Are you ready to take the next steps toward home ownership?
This step-by-step newsletter can help you move from renting to owning your own home. Over the next 12 months, you will receive a monthly newsletter with helpful information that can assist you with the process of becoming a homeowner.
step one: Your Credit Score
This month’s step is all about credit.
You must have a good credit history and enough income to support a monthly mortgage payment. Maintaining a good credit history involves more than just making on time payments. Reviewing your credit history for accuracy is also important. You can obtain a free credit report from each of the 3 major credit reporting agencies annually at annualcreditreport.com.
Staying on top of your credit is very important
You will need to review the report to ensure that the accounts indicated belong to you and that the information is correct. Report any incorrect information to the bureau to have it updated. The bureaus can be reached at the following addresses:
Experian www.experian.com 800-222-4930
Equifax www.equifax.com 800-203-7843
TransUnion www.transunion.com 800-916-8800
When you request your credit reports, you may begin receiving unsolicited offers for mortgages and other services.
You can opt out of these mailings by going to optoutprescreen.com
Our final tip for this month is to begin documenting your rental history. Start a file to collect your canceled checks, receipts, and any other documents regarding your lease. Having a documented on-time 12-month rental history can have a positive impact on your mortgage application and qualification requirements.
Step 2: Managing Your Credit Cards
This month we will discuss how managing your credit cards can improve the qualification and approval process. Several factors concerning credit card use can impact the credit approval process.
These factors include account balance, payment history, and unused buying power. All are considered during the decision process. Ideally, you should have about 3 open accounts, with one having at least a 12-month history, and another having at least a 24-month history. These are good indicators of how credit is managed.
Recurring balances also have some bearing on the approval decision.
Having all the cards used up to the limit does not show as favorably as a card that has a small balance month-to-month. The card’s interest rate plus the size of the recurring balance can have a negative impact on the overall credit score.
Other Factors: What if you have no credit or credit cards? Using a secured credit card is an option to help build or rebuild credit. A secured card requires a deposit that usually matches your spending limit. This option allows for a more favorable interest rate versus the high interest credit card for low or no credit score cards. Example companies that offer secure cards include USAA, Capital One, Discover it, and OpenSky.
Actively managing your credit card debt is an effective way to improve your credit score, and in turn, qualify you for more attractive finance programs and terms.
Step 3: Employment and Income
This month, we are discussing employment and income and how each is viewed in obtaining a mortgage. One of the key factors in obtaining a mortgage is demonstrating the ability to pay your mortgage payment.
Some can pay cash for their home, most of us rely on financing.
In obtaining financing, consistent and stable employment is a must. Avoid changing jobs during the mortgage approval process, unless it is necessary. If you must change jobs, staying in the same industry is helpful. Changing from a W2 employee to a 1099 contractor can introduce some other challenges, and the 1099 contractor is viewed as self-employed. Without a history of deductions, demonstrating income is difficult. Contact me to discuss in detail if you think this is a possibility. It’s always a good idea to check with me before changing jobs. I can help you determine if that change will have an impact on your approval status. Some types of employment changes could require you to wait two years.
Different jobs have varied types of compensation, and these types of income are often viewed differently. Some are paid hourly, some salary, and some are paid through commission. Some are considered self-employed, and some pay overtime. Each of these are unique, and how they are credited toward usable income vary. Some examples include: If you own 25% or more of a business, you are considered self-employed. To count that income, we will need to see your personal tax return, your business tax return, and your K1s.
Commission is generally considered based upon a 24-month average. If you have less than a 24-month history or claim certain deductions on your taxes, the amount credited as income can vary. If you make commission, give me call so we can discuss your circumstance.
W2 hourly and salary income is considered, and overtime is typically viewed on a 2-year average. Overtime needs to be consistent and likely to continue to be counted.
In Conclusion
These are by no means the only types of income. If you have specific scenarios that you would like to discuss, please give me a call.
Step 4: Understanding Assets
This Month, we will discuss what constitutes an asset and how assets are evaluated in the mortgage application process. Assets are considered and evaluated based on how they help facilitate the ability to make the down payment and how they can be used as reserves.
Savings and checking accounts are the typical assets used to supply the funds for any down payments and closing costs.
