Good Credit Scores Will Help You Score a Mortgage
There’s some good news for your wallet to start the year – nationally, rents appear to be leveling off after many years of soaring increases. Real estate website Zillow.com estimates that the national median rent will increase only slightly this year. The national median rent is estimated at $1,396.
But that good news is tempered by the fact that the slight increase still means that rising rents are still outstripping income increases. And in some markets – particularly in the hottest and hippest areas to live – rent can consume as much as half of take-home income. That means hello, Oakland and Staten Island. Goodbye, San Francisco and Williamsburg.
Nothing in the history of the world has risen in price forever – not tulips, not stocks, and certainly not real estate rents. But the laws of supply and demand dictate that as more people wish to live in urban areas with sophisticated amenities, they must pay for that privilege.
Given that situation, it may be time for you to explore getting out of the rent rat-race and consider owning your own house, townhome or condominium. By doing so, you gain control of your living situation and benefit from any appreciation on the property’s value.
Of course, not everyone can qualify for a home loan. You need a down payment in most instances, must be employed or doing well in your own business, and your credit score can’t be a disaster. While there are many factors that go into a loan determination, there are credit score minimums in some cases.
Cornett Communications, a public relations firm that monitors the real estate market, determined that a FICO score of at least 650 is a good level to be at for most financing situations. But you can have a lower score, in some cases. Fannie Mae and Freddie Mac are government-backed mortgage lending houses, and many other lenders look to them for guidance on standards. Fannie Mae requires a minimum credit score of 620 with a 20 percent down payment for its loans, and no more than 45 percent of your income can go towards paying debt.
The Federal Housing Administration and the Veterans Administration also provide credit to certain segments of the population. The FHA requires a minimum credit score of 580 and a 3.5 percent down payment. The Veterans Administration is an even better deal – there is no minimum credit score required to qualify for a loan, and 100 percent financing is available. However, any down payment and a good credit score will lower your mortgage’s interest rate. To qualify, you must be an armed services veteran.
THE FED MAY BE ACTING
If you decide to move forward on getting a dwelling and your credit score matches up, it’s a good idea to move fast. Interest rates on home loans are still at historic lows, but that could change in the coming year.
The Federal Reserve is the central bank that determines the prime lending rates that influence what you pay for your mortgages, credit cards and other loans. In December, they raised the prime lending rate a quarter point, marking only the second time since the 2008 financial crisis that the needle has moved upward.
When the rates rise, you pay more for any loans. Although no one can predict which way the economy is headed and the Fed’s response to that movement, many seasoned observers believe that interest rates will be raised several times in the coming year.
Let’s assume you have a decent credit score and a down payment, are gainfully employed in some fashion, and are ready to seek out your new home. There are several steps you can take before starting to call real estate agents that will make your search easier and improve your chances of getting a home. These steps are being pre-qualified and pre-approved for a mortgage.
PRE-QUALIFIED VS. PRE-APPROVED
You can become pre-qualified based on your own statements. A lender will ask several questions either over the phone or via the Internet or an app. They will try to get a picture of your income, debts and assets to get a rough idea of how much mortgage assistance you will likely receive. Once they determine that, you can begin looking at neighborhoods and houses within your price range.
Keep in mind that pre-qualification does not mean you have a loan in place. In order to qualify for a mortgage, you need to move from pre-qualified to pre-approved, the next step in the mortgage process.
Getting pre-approved is where the rubber meets the road in lending. Instead of relying on your statements – a process that proved disastrous in the great real estate meltdown of 2008 – the mortgage lender will now require tax forms, bank statements, pay stubs and other documents that indicate that your claims of prosperity are valid. These are particularly important in major metropolitan areas, where high real estate prices require what’s known as a “jumbo” loan, which is so large it’s not backed by the government.
Once the lender determines how much they will be willing to lend you, you can begin shopping in earnest. Sometimes, in a competitive housing market, there are multiple bids for the same residence. Having financing in hand means you are a serious bidder and will not present any undue problems to the seller regarding closing. That can sometimes give you an edge over less-qualified people.
There’s one more step on the path to home ownership, though – your mortgage lender will need to make a final commitment. In this process, the house you want to buy will be evaluated to make sure you’re not wildly over-paying for it. The home will also be appraised for structural flaws and any legal matters that may tie up the title.
While that appraisal is going on, you may also undergo a final round of scrutiny on your own finances. This is done to ensure that nothing has changed in your circumstances since pre-approval, like losing a job or piling on some other form of enormous debt.
Presuming everything clears, you will soon be filling out paperwork and picking up the key to your new home. You will be done with rising rents, and now join the long line of home owners that are the bedrock of any society.
If your credit score or other circumstances weren’t sufficient to get a home loan, don’t despair. You can build up your credit score monthly by paying your bills on time, paying down credit card balances, and making sure your credit report doesn’t contain errors. Over time, you will rise to a level where mortgage lenders will compete for your attention.
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