While there may be lingering questions about taking the leap in purchasing a home, the elements of the home buying process combined with stabilizing home values make it the right time to consider buying your first home. Preparation is key, however, to making sure that you have placed your best foot forward when searching for a home mortgage.
Here’s an FAQ to keep in mind when shopping around for a mortgage:
Q: What are the current interest rates and the best places to get a mortgage?
A: Interest rates can fluctuate. For example, recently rates for a 30-year, fixed-rate mortgages were about 3.62 percent. These rates typically fluctuate on a daily basis and may not be applicable to your specific situation (a low credit rating, for example, can impact your ability to get the lowest market rates), so talk to your lender about your options. When selecting lenders you’ll have the option of working with a local bank, a credit union, an online lender, or a mortgage broker (who will “shop” your application around to any or all of the lender types mentioned here).
Q: So, what is a FICO score?
A: This is a numerical, computer-generated statistical grade that automatically evaluates all the information in your credit profile and generates a number that lenders use as a parameter when approving or turning down loan applications. Your FICO (which stands for Fair, Isaac and Company) score isn’t the only deciding factor during the loan approval process, but it is an important one. The FICO score is calculated from several different pieces of credit data in your credit report, and is grouped by payment history, amounts owed, length of credit history, new credit and types of credit used. Credit scores generally range from 300 to 850.
Q: How do I find out my credit score?
A: You can get a free annual credit report at AnnualCreditReport.com. This site allows you to request a free credit file disclosure, commonly called a credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.
Q: Why is my credit score so important during this process?
A: Lenders look at borrowers with higher credit scores as having “lower risk” when compared to those whose FICO scores fall below a certain level. The theory is that if you’ve paid your bills on time, avoided over-leveraging yourself debt-wise, and otherwise kept your credit history clean over the years, that you’ll be less likely to default on your loan. With foreclosure rates as high as they are in the U.S. right now, lenders have set forth even tighter underwriting standards.
Q: What can I do to improve my chances of getting a mortgage?
A: Start by paying off all past-due balances and overdue obligations that may be lingering on your FICO report and bringing down your score. Keep credit card balances as low as possible (preferably to 30 percent or less of the card’s available credit) and avoid having too many “hits” on your credit report (they are triggered when a lender pulls your report). Don’t close existing accounts, even if they are paid off, since a portion of your score is based on your credit history.
Q: What else should I be thinking about when applying for a mortgage right now?
A: In terms of your mortgage application, you’ll also want to start gathering necessary paperwork a few months before you apply for the loan (two years’ worth of income tax returns, a 30-day cycle of pay stubs and so forth) and ask about any housing counseling, first-time buyer programs, or government assistance programs that you may qualify for.
Banks will look at your income stability, yearly income, the property that you are buying, how much cash you have on hand for a down payment (or whether you have access to “gift” funds from relatives, friends, etc.), and various other factors. While credit is certainly an important component of the decision-making procedure, your entire financial profile will be carefully reviewed and considered during this process.
This article has been prepared for informational purposes only. The accuracy and completeness of this information is not guaranteed and is subject to change. Since each individual’s financial situation is unique, you need to review your financial objectives to determine which approaches might work best for you.
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(Photo: Daniel Acker/Bloomberg via Getty Images)
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