Above is a chart that shows how the credit bureaus value the various parts of your credit in order to determine your score. Source: Fair Isaac Corp.

1. Payment History - Your history of making payments on time helps to increase your credit score the most. Typically, the last 12 months of payment history is much more important than any other history before the last 12 months. On top of that, it is more important to keep the mortgage payments on time than a credit card or energy bill.

2. Amounts Owed - This is the total balances of all revolving accounts over the total credit limits that are reporting. Revolving accounts are credit cards and personal lines of credit that you can draw on at any time and is an unsecured loan. A mortgage is a secured loan to your property and you are not allowed to used the remaining money you have paid down over time.

Example: Lets say you have 3 credit cards. Each of the three cards has a balance of $500, which gives you a total balance of $1500 for all three. Now, the credit limits of all three cards are $1500, so the total of all your limits is $4500. Take the total balance, $500, over the total limits, $4500, and your percentage of usage is 33%. It is said that you shouldn’t exceed 30% otherwise your score will start to drop, because the credit bureaus will thing you are charging more than you can handle.

Here is another thing to keep in mind. Lets say you transferred one of the $500 balances to another card and closed that card. You still have a total amount of $1500, but your total limit is $3000, since you only have two cards now. Take the $1500 over $3000 and your percentage is now 50%! There is nothing wrong with transferring a high interest rate balance to a lesser rate card, but don’t close the card where you transferred the money from. Keep the card open, put it somewhere where you won’t use it. If the credit card company gives you a hard time about not using the account after a certain period of time, then just charge something small once in awhile and keep the balance low, if not at $0.

3. Length of Credit History - This one is pretty self explanatory. The longer you have credit history the better, especially on a couple of credit cards. Opening a new account just to take the 0% interest for a short period of time and then closing it is going to hurt the part of “length of credit history”. To help offset this, you want to keep at least 2 credit cards open for a long period of time. 2 or more years is a good history to have. The bureaus won’t even grade a new account if it doesn’t have at least 6 months of payment history. For those people that are new to credit, like a college student, it is best to start at least one account and keep the balance low and payment history on time. By the time a year or two passes, he or she will have built up a decent credit history, even with one account.

These are also the types of things to keep in mind when trying to rebuild your credit for a mortgage refinance or buying a new home. If you are looking to refinance to get out of an adjustable rate or just trying to get a better interest rate, take the time to use this advice and get the credit scores as high as possible. This way you will save more money every month, along with less interest over the life of the loan.

If you liked this post, you should read Understand The Simple Steps To Build Credit Scores.

Question 1. What do lenders look for when I apply for a mortgage?

Answer: There are four things that lenders look for when deciding on approving your loan:

• Credit – They are looking for good established credit history. A credit report inquiry will be obtained from the 3 major credit bureaus. Don’t worry if you don’t have the best credit history, this will usually not just out right deny your loan.
• Debt to Income Ratio – The total amount of gross monthly income over the total amount of monthly payments. A good rule of thumb to follow is not to exceed 45% as your total ratio.
• Assets – Any type of liquid assets will help to strength your loan application. Things like a 401k, stocks, savings, etc. can be used as assets to support your approval.
• Property – Whether it is a home you plan on living in or buying as an investment property, this can have a difference in the interest rate. Also, the number of units like a duplex or 4 unit can have a difference in your approval.

Question 2: Do I need a down payment?

Answer: No. There are still programs that allow you to finance 100% of the purchase price. Having a down payment does help in getting the best interest rate, but it is not necessary.

Question 3: What if I don’t have the best credit?

Answer: Not having the best credit doesn’t necessarily mean you will never be approved for financing. Many times someone who has a few late payments in the past or extra debt and they will still be approved. There are government first time home buyer loan programs that approve bad credit history everyday!

Question 4: What are the closing costs?

Answer: Closing costs can vary with different loan programs and approvals. Typically, you can expect to pay the following:

• Lender Fee – This is a fee from the lender for underwriting the loan.
• Appraisal Fee – An appraisal is required to obtain value of the home.
• Title Fees – A title company is used to obtain a lenders policy for the lender and handle the closing of the loan.
• Pre-paids – This is the escrow account (money set aside for property taxes and homeowners insurance) and interest paid through the rest of the month, depending on when your closing date is.

