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Consumers: Financing a home

Get your financial house in order
Since most people, especially first-time home buyers, must finance part or all of their home purchase with a mortgage, it is very important to have a good credit rating. The best loan terms are reserved for those individuals with the best credit history. The worse your credit rating, the higher your interest rates will likely be, and the more points you may have to pay to secure your loan.

Frequently, people don’t start to think about credit until they are ready to purchase a home. For many, this is too late. It is often recommended that for at least one year prior to purchasing your home, you should assure that every credit card bill, rent and utility check, car payment and other debt is paid in full and on time. It is also a good idea to get a copy of your credit report from one or all of the three credit reporting agencies: Equifax, www.equifax.com; Experian, www.experian.com; or TransUnion, www.transunion.com. This will let you check for any discrepancies and correct any errors that may have a negative impact on your ability to secure financing.

Your Credit Rating

Length of Credit History: Having had credit accounts for a long time is a positive factor, because your history gives lenders information to evaluate how you typically use credit and repay your debts. Credit reports with approximately 10 years are optimal; seven years is short and 3 years is too little.

Credit Accounts: A high amount of previous credit is a positive factor because it indicates to lenders that other lenders have trusted you by lending you money in the past. Conversely, having a low amount of credit is a negative factor because it indicates you are just starting to use credit.

Payment History: Late or missing payments are a negative factor. However, missing a single payment is not as harmful as missing several consecutive payments because many lenders consider missing three or more consecutive payments as an indication that you may not repay them. 

Credit Usage: High balances are a negative factor (except for some types of installment loans such as mortgages and auto loans), because lenders worry that you are living beyond your means and may not be able to repay them. This is particularly true with credit card debt. 

Credit Applications: When you apply for any type of credit, the lender considering your application checks your credit history, and it is noted on your report as an “inquiry.” Although inquiries are a natural result of applying for credit, lenders dislike seeing many within a short period of time. This is because it is hard for them to determine whether you are applying with different lenders in search of the best offer or if you are trying to obtain credit because of financial trouble.

Financing your purchase

Nearly 90 percent of home buyers finance their purchase. The issue is getting the loan that is right for you--one with the lowest cost and best terms. The vast majority of home loans are secured with a mortgage. There are several types of available mortgage options. Ask your REALTOR.

Following are some terms to be familiar with.

  • Loan Term: The life, or length of a mortgage is typically 30 years, but 15 and 20-year loans are also available. A longer term means a lower monthly payment but higher total interest paid.
  • Principal: This is the sum of money borrowed to buy your home. Before the principal is financed, you can give the lender a sum of cash called a down payment to reduce that amount.
  • Interest: Usually expressed as a percentage called the interest rate, interest is what the lender charges you to use the money you borrow.
  • Annual Percentage Rate (APR): The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee (points), expressed as a percentage.
  • Point(s): Additional loan costs are often expressed in points. A point is one percent of the financed amount of the loan. These costs are generally rolled into your mortgage payment.
  • Fixed-Rate Mortgage: With a fixed-rate mortgage, your interest rate stays the same for the term of the loan.
  • Adjustable-Rate Mortgage: ARMs usually offer a lower initial interest rate than do fixed rate loans, but your rate and payments can go up or down, depending on which way interest rates in general are going.
  • Private Mortgage Insurance (PMI): Lenders typically require a down payment of 20 percent. If your down payment is less than 20 percent, your lender considers your loan riskier than those with larger down payments. You can usually cancel your PMI when your equity in you home reaches around 20 percent. Ask your lender for complete details.
  • Good Faith Estimate: Approximate dollar amounts (or a range of amounts) of all the charges, costs, and fees a prospective home buyer will have to pay at closing on a particular property.
  • Mortgage financing: This can be obtained from mortgage bankers, mortgage brokers, savings and loan associations, mutual savings banks, commercial banks, credit unions, and insurance companies. To apply for a loan you must complete a written loan application and provide supporting documentation such as pay stubs, tax returns and rental checks.

Should I be pre-approved for a loan?

Before you begin to make offers on properties, it might be in your best interest to get pre-approved for a loan. Pre-approval means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. 

Although it is not a final loan commitment, the pre-approval letter can be provided with an offer to purchase to assure the listing agent or seller of your ability to secure financing.