These days, there are almost as many mortgage options as there are consumers looking to purchase homes. It is very important that you review your own financial standing and research the various offerings thoroughly before committing yourself to a particular type of mortgage. Your decision will probably impact your life for the next several decades. Here are some tips to help you find the option that works best for you.
Check your credit report before you apply for a mortgage
Before you apply for a mortgage, get copies of your credit reports from all three of the credit reporting agencies, Trans Union, Equifax and Experian. Recent changes in the credit industry now allow individuals to obtain a report with their FICO credit score. Many states mandate that you can get one copy for free every year. Credit scores are based on the information in your credit bureau record. Scores generally are between 350 and 850, the higher your score, the better. With a high score, you can normally qualify for some of the better interest rates. If your score is low, there are other programs you may be able to qualify for, but the interest rate may be higher. Keep in mind that when lenders consider a loan or credit application, they generally ask for more information because credit scores are not the only factor they use in making their decisions. Typically, this includes personal data (such as income and monthly payments) used to determine your ability to pay.
When qualifying for a refinance or mortgage, most mortgage companies will run a three credit bureau merge. This allows them to get the most accurate look at your credit. If you are married, your report is combined with your spouse's to form a single report. This report is generally one of the most thorough reports generated by the credit bureaus because they investigate all items from both individuals before providing it to the lender. So, be sure to check your report from all three bureaus, especially if you are married.
Dispute incorrect information
Under the Fair Credit Reporting Act, you have the right to dispute items on your report that you believe to be incorrect. Remember, only incorrect information can be removed from the report. When you receive your reports, they will come with instructions on how to dispute information. When the agency receives a dispute, they must reinvestigate and record the current status of the disputed items within a reasonable period of time. If the agency cannot verify a disputed item, they must delete it. If your report contains incorrect information, the agency must correct it.
Improve your credit
While you are reviewing your report, look at your repayment history. If you don't have the best credit history, start strengthening it now. A lender is usually looking for a minimum of 12 months of "on-time"? payments. Also, because numerous credit inquiries, such as new applications for credit cards, can hurt your credit score, it is best to avoid applying for new credit in the months preceding your application. Following are some suggestions to rebuild your credit:
- Pay your bills on time.
- Keep balances low on credit cards.
- Limit your credit accounts to what you really need. Accounts that are no longer needed should be formally cancelled since zero balance accounts can still count against you.
- Check that your credit report information is accurate.
- Be conservative in applying for credit and make sure that your credit is only checked when necessary.
Prioritizing your current debt is important. Credit-scoring systems look at the performance of similar loans first when deciding what type of score to assign. If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have and finally, the payment for an existing mortgage.
Pre-qualifying vs. pre-approval
Pre-qualifying is a process whereby a loan officer takes information about you, either over the telephone or face-to-face, and indicates the mortgage amount and type you will qualify for. The lender would then give you a "pre-qualification letter"? which is of considerable value in dealing with a realtor or potential seller. Realtors and sellers are interested in dealing with people they know can get the loan necessary to close the deal. Pre-approval is a step beyond pre-qualifying, in that you are actually approved for an amount and for a certain type of loan. The pre-approval is contingent on your finding or making an offer on a property. With a pre-approval in hand, you can close the loan faster. In this scenario, you will find your offer more acceptable to the seller.