Loan Lessons
Credit-worthiness is Key
September 30, 2008
By Christianna McCausland
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A quick read of the business news pages these days is enough to make any potential homebuyer reach for the Pepto-Bismol. It might be a buyers’ market, but it’s not so easy anymore to get lenders to pony up the money for a home loan.
Bye bye, days of the 105 percent “we pay you” mortgage. Still, while some of the, uh, “creative” loan packages that led to the credit crunch are no longer available, home loans are still there for people with a good credit history. If you’re thinking of buying a home anytime soon, it’s important to qualify now — or, in industry parlance, to prequalify.
“Don’t assume you can’t get a loan,” says Eric Gates, president of Apex Home Loans in Bethesda and a certified residential mortgage specialist. “For people who are reasonably qualified, there is financing available that is reasonably easy to get.”
There’s no trick to qualifying for a loan. It all comes down to having a good credit score and the money for a down payment. Your credit score is a number that represents your credit-worthiness based on your credit history; lenders use it when determining how likely you are to repay your debts. Good credit will open doors and bring in lower interest rates, which is particularly important if you’re seeking a big mortgage. Technically it is still possible to get 100 percent financing, but you need an impeccable credit history and will likely pay a higher rate. (And it helps if the stars are in alignment.)
Although there are many ways to improve your credit score, you can start by not maxing out your credit cards, paying more than the minimum payment each month on your debt, and demonstrating that you are paying your current housing obligations on time.
You also need money to put down, usually between at least 3 percent and 5 percent (more is always better). Maryland just passed legislation that requires homebuyers to demonstrate that they have the funds to pay their monthly mortgage bill — so be prepared to show verifiable proof of your income. If you are self-employed, have your tax returns ready to prove what you make.
“The main thing everyone is looking at is, ‘Can you make your monthly payments?’” says Stacie Tomasello, a branch manager at Universal Trust Mortgage Corp., based in Columbia. She urges homebuyers calculating monthly expenses to think beyond the mortgage to include all bills — and to throw in a little extra for home repairs.
“Make sure the monthly payment you’re getting into is one you can afford,” Tomasello says. “If you’re buying a home that’s $500,000 but your income substantiates that you can really only afford $250,000, you need to make realistic expectations.”
April Moszer, 31, qualified for a loan in mid-March to buy a foreclosure property in Laurel. Far from anxious, she was delighted to get in on the buyers’ market.
“Prices had dropped and I had found this house that I was really excited about,” says Moszer, who sold her house in Glen Burnie to buy the new one with her boyfriend. Moszer’s good credit and her income — she is a budget analyst for the federal government and a MBA student — coupled with her boyfriend’s income helped her qualify for a loan on the $282,500 sale price. She put down 3 percent, received $5,000 worth of closing cost assistance from the seller, and qualified for a Federal Housing Administration loan at 5.25 percent. Even with the addition of private mortgage insurance, which is required when a loan exceeds 80 percent of the home’s purchase price, her rate stayed at around 6.25 percent.
The process was not without a few bumps. When Moszer and her boyfriend went on vacation, their income dropped — which showed up on their pay stubs. They each had to write an explanation for the trip. “Be organized,” Moszer emphasizes. “Make sure you’ve checked your credit score and you don’t have anything crazy lingering out there. Have all your paperwork — your W-2s, your pay slips — in order.
“Reconcile how much you have to put down with how much you can pay on a monthly basis,” she continues. “If you can’t pay that monthly amount, try your hardest to put more into principal so you can be comfortable month to month. If I have money in the bank just sitting there for a rainy day, that’s great, but isn’t every day kind of a rainy day?”
Even if you are not considering buying a home for a few months, there’s no time like the present to get your paperwork in order, talk to a mortgage broker about your finances and establish realistic expectations of what you can afford. With good credit and money for a down payment, homeownership is within reach.
How to Find a Broker
Two out of three homebuyers use a mortgage broker to find a loan. A broker can take the time to research loans and options that most homebuyers don’t have the time or expertise to find. But getting a good broker is like finding a good mechanic. Here are some tips:
- Visit the National Association of Mortgage Brokers web site (NAMB.org) for a listing of certified brokers and links to your regional association.
- Look for the Lending Seal of Approval, authorized by NAMB, at your broker.
- Make sure your broker is licensed.
- Check to see that you broker is listed with the Better Business Bureau.
- Ask for references and call them.
- Ask friends, family members and co-workers to recommend a broker they know and trust.
- Even though it is a down market, remember you are still the shopper and you must be comfortable with your broker.
- If a broker comes back with a loan that sounds too good to be true, it probably is. Get a second opinion before accepting the loan.
For a free annual credit report from the three major credit agencies, visit www.AnnualCreditReport.com.
