Home Buying Guide
Where do I start?
The best place to start, when you are thinking about buying a home, is finding a mortgage lender you feel comfortable talking to. They will be asking you a lot of questions and compiling a lot of data. Make sure this person is someone who is a member of their state mortgage lenders association. These are the companies, and loan officers, that are most likely to have the greatest understanding of current laws, regulations and new programs. They proscribe to a very high set of lending and ethics standards and are usually the best in the industry. Most people do not want to go to a doctor that is not board certified and a member of the association for their field of medicine; just like finding the right doctor you should be careful in choosing a mortgage lender. Be sure to find those who are members of their state mortgage lenders association. You can search the database on this site to find a member in Nevada.
Now, that you have chosen a loan officer, meet with that person and get to know them. When you make an appointment they will be give you a list of documents to bring with you (e.g. two months current bank statements, your W-2 for the last two years, paystubs covering the most current month, etc.). Gather all of this information for everyone who will be applying for the loan. Your lender cannot give you an honest opinion until they have all of this information so, be sure to bring it to your first appointment.
Once you have met with your loan officer they will tell you how much of a mortgage you qualify for. Until you have this number and until you have talked to a lender, do not go out and look for a house. Get your financing in line first, it will save a lot of headaches and heartaches in the home buying process. There is nothing worse than going out and finding the perfect house, only to be told you do not qualify for that price range. Or settling for a small house when really you qualified for a mansion. We cannot stress the importance enough that you need to see a mortgage lender first.
What are the lenders looking for?
When a lender looks at your credit report they are looking for a history of paying your bills on time. This applies to ALL of your obligations: your car payment, your credit cards, doctor bills, cable bill, etc. They all need to be paid by the due date to avoid showing a negative mark on your credit report. Your credit report will show a negative history, for the past seven years, for installment and revolving debt (installment = payments for cars, student loans, mortgages etc. An installment is a closed end loan, one in which you borrow a lump sum of money and then re-pay it over a defined period of time. Revolving debt is primarily credit card debt, it is a line of credit. You are granted X amount of money to use and as you pay-off the debt that money becomes available to you again). Utility bills (phone, cable, gas, electric, etc.) and doctor bills need to be paid on time so they will not be turned over to a collection agency. If a bill is turned over to collection it will then, most likely, appear on your credit report and will stay there even after it is paid.
The lender also wants to see that you can use credit wisely. This means they want to see that you have not maxed out all of your credit cards. It is best to pay off your cards monthly or at the very least not carry large sums of debt on your cards. If your credit cards are maxed out it will appear you are over-spending or perhaps even using your cards for day to day living expenses.
In addition to your credit report a lender is also going to be looking at your monthly bank statements. If your statements reflect excessive over-drafts (this applies to both checks or debit card purchases that have either been retuned for non-sufficient funds or have been paid from a line of credit the bank has issued to you, normally referred to as an over-draft line of credit). When you have an overdraft it creates a charge to you of $25 -$50. These charges can quickly diminish funds available for your monthly budget and leave you unable to pay your bills at the end of the month. Your bank statement will often show just how many overdrafts you have had in the past 12 months. If this has been a problem for you, be sure to get this under control before you apply for a mortgage. Also, know that you will often have to explain each and every one of these overdraft charges to the underwriter.
There are four credit bureaus but we will only talk about the three major bureaus right now. They are the three bureaus that matter in mortgage lending. The bureaus are: Experian, Trans Union and Equifax. You are allowed to get a copy of your credit report, for free, one time per year from each bureau. The bureaus have worked in conjunction with each other to make getting your annual free credit report as easy as possible. You only need to go to one website to order this report (it will actually be three individual reports but they are all ordered in one place). Simply go to Annual Credit Report, www.annualcreditreport.com and click on the red bar on the left side that says, Request Your Free Credit Report. You will then be taken to an order screen for each of the bureaus. It is recommended that you monitor your credit annually. If you notice something incorrect on your report there will be directions on the site direct you how to get the error fixed.
