Your Credit Report
A very basic-and yet extremely important-factor in your ability to get a mortgage is your credit rating. It is not a secret that the best interest rates, as well as the most flexible loan terms, are available only to those with the strongest credit scores. Your credit history is one of the principal measures used by a lender to determine your interest rate. Not only will your monthly mortgage payment depend on your interest rate, but the amount you qualify to borrow will be affected by it as well. A higher interest rate translates into a higher payment and may reduce the loan amount for which you can quality,
You should be aware of what information the credit reporting agencies have regarding your financial situation by obtaining and reviewing copies of your credit report from the three main credit reporting agencies. (Even if you are not planning to purchase a home, you may want to consider obtaining and reviewing your credit reports on an annual basis to make sure the information reported is accurate, and to catch any discrepancies that could damage your credit.) By making this task one of the initial steps in your house-hunting venture, you may save yourself from unnecessary delays later in the purchasing process.
Credit Reporting Agencies
There are three major credit-reporting agencies: Equifax, Experian (formerly TRW), and Trans Union.
Rather than contacting only one of them, we strongly suggest that you request a credit report from all three. Since not all creditors report to all three agencies, it's not uncommon to find different information reported on each one. However, your goal in ordering all three credit reports is to make sure that all of the information stated on each report is accurate and correct.
You can request your credit report from these companies for a nominal fee. An annual report is free upon request for residents of Colorado, Georgia, Massachusetts, Maryland, New Jersey, and Vermont. Additionally, you may obtain a free personal credit report if you have been denied credit within the past 60 days.
Here is how to contact the credit reporting agencies:
Equifax Information Service Center
P.O. Box 740241
Atlanta, GA 30374-0241
You can also order your credit report from a secure section of the Equifax website at http://www.equifax.com.
Experian National Consumer Assistance Center
P.O. Box 2104, Allen, TX 75013-2104
You can print a credit report order form at http://www.experian.com.
Trans Union Corporation, Consumer Disclosure Center
P.O. Box 390
Springfield, PA 19064-0390
You can order a credit report online from Trans Union's website at
How much home can you buy?
Although it is early on in your plans to purchase, it is likely that you have wondered how much home you will be able to buy. The best way to determine your purchasing power is to speak with a ARC mortgage specialist 814-946-0857 opt 4. However, there are several rules of thumb that will give you an approximate idea of what you will be able to spend.
The first rule states that you can afford a home with a price tag that is 2.5 times your annual salary. For example, if your annual salary is $50,000, applying this formula would mean that you can probably shop for a house with a price up to $125,000. Calculate
The second rule says that you should be able to use 30% of your gross monthly income (before taxes and deductions) for a house payment. Assuming, for example, that your gross monthly income is $4,000 and using this formula as a guide, you may be able to comfortably afford a monthly payment of $1,200.
Upfront Fees and Expenses
Most homebuyers understand the concept of the down payment, but that is not the only upfront expense when purchasing a home. In addition to the down payment, money must be allotted for costs associated with the loan, which can range from 3-7% depending upon your lender, and closing costs. As the name implies, closing costs are paid at the time you close the transaction, otherwise known as settlement.
There are also 'hidden' costs that apply to moving in general. For instance, you may need to purchase major appliances, pay a mover or rent a moving truck, etc.
Once all of these costs are added up, you may become discouraged, thinking that you don't have the necessary funds to purchase the home you want. However, chances are good that there are other possible sources of funds available that you've not yet considered.
In addition to savings accounts and the proceeds from a home you already own, there are other less obvious sources of funding as well. These include:
Home Equity Loan - Your parents or other family members may have a considerable amount of equity built up in their own home that they were planning to borrow against in order to gift money to you for your upcoming home purchase.
Life Insurance - If you have a cash value policy, it may have accumulated an adequate amount of "available" funds from which you can borrow. More often than not, the interest rates on this type of loan are very favorable.
Stocks and Bonds - If you do not wish to sell your portfolio or feel this is an inappropriate market in which to do so, then perhaps you can use it as a form of collateral.
Company Profit Sharing or Savings Plan - Check with your employer to see about the possibility of withdrawing or borrowing from what you have in your account(s).
Retirement Savings Plan (401k) - If your employer offers this type of plan in place, inquire about the possibility of withdrawing or borrowing from this account as well.
If the above suggestions do not apply to you, there are still other possibilities:
Mortgage Insurance - Purchasing this form of insurance (usually through the lender) can reduce the down payment required. Private Mortgage Insurance (PMI) protects the lender in case of default and allows for an approval of a larger loan amount.
First-time Buyer Financing - If you have not held title to real estate in the past three years, you could qualify as a first-time buyer, which could mean special financing from your state or local housing agency. This usually means a smaller down payment or a lower interest rate, and in some cases both.
VA Loans - If you qualify for this loan type, many times you can get financing with "zero down."
