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If you are a first time home buyer,you have no doubt come across the fact that your credit score is one of the most important factors regarding your mortgage options. With the way this country revolves around money and finances, you would think that understanding the credit scoring model would be required education. Instead year-after-year we see the same ignorance towards credit.
The basics for credit need to be understood by all. Even those with great credit scores need some background on understanding the credit scoring model.
Credit scores range from 350 - 850. The higher the credit score the better. The majority of mortgage programs today require a score of 620 or better. Some mortgage programs will allow scores below a 620 credit score, but these are limited and may not be the programs you need. Ideally you want as many options as possible, and the higher the credit score the more mortgage options you will have.
Credit scores do not always relate to lower or higher interest rates. For instance, if you choose to use an FHA mortgage to buy a home, the rate will be the same if you have a 720 or an 820 credit score. Most lenders will also give you the same or very close rate with a 620 credit score.
A conventional loan on the other hand requires more money down, has stricter guidelines, and has several price and/or rate increases depending on the credit score. A low credit score when utilizing a conventional loan can very quickly become expensive because of increased rates and costs. That is if you can even utilize a conventional loan. Many people are currently priced out of the "conventional loan" market due to their credit scores.
Mortgage insuranceis another credit related mortgage necessity. Mortgage insurance is required on a conventional loan with less than 20% down payment, and depending on one's credit score, even though a conventional loan may be a possible option, if there is no mortgage insurance company that will offer you insurance coverage because of a lower credit score, you can not use a conventional loan. Credit scores really can rule the day.
The good thing is that FHA loans are often there to save the day and offer great rates and low fees.
Now that we understand some of the ways that a credit score can determine what options are available for mortgage financing, it is now up to you to take about an hour to read up on the credit scoring model and how to obtain and maintain a great credit score.
Don't leave this important aspect of your life a mystery. A few minutes of education here will serve your life finances well, and long term will save you thousands and make a big difference in your life and the life of your family.
Additional articles for a better understanding of credit scores and the credit scoring model
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In this current credit tightening market, there are still some options out there for financing a home mortgage with a credit score below 620. In case you are not aware, 620 is the current magic number (cut off) for the majority of loan options available today.* But not all loans are created the same!
As an example, one of the options still available today for credit scores below 620 are the NJ first time home buyer mortgage programs. Last week we closed a purchase transaction where the buyer had a 597 FICO score. That is not a typo ... 5-9-7.
There are still some mortgage programs out there that can be approved through an automated system with lower credit scores. Even where an automated (computer generated) approval is unavailable, a buyer with a lower credit score can still be approved as a manually underwritten loan. This is where an underwriter crunches their own numbers, and digs into the file. You know, the way they did it before the computers and Internet took over. If the file is solid you may be approved.
What would be considered a solid borrower or a strong file? Here are some examples:
You might think of it this way; Would you want to lend money to you? Are you a bit over extended? Is the underwriter going to look at this and say, "I'd be scared if I was in this position and buying a home?" Are you familiar with making a rent payment and have you been consistently on time? These questions will help you understand how an underwriter may think. As well as what you may want to think about.
Even if your scores are a bit lower than where they should be, a little education and a little tweaking of your credit profile could give you the boost in a credit score to make things happen. Getting a credit score boost of 20-30 points typically isn't too difficult. And a higher increase may be obtainable as well, depending on your credit profile. Just make sure you are working with a lender that knows the credit scoring model inside-and-out before you take their advice!!
There is no doubt that the credit markets have tightened over the last few years. In some cases a little too much. But not all is lost. If you find yourself or someone you know in a tough situation, find a local expert to help you out. The reality is that not everyone will qualify, but there is no doubt that some more would qualify if they knew the options were even available - somewhere.
*Even when mortgage guidelines don't have specific credit score requirements, there may be something called "lender overlays". These are additional restrictions on top of the basic guidelines and can vary among lenders. For this reason at times one lender have more flexible guidelines than another one down the street.
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The first and most important part of being a first time home buyer is to get your ducks in order from the beginning, and that is by getting pre-approved before doing anything else. Getting a knowledgeable loan officer to pre-approve you shouldn't take long. The initial conversation only takes about 10 - 15 minutes. Expect your loan officer to take 24-48 hours to complete a pre-approval. Some situations require (literally) hours of a loan officer's time to complete a pre-approval.
It is important that you are clear, honest, and don't hide anything regarding your income, assets, credit, or anything else regarding your finances. Keep in mind that the loan officer is your friend. Your loan officer does not ultimately approve your loan and offer a commitment to lend you the money. An underwriter does that. The loan officer is there to help you structure your loan; To create the best financing for your situation, to make you aware of your options, and to help you navigate together to settlement.
Be forewarned: Going onto a website and plugging in your income, assets, and some other minor info is NOT the same as having a conversation with a knowledgeable loan officer. Completing a form like this on the Internet may be what some consider a pre-qualification. This is typically a worthless analysis and has only very minor helpfulness for you in determining your potential approval.
A pre-approval will help you with;
A pre-approval should't cost you anything upfront. However, expect to start paying fees once your loan has to be processed.
