People often wonder about how the loan process works, and worry if they will qualify.  The process, while it may seem overwhelming if you don’t work in it every day, is really quite simple and can be broken down into 4 critical tests.  We will give you a brief overview of the process, give you some tips for making the process easier, and would love to sit down with you personally to answer any questions we may not have answered.

Loan Approval Test 1:  Credit

Credit seems like it would be easy to determine because the credit bureaus offers credit scores.  Most everyone knows this.  But one of the challenges sometimes is that the credit score people get from a credit bureau report is somewhat of a “generic” credit score, and tends to be higher than the mortgage credit score.  So, many times people will say they have a credit score of 900, where in the mortgage industry the top credit score is 850.  It is really best to go to a mortgage professional to get a true account of your mortgage credit score and to pre-qualify you for a loan.

A credit score is determined by a lot a variables.  The way we like to look at credit scoring is like a big black box that data is fed into.  No one knows EXACTLY how scores are determined, but we have a pretty good idea of what impacts it; How you’ve paid your bills, the amount of credit you have outstanding, who are your creditors, the length of time you have had credit, and other variables all help determine your score.  Your score is just a statistical predictor of your probability of making your mortgage payment as agreed.

Credit scores are used in a lot of different applications and people are often concerned that the pulling of their credit score drives their credit down. Part of this is correct; each time it is pulled for a “specific purpose” it drives your score down about 1 to 1 ½ points.  However, when we say a “specific purpose” what we mean is that if you are say, buying a car, and you go to 10 dealerships and they ALL pull your credit, it only counts as 1 activity on your credit report.  So, in the case of getting a home mortgage, if you were to go to a second mortgage lender, it wouldn’t impact your score further, and doing your homework and due diligence could save you money in the long run.  At Wyngarden Lending we would love to give you more information about your loan options.

Things have changed quite a bit over the last year.  While it used to be that a credit score of 580 was enough for an FHA loan, that score now needs to be 620-640.

Credit scores for a conventional loan need to be 660-680.  As your credit score goes up, the amount you pay in interest goes down.  So, having a good credit score is very important.  See the section below for 3 easy ways to improve your credit score.

Loan Approval Test 2:  Down Payment

The minimum down payment that is available right now is with an FHA loan.  It is 3.5% of the purchase price, if the seller is willing to pay for your closing costs (appraisal, credit report, title work, etc.), and for your pre-paids (first years insurance, homeowners associations, real estate taxes).  Often times, sellers are willing to pay for this.  So, if a seller pays for all of the closing costs and all of the pre-paids, then you can truly get into a home with just 3.5% down.  Plus, with an FHA loan, that 3.5% down can come in the form of a gift from a family member, which can be a really wonderful situation!

If you are doing a conventional loan you need to have a minimum of 5% to put down.  With this type of down payment you will need to pay mortgage insurance.  This is insurance that protects the investor in case you default on the loan.  The time when a conventional loan really shines over an FHA loan is when you are able to put 20% down.  Then you don’t need to pay for mortgage insurance, because the lender is covered for a portion of their cost if you were to default in this case.

Loan Approval Test 3:  Income

A lender looks at your income in the following way: Is there a history of income and a probability that it will continue into the future.  Then they look at what your gross income is (your income before taxes)  vs. what your  “monthly obligations” are: payment on the new house, principal, interest, taxes and insurance, homeowner association dues if there are any, plus any automobile payments, credit card payments, child support, alimony and maintenance, and any other loan payments you may have.  If you send your kids to a private school, send money to a relative or have other types of non-loan obligations, those ARE NOT considered monthly obligations. Generally, about 1/3 of your income is considered a good amount to go towards a house payment.

Loan Approval Test 4:  Property

The property piece of the puzzle relates to the actual property itself and can be broken down into 4 pieces: 

a.  Value:   Does the home appraise for what you are paying for it.  The bank wants to make sure you are making a good investment too.  An appraisal will determine the market value of the property based on what has sold in the immediate are, preferably in a 1 mile radius within the last 90 days.  They are looking to make sure you aren’t paying too much for the property (for example, is it “over-improved” for the area or is it “normal” for the area) so that in the unlikely event that the lender would end up with it, they sell it for what the loan balance is  (If you are experiencing appraisal problems with your property, please see FREE REPORT under the Strategic Alliance Partners tab entitled “Ways To Deal With Appraisal Problems”)

b.  Condition:  The home will need to be inspected to make sure that it is safe for you to occupy.  Is the roof leaking?  Are there structural problems?   The FHA is extremely sensitive about peeling paint because they are worried about children getting lead based paint poisoning.  These are just a few examples of things that need to be looked at in regards to the condition of the property.  Anything that doesn’t meet these safety standards will need to be dealt with prior to closing.

c.  Title Work:  This area looks at the legal aspects related to the property.  Are there any judgments, any liens, any issues with the homeowners association, any pending litigation, are there encroachments (like does the neighbors driveway go across your property line – is the neighbors house on your property or is yours on theirs).  These things can be very “exciting” if you find out AFTER closing, but when you find out about them before closing they are not so bad and can be effectively taken care of.

d.  Property Type:  Are there any issues relating to the type of property it is?   Is the property typical and functional for its construction type? For example, if it’s a log home in a neighborhood that doesn’t typically have log homes, that could be a potential issue.  Or is it a 3,000 square foot home with only 1 bedroom and 1 bathroom, which doesn’t make it functional for most other people.  Or is it the nicest house in the neighborhood, and will other people want to buy a great big house in a modest house neighborhood? Or is it a junky little house in a neighborhood with all kinds of deluxe houses?  These types of properties may not be very marketable to the normal housing market, so they are things that the lender will look at before approving your loan.

3 Easy Ways to Improve Your Credit Score

1.  This one may seem the obvious, but many people just don’t do it.  Look at your credit report to see if there are any mistakes, because there may well be!  If there are, contact the company who has made the error and ask them to remove it, rather than having it show as a paid collection.  The ease of doing this often depends upon which kind of creditor you are dealing with, but when corrected can make a definite difference in your score.

2.  Lets say you have a credit card that has a $400 balance and a $500 limit.  A credit analyzer, which is an automated search, will check to see what would happen to your credit score if you were to pay this loan off or down.  For one of our clients last week who was trying to buy their dream home, paying this $400 balance off was enough to raise their credit score to 626 – 6 points over what they needed to qualify!  Believe me when I tell you that they were ecstatic to pay that $400 balance off.

3.  Sometimes people think it’s best to close credit card accounts they aren’t using anymore, but this isn’t always the case – you can make them play in your favor.  Here’s why:  One way to improve your credit score is to use a credit card – even if it’s been sitting dormant for 6 months to a year.  Take one of your dormant credit cards, fill up your car with gas (or some other small, easy to pay off purchase) and pay it off when you get the statement.  Now, this counts positively towards your credit – it shows an active credit limit, shows a balance, shows an activity, and shows it’s been paid on time.