Determining your target price for a house is dependent upon the financing terms available to you as well as the amount you have available for a down payment. The monthly payment usually consists of principal with interest, plus taxes and insurance, also known as P.I.T.I. Some lenders, however, also may require mortgage insurance when the down payment is less than 20%. When you consider these added expenses, you'll soon realize the term "affordability" means more than just the price of the house itself.
The the next step is to get preapproved for a loan. Pre-approval is not the same as pre-qualification. What's the difference between pre-qualification and pre-approval? In the world of real estate, the terms "prequalification" and "pre-approval" are often used interchangeably. But they have different meanings.
Pre-qualification is an estimate of how much you can afford in a mortgage payment. It is based upon the information provided by the borrower, which will later be subject to the approval process and additional information, including a credit report, appraisal, and income verification. The information provided by the borrower is not routinely verified as part of the pre-qualification. process.
Pre-approval, on the other hand, is a firmer commitment on behalf of the mortgage company. Obtaining pre-approval is a more formal process that includes a credit check and employment verification. During a pre-approval, ARC will do all the work of a full approval except for the appraisal and title search. We will obtain a credit report to verify monthly payments on installment loans and credit cards, and to check payment history on these loans.
If you've been pre-qualified for a loan, you can shop for a house with more certainty and less anxiety. Additionally, the seller is likely to view you as a more capable buyer. This can give you an advantage as a buyer in the marketplace, especially when the seller is considering multiple offers.
However, neither a pre-approval nor a pre-qualification means you are guaranteed a mortgage. ARC still needs to look at property appraisals, verify information, and, in many cases, re-check credit before agreeing to make a loan. Still, it's worthwhile to obtain pre-approval at the beginning of the buying process to know how much home you can afford and to avoid the headaches and embarrassment of not qualifying for a home you have under contract.
If you intend to obtain a pre-qualification, you should begin rounding up information that ARC will need in order to process the loan. The checklist on the next few pages may be useful to you as you compile this information.
- Copy of purchase sales contract or,
Offer to purchase and all addenda, signed by the buyer and seller.
- Property information listing sheet, or
Multiple listing service sheet.
- W2 forms
From the previous two years.
- Pay stubs
From the most recent month.
- Employment history
Include name and address of employer(s) for the last two years, dates of employment, and income. Provide explanation of recent gaps in employment, if one month or longer.
- Social security number(s)
For both borrower and co-borrower(s).
- Bank statements for checking and savings accounts
From the past three months, include names, addresses, account numbers, and balances of depository institutions (banks, credit unions, and savings banks); all pages of all statements are needed, even if blank.
- Credit information
For each open credit card account, provide the creditor name, address, account number, payment amount, and current balance; include letter of explanation for any credit problems.
- Tax returns
Provide previous two years' personal federal income tax returns and all schedules if you are self-employed; employed in a family business; a tradesman; receiving all or a large part of income from bonus, commission, partnership, or trust income; own rental property; or have income from an otherwise non-verifiable source, such as corporate ownership, installment sales, or tips.
- Stocks, bonds, and investment accounts
If these are being used for your house purchase, you must supply the name and address of broker and previous three months' statements or copies of the stock certificates. A list of serial numbers and issue dates may be acceptable for verifying bonds. All pages of all statements are needed, even if blank.
- IRA/Retirement plan
Approximate value of vested interest and copy of most recent statement.
- Life insurance policies
Name of insurance company, policy number, face amount, and approximate cash value of each policy.
- Automobiles owned
Make and year of each automobile owned and current market value. (Evidence of clear title may be required if owned free and clear).
- Gift letters
If part of your down payment or closing costs is from a gift, a signed letter is needed from the donor to verify that the borrower is not required to repay the funds. Your lender may give you a copy of a form letter that you can use. Always talk to your lender prior to the movement of gift funds.
- Other income
Documentation of the income received for the past 12months if such income is used to qualify (for example, interest or dividend income).
And, if you are:
Provide landlord's name, address, and phone number and/or previous 12-month rental payment history (canceled checks and rent receipts are acceptable).
Provide previous two years' and current year-to-date Profit and Loss Statement and Balance Sheet.
- Divorced or separated
Provide a copy of divorce decree or maintenance agreement, along with any amendments and a 12-month payment history of alimony/child support payments, if payments are provided or received and are needed to qualify. Be sure to provide either check stubs or copies of both the front and back of the checks.
- A student
If you do not have two years of employment history due to attending school, then school transcripts or your diploma will be needed.
- The owner of rental properties
Provide federal tax returns (signed), along with a schedule of all real estate owned and the account number and address of the mortgage company that holds the properties,
In addition, if the real estate owned is:
- Currently rented - Provide a copy of the current lease or rental agreement.
- Listed for sale - Provide a copy of the listing agreement.
- Sold, but not closed - Provide a copy of the sales contract and escrow number.
- Sold, closed and proceeds will be used for down payment- Provide a copy of the HUD-I Uniform Settlement Statement.