Some loan products also require a certain amount of reserves. The reserves are required to be in place at closing, and need to cover a certain number of monthly mortgage payments. The amount of reserves required can vary by product. As assets are being reviewed, any large deposits will need to be sourced and verified.
Gifts are allowed by some loan products, but must usually be accompanied by a gift letter indicating that it does not have to be repaid. We can typically use the wire receipt to the title company to verify the donor’s funds, and we would normally not need to see the donor’s bank statement. We will need copies of statements to verify the asset accounts. Screen prints are not usually accepted, but complete online statements can usually be used.
Final Notes
Retirement accounts are also assets and can be considered during the mortgage application process. Accessibility and liquidity will be reviewed to determine if they qualify. For more detailed information regarding retirement funds, please give me a call so we can review your unique circumstance.
Assets, as also with income, need to be reviewed and evaluated during the mortgage application process. I can answer any specific questions about them. Please do not hesitate to give me a call with any questions you may have.
Step 5: How much do I need to put down?
This month we cover the various mortgage products, including those that DO NOT require a 20% down payment. There are plenty of acronyms and their corresponding loan programs that you may have heard of. Putting 20% down on a conventional or jumbo loan will secure you a competitive loan rate and not require mortgage insurance premiums.
What if you don’t have 20% to put down toward your mortgage? Here are some of the alternatives: FHA (Federal Housing Administration) – They insure loans with as little as 3.5% down. If you don’t have 20% to put down, FHA provides several attractive alternatives.
Are you a Veteran? Through VA, you can secure 100% financing, which means NO down payment. Interested in purchasing in a rural area? USDA (US Dept. of Agriculture) has programs that allow for 100% financing as well. The HomeReady mortgage does not require you to be a first-time homebuyer and requires as little as 3% down.
The Home Possible mortgages require as little as 3% down. With 5% down even someone with no credit score can be financed. There are also numerous programs for first-time homebuyers where grants can be secured to cover down payment and closing costs. Additionally, if you are interested in undertaking a fixer-upper, there are programs designed to help finance the renovations and the purchase
In Conclusion
Many of these programs are designed to fit specific scenarios. Please give me a call if you would like to discuss these options in more detail, and to see if you qualify?
Step 6: Credit Inquiries
This Month, inquiries can have a big impact on your credit score.
Sometimes, you will end up with multiple credit inquiries even if you are only looking for one loan. Such is the case when looking for a mortgage, auto or student loan and multiple lenders pull your credit in order to quote you. The good news is that mortgage, auto and student loan inquiries are ignored if they are made within 30 days prior to scoring. Therefore, the inquiries won’t affect your score at all if you decide on a lender within 30 days. If a credit inquiry is found on your report that is older than 30 days for a mortgage, auto or student loan, it counts them as one inquiry as they would fall into a “shopping period” as well. This is applicable for all credit bureaus except for Experian, which has a 15-day window instead.
Some credit inquiries are more substantial than others.
When looking at score factors, if they state either “too many inquiries in the past 12 months” and/ or “inquiries negatively affected the scores”, it means that there is a possibility that the scores were slightly affected. Usually, this will not be substantial.
Remember:
A mortgage inquire has no effect for the first 30 days. Have questions about your credit score, inquiries, or anything credit related? Our expert team will help you find the answers you’re looking for. Get in touch with me today!
Step 7: Debt to Income Ratios
What’s Your Debt-to-Income Ratio?
Your debt-to-income ratio shows how your debt stacks up compared to your income. Lenders look at DTI to ensure you can repay a loan. Debt-to-income ratio divides the total of all monthly debt payments by gross monthly income. Lenders use this calculation — along with credit history — to evaluate whether a borrower can repay a loan. Your debt-to-income ratio (also called DTI) can also be used to help you consider different ways to handle your debt.
How lenders view your debt-to-income ratio. Lenders look at debt-to-income ratios because research shows borrowers with high DTIs have more trouble making their payments. Each lender sets its own debt-to-income ratio requirement. Not all creditors, such as personal loan providers, publish a minimum debt-to-income ratio, but generally it will be more lenient than for, say, a mortgage. Note that a debt-to-income ratio of 43% is generally the highest mortgage lenders will accept for a qualified mortgage, which is a loan that includes affordability checks. You may find personal loan companies willing to lend money to consumers with debt-to-income ratios of 50% or more, and some exclude mortgage debt from the DTI calculation. That’s because one of the most common uses of personal loans is to consolidate credit card debt.