Your initial mortgage pre-approval conversation will cover your income, assets, credit, work history, and of course what you are looking to accomplish as a first time home buyer. Once you speak with your lender you should start to gather the necessary documentation needed for your approval. A loan officer may issue you a pre-approval without reviewing your documents, however you run the risk of wasting time and money if anything different or out of the ordinary comes up after a review of the supporting documentation.
Basic documents needed
Other documents that may be needed:
Documents needed once you find a home and an offer is accepted
Your pre-approval should be updated once a home is found that you would like to put an offer in on. Keep in mind that credit reports are only valid for about 120 days. If it takes you a few months to find a home, your credit will need to be pulled again to allow it to be valid through the settlement date. Therefore, be very careful to do everything possible to keep your credit score as high as possible. A good loan officer will give you sound advice on credit scoring, but BE SURE to know the rules for yourself. This can not be overstated.
Lastly, a pre-approval is based on a monthly payment, not just a purchase price. So a cheaper home with higher taxes doesn't guarantee that you will qualify. This will have to be reviewed by your loan officer, so keep in constant contact with your loan officer to ensure your success.
Be sure to visit the next installment in the Gloucester County, NJ First Time Home Buyer Series.
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It is possible!! Steve Kappre at Treasury Mortgage had the first "Tax Prefund Mortgage Program"settle last Monday. It was a seemless transaction where the buyers utilized $5,000 of the (up to) $8,000 tax credit the government is currently offered to first time home buyers who close before December 1st of 2009.
When you apply for your mortgage as a first time home buyer let your lender know that you would like to utilize a portion of the tax credit NOW to purchase your first home. If the lender says it isn't possible than RUN THE OTHER WAY!! What they may really be saying is either they don't offer the program, or there is a good chance they don't even know the option exists. Certainly not all mortgage lenders are made the same, nor have access to the same programs.
When your loan is approved it is approved with the designation of the"Prefund" program. You can use this $5,000 towards either your down payment or your closing costs (or both). The first time home buyer prefund program can be used under the umbrella of Conventional, FHA, VA, or USDA (100%) guidelines.
There are times when one option will allow an approval where another option will not. Your loan officer/mortgage lender should be able to advise you of what direction to take and why that direction is in your best interest. The interest rates for such programs are right in line with other conventional, FHA, VA, or USDA rates.
There really isn't a better time to consider buying a home. Take the time to educate yourself and put all the cards on the table. Below is a few other articles that may help you better understand first time home buyer options.
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Call direct - 856.419.3561 - Specializing in First-Time Home Buyer Mortgage Loans and down payment assistance grants for Gloucester, Camden, and Salem County, NJ and the surrounding areas.
One of Steve's primary focuses is to work with First-Time Buyers. Steve knows the fears and concerns that come with someone just starting out in life, and his business has focused on first time buyer mortgages and grants for years. It is important that first time home buyers understand all of their options such as the specific mortgages currently available, home buyer grants, seller concessions, the credit scoring model, tax credits and more. It is also important to understand how these options can all be used together to create a successful home purchase.
Some of the first time home buyer options are;
Steve has extensive knowledge regarding credit restoration, and has trained for the specific occupation of a credit restoration specialist. The credit advice that is offered, although very valuable, is free to mortgage clients. Check out some of the articles Steve has written on understanding the credit scoring model and how to improve your credit scores.
Graduate: Certified Mortgage Planning Specialist Institute(CMPS). To learn more about CMPS, check them out at http://www.cmpsinstitute.org/
Specialty programs
"I am very grateful to you for taking the time to help me (fix my credit) even though I am doing the work. The fact that you have laid out the steps for me to follow is the best thing that anyone has ever done for me. It is easier to understand now what I need to do to get to where I need to be. Before reading this and talking to you, all I honestly knew was that as long as I paid my bills on time and got them under the limits my score would go up. Having the whole equation makes it so much easier. Thanks again!" - H.S.
"Thank you again for all of your help, you will be highly recommended to all my
colleagues"
- D. B.
Good service is hard to find, and I believe that your firm has really done an outstanding
job. Your response time is outstanding, your staff is educated and courteous and that
alone is a big deal"
- I. L.
"Steve, thank you again for all of your help. You were great ... and I appreciate
everything."
- S. J.
"Steve, you have been great and have always been willing to answer my calls and
questions. I think that your customer service has been top notch and have no
complaints."
- T. F.
"Thanks. You're the best"
- M. S.
"Thanks for the info ... I knew I could count on you!"
- P. T.
"Does your company send out a survey on the quality of your service we have received
because I would really like to fill a nice one out for a change!:)"
- D. D.
"I have given your name out to a couple of friends ... hope you don't mind"
- K. O.
This information is provided to assist Real Estate Professionals and is not intended as an advertisement to extend Consumer Credit as defined by Section 226.2 of Regulation Z. Quoted Interest Rates, Fees, and Programs are all subject to change without notice and are subject to errors, omissions, changes, and/or withdraw at any time.
ActiveRain Corp. is not responsible for the accuracy of the site's content (which is written by members of the ActiveRain Real Estate Network) and does not endorse the views of the real estate agents, mortgage brokers, and others listed here.
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