Frequently Asked Home Loan Questions
As a Senior Loan Officer I speak with many individuals seeking to purchase a home. I would like to take the opportunity to address some of the frequently asked home loan questions:
How can I build my credit if I don’t currently have a score?
I have run across this home loan question many times through the years. On occasion I speak with a potential home buyer that does not have bad credit they just don’t have any credit. This might be the person who pays cash for everything. The problem with paying cash for everything is that you don’t get credit for making the purchase. You are essentially “off the grid” when it comes to credit. So how can you get yourself “on the grid?” Your first step might need to be to get a secured credit card. You would do this by going to your bank or credit union and asking to sign up for a secured credit card. What makes the card “secured” is that you will give them money, perhaps $300, and you would then be given a credit card with a $300 limit. Now you would use the card just like a regular credit card, for example if you were to be stopping for gas you would put the cost of the gas on your new secured credit card. Then when your payment is due you will make the payment (on time) and you will now receive “credit” for the purchase. The reason the secured credit card is usually the first step to establishing credit is because it can be difficult to get someone to give you a credit card without a credit score. You may want to get more than one secured card so that you can have several things reporting each month to the credit bureaus to make your score go up even faster. It is a good idea to have at least 3 or 4 items that will will report to the credit bureaus each month. Here are some examples of things that report to the credit bureaus; revolving credit account (credit cards), installment loans, student loans, car loans. Sometimes people are surprised to hear but these are examples of things that do not report to the credit bureaus; car insurance, cell phone bill, cable bill, utilities, internet, netflix. The only time these items will report is if you do not pay them and they become a collection (hint: this is not good).
What is my credit score based on?
There are 3 credit bureaus Equifax, Transunion and Experian. They report each month what your activity has been from the previous month and they score you according to how you have done. If you think of your credit score as playing a game then we should know the rules of the game. Your credit score is primarily based upon your propensity to pay or not pay for your debts. So the #1 rule of the game is to make all of your payments ON TIME, no exceptions. The penalty for not following rule #1 is that your score will go down and go down in a hurry. I have personally seen peoples credit score go down by more than 100 points from 1 thirty day late payment. The only way to recover from the mistake of breaking rule #1 is time…and not doing it again.
Another little tip when it comes to your credit score is to keep the balance on your credit cards below 30% of the available limit of the card. For example if you have a credit card with a limit of $1,000 then you should keep the balance at the end of the month below $300. So rule #2 of the game is, do not “max out” your credit cards. Be responsible with your credit cards, do not spend money that you do not have. You’re playing the game to get credit for a purchase not to go in debt that will cause you stress. For example lets say you are at your favorite Best Buy Store (mine is on Miller Rd in Flint MI http://stores.bestbuy.com/mi/flint/g3660-miller-rd-411.html) and you see a TV that you would like to purchase. In one hand you have the “cash” to buy the TV and in the other you have your Best Buy Credit card, what should you do?? Well if you want to “get credit” for the purchase you should buy the TV with the credit card in your one hand and pay the credit card payment with the cash in the other. You just built your credit without spending money you did not have, and you can feel really good about that!!
What items should I be prepared to submit if I would like to be pre-approved for a home loan in Michigan?
The following would be a list of the most common items that would need to be submitted and reviewed:
- W2’s for the most recent 2 years
- Federal tax returns for the most recent 2 years (State of Michigan returns not necessary)
- 2 months (most recent) bank statements (checking/savings)
- 30 days (most recent) pay stubs
- Copy of drivers license
- Copy of divorce decree (if applicable)
- Complete Bankruptcy Petition and Discharge (if applicable)
- Benefit Award Letter(s) for Social Security, Disability or Retirement income (if applicable)
In order to make an informed decision regarding how much you can be pre-approved for these items listed above are essential. As a loan officer I am building a case for you. The more documentation I can provide to an underwriter the better opportunity you will have to successfully purchase a home. Note: Additional items might also be required by an underwriter depending on credit history.
Forbes did a great article on this topic. For further information, check it out here http://www.forbes.com/sites/markgreene/2016/04/03/why-your-mortgage-lender-needs-all-that-paperwork/#5c2e36585b1d
Once I have a signed purchase agreement is there anything I should avoid leading up to the closing on my new home?
- Don’t make any deposits into your bank account other than payroll checks.
- Don’t apply for any new credit (credit cards, auto loans, revolving or installment loans)
No matter how much you love the dining room set at your local furniture store (my favorite is Ikea in Canton Michigan http://www.ikea.com/us/en/store/canton). Don’t buy it until you close on your home. Adding new debt could cause your pre-approval to be voided and you could find yourself missing out on the home you were so excited to purchase. Avoid this at all costs and you will have success in the home buying process. No stress, no mess!!
What is an Earnest Money Deposit or (EMD)?
When you sign a purchase agreement with your realtor you will place a deposit on the house called your earnest money deposit or EMD. This deposit guarantees that no other offers from other buyers can be considered and locks in a purchase price. This money of course, goes towards your cost in acquiring the home. This means that the money you are required to bring to the closing table (cash to close) is equal to the total cash to close minus your EMD.
For further defenition of an EMD check out https://en.wikipedia.org/wiki/Earnest_payment
What is Cash to Close?
With any mortgage transaction the borrower is required to contribute a certain amount of money to cover the cost of the transaction. Cost like your down payment and other miscellaneous costs combine to form what is called your “cash to close.” This is the amount of money you are required to bring to the closing table when you close your loan. The money on deposit with the realtor (EMD) counts towards your required investment.