of buying a house when she took her fairly new car to dealer for a routine schedule maintenance.
She mentioned to a salesperson that her husband needed a new car too but she was in the process of buying a house.
The sales person asked to take l look on her credit AND “he” determined that her credit was good enough to buy a new car AND the house as well!
She walked away with new car for the hubby, alright!
…but the house went down the tubes!!! Sayonara! Good by!
Pro Home Buzz Tip: I mentioned above that even an ‘inquiry’ brings your credit scores down. So, I think that the ‘inquiry’ alone would have derailed her home purchase at time.
Home Buzz Tip: Immediately after a home purchase, your scores will go up AND she could have purchased that car with a lower percentage rate
Credit Scores Are “The Pulse”
Your credit scores are “the pulse” of your home buying financing process – you need to “take it” when it is in the upswing.
Which means you need to have a clean credit record, no liens, no delinquencies, no excessive bounced checks, not many late payments and that includes late rent payments.
Every credit application is reported to the credit bureaus AND those will bring your credit scores down.
Pay timely and use your credit cards within the +/- 30% (rule of debt-to-credit ratio) and your credit scores go up. Pay your car installments timely and your credit scores go up! …when you get there, pay your mortgage timely – and watch your credit scores soar!
Why Credit Scores Are Different
In Each Bureau
Also, please be aware that each of the credit bureaus will give different weight to different factors and therefore they will always vary …translation: “Your credit scores” will always have a “different score” for each of the bureaus…
Confused? It used to beat me too!
Until I learned that ‘not all lenders use all three credit bureaus all the time.’
Therefore, not all the bureaus have all the same credit information on you.
Consequently, when each of the bureaus apply the FICO® formula to your records in their files, it is bound to come up with different results.
But that is how the system works, do not lose sleep over the different scores.
For now, however, here is what is an important rule to know: To be in the ball game of your home buying financing process you will need 620 Middle credit score.
What Exactly Is Middle Credit Scores?
Given that each of the bureaus will give you a different score, home lenders will not use the highest nor will they consider the lowest… Which one is the winner? You guessed the one that is still left: let the middle score step to the plate!
Since circa April 2009 – the minimum middle credit scores required to attain home financing has been 620.
There are some mitigating factors – in extreme circumstances – that a lender might give you some “reprieve.” But I would not count much on it.
Down Payment
Unless you are a veteran using your DD214, OR you are buying your home via USDA loan program, you will need to come up with a percentage of your purchase price up front. That’s your down payment.
How much of the down payment will determined by the type of loan you will be using.
This is also mighty important in the home buying financing process – you most likely will need to have some reserve to put down – no less than 3.5 % of the purchase price, if both you and the property you intend to buy qualify for a FHA loan.
Please see more details FHA loans entry below.
HOME BUZZ TIPS:
Seasoning: by and in large, the money you are using will be scrutinized on how long it has been in your possession: It is called “seasoning.”
Funds must be under your name, or it has to proceed from assets you own for a while, before it is converted into cash.
Gift Funds For Down Payment: A onetime gift funds for down payment is acceptable.
Please inform your mortgage loan office early on the process so that can be smoothly arranged.
Down Payment Assistance (DPA)
All fifty states, counties, municipalities and indeed, sometimes just a small area of a city / county, may have some type of finance assistance to help you buy you home.
It does vary a lot from state to state. Try to inform yourself on what is available in your area.
Your home buying financing process does require some homework, creativity and diligence: With the right blend of these elements along with the money you have saved, the good credit you have built will go long ways in making your home ownership a realty!
There are $10,000s on home buying grants and down payment assistance (DPA) waiting for you just around the corner.
NYC Down Payment Assistance $100,000 - This is NOT a typo!
But don’t rush there as yet: For starters, the home prices are proportionally high to the grants; secondly I can guarantee that the waiting line is ‘deep!’
TYPES OF LOANS
Federal Housing Authority - FHA Loans
FHA Insured Mortgage Loans: This institution backs loans that will fall under their guidelines.
If both you and the home you are buying qualify, you can by the property with as little as 3.5 % down.
You may, and most certainly will, be required to purchase mortgage insurance (MI) up to point that you have built some equity in the home and you able to refinance it.
Used to be that FHA would let you lose when you paid 22% of the original loan.
It has changed, the only ones that can use that possibility are those who paid 10% down at the onset of the purchase.
These guidelines apply for any type of property: detached homes, condos and town home. These last two are put through additional scrutiny.
Most townhomes will qualify for an FHA loan; condos must be previously approved. I mean, the whole complex must be approved.
Veterans Administration – VA Mortgage Loans
If you, or your espouse, have served a certain length in any branch of the Armed Forces, you, most certainly, will qualify for a VA backed loan.
Under their guidelines they guarantee up to 25% of the purchase price. It is just fit that those brave men and women, who served our country are able to buy a home to call their own, with no money down and with no mortgage insurance premium (MIP)!
Conventional Mortgage Loan
Conventional mortgage loans are those made without any ‘insurance’ or ‘guaranty’ from the government.
They are usually stricter in their criteria to lend and also tend to require a higher percentage of down payment.
If you and/or the home you select to buy will not qualify for an FHA backing loan, the other alternative will be a “conventional” loan. You will then have to put 20% down payment.
At this amount of down payment, there is no mortgage insurance premium (MIP).
…In many, many cases the 20% down is a deal breaker.
5% Down Conventional Loans
I recently came across this new type of loan while working with a home buyer. (At least new to me)
It is ‘private’ (no government participation) and it requires mortgage insurance premium (MIP).
However, the premium is lower than what is charged for an FHA loan AND the MIP can be lifted after homebuyer pays some 22% OR comes to a combination of the payments made by homeowner plus the value increase of the home.
FHA used to be that way, but they longer lift the MIP for borrowers the 3.5% down programs.
It will require homeowners to refinance to a ‘conventional loan’ later.
Although homebuyers who put 10% down at moment of the purchase will be eligible to lift the MIP at some point.
Jumbo Mortgage Loans
A large property and/or in a high valued neighborhood will, naturally, require a larger loan. Any amount above $766,550 in 2024 is considered a “jumbo.”
Jumbo mortgage loans require a lot more scrutiny – which means applicant must have a very solid source of income and their credit scores must be high.
Make sure that you have all the home buying financing ducks in a row – I mean “docs.” 😊
Mortgage Interest Deduction [MID]
Home ownership has a lot of advantages, along with its liability, of course.
However, to my humble thinking, the best one is that of the interest payments that you make through the years, it is all, 100% deducted from your gross income tax.
Cash Buyers Lose
Mortgage Interest Deduction (MID)
If you have saved enough and/or in some other ways have enough money set aside to buy your home outright, with no need to finance it: Congratulations!
My humble hat goes off to you! Ways off!
In that case, you probably do not need most of this page about the home buying financing process – except, perhaps the paragraph on mortgage interest deduction (MID), as indicated immediately above.
You stand to lose truck loads of dollars for not being able to deduct any of the mortgage interest deduction that you would entitled - through the years! I would never buy a house for cash …not even if had to attain a ‘Jumbo Loan!’ the more interest you have to pay on your primary residence, the merrier!
Phew! Who said the home buying financing process was easy?!
And this is only the financial side of it! :-)
Now let’s move to other equally exciting Home Buzz!
Is there anything you still need
to know about which is not in this Home Financing page?
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