What if I have had credit problems in the past?
If you have had credit problems in the past it does not mean you will never be able to buy a house. The mortgage underwriter (the person who says “yes” or “no” to your request for a mortgage loan) understands that “bad-things-happen-to-good-people.” Our country went through a very tough economic time where many people lost their jobs and were unemployed for an extended period of time. The underwriters know this was an unprecedented time in our history and most people were not prepared for these long periods of unemployment. As a result many peoples credit suffered for a period of time. What the underwriter wants to see is that this was truly an isolated incident. They want to see that you have re-established credit and are back to paying your bills on time. If you had a problem in the past or are currently going through some problems, it’s ok, it happens, just get back on track as quickly as possible and pay the bills on time.
How to build good credit
Many people feel that the path to building good credit is overwhelming and impossible to achieve, especially if they have had any credit issues in the past. Of course, it is best to build good credit from the moment you receive your first credit card or get your first car loan. However, even if you have had problems paying your bills in the past, it is possible to recover and build good credit again. One of the biggest misconceptions is that you need to have a wallet full of credit cards with $50,000 credit limits to show you are a good credit risk. This is far from the truth, in fact, the ideal credit profile will consist of three credit cards with low balances and two installment loans. Many people have a car loan and a student loan so that part of the equation is taken care of. You can then open a few credit card accounts, preferably Visa and Mastercard and not store credit cards. The interest on store cards is much higher than a Visa or Mastercard, you can only use them in a particular store and the limits are very low. The problem with the low limits is how a card like this will affect your FICO score if you charge even a small amount on the card. As stated above, you do not need cards with high limits (such as a $50,000 VISA card) but store cards often have exceptionally low limits, as low as $200, and this can have a negative impact on your “debt-to-limit” ratio. See the section on FICO scores for more details.
To summarize, the best way to build good credit is to have three credit cards and two installment loans, and then pay ALL of your bills on time.
What is a FICO score?
Most people have heard the term FICO score (also referred to as a credit score) but it remains a mystery as to what this score really means or how it is calculated. Let’s first try to explain what it is in as few words as possible. It is a scoring model that has been developed over many years, to analyze a credit report and predict how likely a person is to repay a loan. There are hundreds of scoring models that different segments of the lending industry use to predict if a person is likely to repay their car loan, credit card debt, student loan or mortgage. When applying for an auto loan the bank will use a different model than when you are applying for a mortgage or a credit card. The score used in the mortgage industry is consistent with each mortgage lender; everyone the same scoring model.
The FICO score used by mortgage companies runs from approximately 350 points to 850 points, the higher the score the better. It takes time to raise your score so, be patient. Some of the factors that go into the calculation are based on the length of time your credit has been open so, it takes time to get to a score over 800 points. The rest of the factors that go into generating a score are based on your use of credit and your payment history. Keep your balances low, pay your bills on time, do not keep opening new cards and you can work your way up to a stellar score!
Where do I get a FICO score?
You hear the ads on T.V. all the time, go to this website or that website and, get your credit score for free. You can get your score for free but these scores are for educational purposes only. It is not the same score your mortgage lender will use when you apply for a loan. The scores from these websites also tend to be “feel-good” scores that are much higher than what your actual score, used for lending purposes, really is. It is common for someone to receive a score from a free site (this includes those reflected on your monthly credit card statement from some companies) that leads a person to believe they have a score well over 700. Unfortunately, when they apply for a mortgage the FICO model used in mortgage lending is only a 640 score. This is normal and you should not panic when this happens. Just remember the score you have been receiving for free is just to help you understand credit scoring. If you want to see a score that is very close the ones used in mortgage lending you will need to get your score from My FICO, www.myfico.com, this site is owned by the Fair Issac Corporation. This is not a free score but it is the only place to get a score that will be much more reflective of the score used in mortgage lending.