What your debt-to-income ratio means for your debt.
DTI of 0% to 14.9%:
You can probably take a do-it-yourself approach to paying down debt. Consider using the debt avalanche or debt snowball method.
DTI of 15% to 49%:
If you have primarily credit card debt, look into a debt management plan from a nonprofit credit counseling agency. You may also want to consider credit card debt consolidation. If you are closer to the higher end of this range, seek a free consultation with a nonprofit credit counselor and a bankruptcy attorney to understand all of your debt relief options.
DTI of 50% or more:
Look into debt relief options, such as bankruptcy.
Step 8: Rent vs. Buy
Take a look at your current situation and future goals
Are you a renter interested in buying a home, or a homeowner wondering whether renting makes more sense at this point in your life? It’s time to evaluate the relative costs, benefits, and drawbacks of owning versus renting your home.
Given the hefty upfront costs associated with purchasing a home, most young people begin their independent lives renting an apartment. As they build careers, save money, and start families, many choose to buy a home. On the other end of the age spectrum, homeowners nearing retirement may choose to sell their family homes, downsize, and become renters once more.
Advantages of buying...Building equity over time! Unlike renters, homeowners build equity over time. On most mortgages, a portion of each monthly payment goes toward the loan’s interest. The remainder pays down its principal.
Tax Benefits! Several tax benefits cater exclusively to homeowners, though not all homeowners qualify for all benefits.
Potential for Rental Income! Even if you don’t initially think of your home as an investment property, you can turn it into a source of income. This can partially or totally offset your mortgage, tax, and insurance payments on it.
Advantages of renting! No Responsibility for repairs
As a renter, you’re not responsible for home maintenance or repair costs. If a toilet backs up, a pipe bursts or an appliance stops working, you don’t have to call an expensive repair person – you just have to call your landlord or superintendent.
Easier relocation
Home values fluctuate in response to changing economic conditions and can decline over time. If you’re a renter, that’s not your problem – it’s your landlord’s.
More lenient credit requirements! lthough most landlords require prospective renters to undergo a credit check, this is typically a zero-sum proposition. Your application is either approved or denied based on your credit score and credit history.
Step 10: Application
- Step 1: Meet with your Loan Officer: Your loan officer will take your application and order a credit report. With our Priority Approval program, we can take you from application to approval in only One Day! This gives you what you need to go house shopping with your agent and make a strong offer.
- Step 2: Find an Agent and a Home: Using a real estate agent to facilitate your side of the home buying process is a wise choice. With their expertise, they’re able to negotiate the most competitive price and terms for your new home. Combine their skills and your Priority Approval letter and you’ve got a powerful combination that is bound to get the attention of a seller.
- Step 3: Make an Offer: Once you find the perfect home, you and your agent will write the contract and negotiate with the seller and their agent, if they’re using one. Speak with your Loan Officer about locking your rate.
- Step 4: Processing: Once you’re offer has been accepted, our operations department checks all of your required documents to make sure they are completed properly. If any issues arise, you and your loan officer are notified. An appraisal will be ordered at application to determine the fair market value of the property you are purchasing and you will receive a Good Faith Estimate and a Truth-in-Lending Statement, which will show your annual percentage rate (APR).
- Step 5: Underwriting: Once processing is complete, your loan file goes to one of our underwriters, a trained credit-risk analyst who will do everything possible to help you receive loan approval. You may need to provide initial and additional verification documents to them. When you’re approved, you will receive a commitment letter that explains the terms of your loan, including any loan condiitons that need to be met prior to closing. Read your commitment letter carefully, and be sure to follow instructions to ensure a timely closing. In the case that your applicaiton is not approved, your loan officer can help you determine what actions need to be taken.