Here in the state of Wisconsin, you can anticipate to pay $1500 to $2000 in total closing costs.

Question 5: How long does the loan process take?

Answer: On average, the entire process takes a total of 2 weeks. Here is a good breakdown:

• Loan Application – A standard application is taken to gather credit, income, employment, assets, etc. (1 day)
• Appraisal – Once there is an accepted offer on the home, the appraiser is scheduled to appraise the home. (3-5 days)
• Underwriting – Once the loan application, personal documents, and appraisal is gather, it is submitted to underwriting for the underwriter to verify all documentation. (2-7 days)
• Closing – Once the loan is completely clear and ready to close, the closing date and time is scheduled with the title company. (1 day)

For additional advice as a first time home buyer, learn more here.

There are other questions that can be answered and don’t hesitate to ask them! Make sure you fully understand the process and feel comfortable with the financing you can obtain. I do make sure all my first time home buyers get all their questions answered, because I know the feeling…I was once a first time home buyer!

It seems with this whole credit crisis lately, people are afraid if they have “bad” credit they cannot be approved for a mortgage loan. Especially, the current home owners who are in an adjustable rate mortgage and their payment is about to increase.

In a nutshell, the FHA (Federal Housing Administration) loan is insured by the federal government for the purpose of helping lower income and less than perfect credit borrowers qualify for a mortgage loan. It is most known to help first time home buyers that have little to no money down when buying a home. Also, many people don’t realize that even someone with a middle 500 credit scores can be approved!

Here is a government website link.

Below I’ve listed the benefits an FHA loan has for the first time home buyer and the existing home owner trying to refinance:

FHA Benefits For First Time Home Buyer & Existing Home Owners That Want to Refinance:

• Little or no money down for the down payment.
• You don’t need much credit history. Example: a college student that doesn’t have bad credit, but just minimal credit history.
• There is no minimum credit score to qualify.
• Low interest rates that can compare to regular rates people get with good credit!
• Lower PMI (private mortgage insurance) than your standard mortgage insurance someone would pay with less than 20% as a down payment.
• If you wanted to buy a home and use the equity to remodel the home right away, an FHA loan is also the best option for that.

So, if you know someone having trouble financing their first mortgage or refinancing their existing mortgage, have them contact me. Keep in mind not all banks and mortgage companies are licensed to do FHA loans. This may be the reason another company couldn’t help out.

“Don’t say I never gave you anything…”

I have a varity of calculators you can use for comparing different payments, to figuring out of paying points makes sense for you.

Click here to access my calculators for free.

Now, if you wake up in a cold sweat at 3am and wonder if that home you thought about buying is affordable, you can find out at any time of any day!

Enjoy!

Without going into to much detail, I’m going to explain in my opinion why right now is a great time to buy a home.

You have a combination of two things going on here:

1. Interest rates are still at a historic low. Here is a link compiled by Freddie Mac (Freddie Mac is one of the largest players that buys mortgages in the secondary market) showing the history of the 30 year fix rate. http://www.freddiemac.com/pmms/pmms30.htm

Today’s rates were around 5.5% on a 30 year fixed mortgage. As you can see from the link above that today’s rates are hovering around an all time low still. It’s really cheap to borrow money to buy a home. Keep in mind, the rate I mentioned above is only offered to those who qualify.

2. Home prices have dropped and are continuing to drop in some areas. Everyone that either owns a home or is in the market to buy a home knows about this. It’s a buyers market. Along with depreciated home prices, you have current owners that may be in a situation where they need to sell their home today! This gives you, the buyer, leverage to perhaps get a better price on the already low priced home. Keep in mind, the market will have it’s turn. When? I wish I had that crystal ball, but I can talk more about that in a future post. I just hate to see people wait to long to get the best of the best deal and then someone snatches up the home of their dreams.

With the combination of these two factors alone, buying a home at the present time is a great deal and investment for anyone.