The good news is that more people than ever can buy a home. Now for something a little less palatable: it’s going to take a lot of patience, restraint and some careful planning to get there.
Here are some warning tips on what to avoid doing right now so you can get the best mortgage later on. If you are not qualified because of credit issues right now, never lose hope for you can always plan for the future. It is very possible that in a few months time you will be able to buy a home if you follow these tips.
THE FIVE BIG DON’TS
1. First off, don’t make any big purchases over the next couple of months. Besides the obvious fact that it makes less money available for the down payment, it might require to get yet another loan. A significant debt such as a $15,000 auto loan will look bad to the mortgage lender’s credit scoring systems. Plus. The human underwriter won’t want to see you adding a couple of hundred dollars per month to your monthly expenses. Generally, as a rule of thumb, you want your total debt obligation to be no more than 36% of your gross monthly income. You certainly don’t want to load up on consumer debt if you’re anticipating purchasing a home and you’re unsure of what your mortgage payment is going to be and if you think you’re within the range of exceeding that 36% requirement.
2. Don’t try for a much more expensive home if its going to be too much of a stretch in your current budget. Lender’s consider what’s known in the industry as “payment shock” when approving loans. Somebody who goes from relatively small monthly housing payment to a huge one either won’t qualify for a mortgage or will end up having to cover too much loan with too little money. You have to make sure you’re comfortable about that kind of a debt load.
3. Don’t just get prequalified for a mortgage, get preapproved. To get prequalified, a borrower need only submit credit, income and et information voluntarily to a mortgage broker or lender. That means the resulting estimate of the maximum mortgage and home that’s affordable is exactly than – an estimate. Before they can get preapproved, however, home buyers must allow their lenders to pull credit reports, check debt-to-income ratios and perform other underwriting steps. That puts a borrower much closer to obtaining a loan and locking in a rate and term.
4. Don’t forget what kind of money personality you have when getting a mortgage. By taking out a 30-year fixed rate loan rather than a 15 year mortgage and investing the money saved on monthly payments, you might earn a higher return on your money in the long run. But that approach won’t work for people who spend any extra cash laying around on dinner and a movie twice a week. They can force themselves into saving and accumulating equity faster by going with the shorter term and higher payment.
5. Last but not least, don’t forget that homeownership brings with it many burdens. The cost of defaulting on a loan is much greater than the penalty of missing a rent payment. Too many black marks on the financial history and it will be 23% interest credit card mailers that show up in the mailbox rather than the 9.9% ones your neighbor gets.
Ken Go has been running his southern California home loans business since 1987. His honesty and courtesy equal loyalty to his customers. Forget about "good faith estimates." With 1st Innovative Finance Group, all loan rates and fees are guaranteed upon application. Ken Go writes a California home loans blog for anyone who might want free advice about financing a home with a mortgage. Ken speaks English, Chinese, and Filipino (Tagalog).