- Step 6: Closing: Congratulations! You’re a homeowner! At closing, a closing agent will review the terms of your loan and explain each document. The closing agent will also provide you with a copy of the Closing Disclosure (CD), which shows all the costs related to the closing. These costs may include, but are not limited to, the down payment, loan origination fee, survey, appraisal, inspections, and title search costs. Information about escrow accounts, real estate taxes, how to make your monthly payment, and more will be provided.
Step 10: documentation
HOME LOAN CHECKLIST
- LAST TWO MOST RECENT PAY STUBS: Providing copies of your last two most recent pay stubs helps to show proof of income and steady employment. Additional documentation may be needed depending on the content of what you provide and the home loan you’re applying for.
- LAST TWO YEARS W-2S: Supplying W-2 documentation for the last two years goes towards showing long term employment. Depending on your income history and the size of the loan, you may also have to show additional paperwork.
- LAST TWO YEARS SIGNED TAX RETURNS: Along with your W-2s and pay stubs, your tax returns go towards showing proof of income. Your tax returns also show the source of your income. If you’re self employed, there may be additional steps required to secure the right loan for you.
- LAST TWO MONTHS BANK STATEMENTS: Along with two months bank statements, we require statements for the past two months for all accounts, including 401(k), IRA, investment, stock and mutual funds. This information is provided to show current assets and liabilities.
- VALID, GOVERNMENT-ISSUED ID: A Valid, government-issued ID proves your identity. Acceptable forms of this ID can include a valid driver’s license, military ID or social security card.
Step 11: Don’t do it list
The following are important things to avoid until after your loan has closed. While you are applying for a home loan and even during the home loan process, any of the following things can greatly impact your ability to obtain a mortgage loan or can delay your closing date.
- Don’t Change Your Job: If you change jobs before or during the loan process it can create real problems in qualifying for a home loan, particularly if your new job is in a different line of work or at a lower rate of pay. During the loan process, it can also create time delays as the new job will need to be verified.
- Don’t Change Banks or Move Your Money: Moving your money to a new bank interferes with the verification process. It is the best to leave your money where it is until your loan closes, unless otherwise recommended by your loan officer.
- Don’t Make Any Major Purchases: Many borrowers make the mistake of buying a new car or making another major purchase without realizing the impact it can have on their ability to buy a home. A new monthly payment can affect the amount you can qualify for and actually make it difficult to get your loan approved.
- Don’t Deposit Cash: Don’t deposit any cash or money into your accounts other than funds that can be documented, such as pay checks or gift checks. Cash deposits can cause a file to be denied.
- Don’t Close Credit Card Accounts? If you close credit card accounts, it can affect your ratio of debt to available credit, which has a 30% impact on your credit score. If you really want to close an account, do it after you close your mortgage loan.
- Don’t Apply for New Credit of Any Kind? If you receive invitations to apply for new lines of credit, don’t respond. If you do, that company will pull your credit and this will have an adverse effect on your credit score. Likewise, don’t establish new lines of credit for furniture, appliances, computers, etc.
- Don’t Fail to Disclose Financial / Credit Information: Surprises during the loan process can make it difficult for the lender to approve your loan. Disclosure to the loan officer up front allows time to work on potential problems.
Step 12: Why Work With the Rick Hennen Team
Ready to purchase or refinance?
- Established Lender: More than 85% of our loans are for the purchase of a home. We make our living satisfying the unique needs or our valued clients.
- A growing company with small business values: We have all of the resources you’ll find at a big company, but we treat our customers the way you’d expect from a family-owned business.
- Unrivaled Service: We believe in making the home buying process simple and consistent. Our company has been structured to offer programs and services that accomplish that goal.
- Additional Benefits: Staying ahead of emerging tech. We believe in engaging with our customers in ways they’ve come to expect in the modern world. When you get your home financing with us, you’ll enjoy a modern application and progress updates throughout the loan process.
- Proven track record of performance: The Rick Hennen Team has experiencing functioning profitably in all types of real estate and economic environments for over 20 years.?
- Priority Approval: Priority Approval is designed to give you a fast and fully underwritten credit decision in one day. This gives you the confidence to shop knowing that you can make a competitive offer and close on your new home quickly.
FREE MORTGAGE PAYMENT
Each January The Rick Hennen Team has a drawing for everyone who used our team the year before to win a free mortgage payment for February