Author: Best-Internet-Mortgage-Loans.com
Most mortgage loan advertisements promise rock-bottom interest rates, low down payments, and virtually guaranteed approval within just a few days. But for many prospective homeowners, the trip from advertising promises to “sign-on-the-dotted-line” reality can be a long and confusing one.
Is it all just one big roll of the dice or are there quantifiable factors that a lender uses to qualify you for a loan and determine your interest rate? Let’s take a look and see.
Understanding mortgage rate advertising campaigns
Generally the qualifications for these “almost too good to be true” low interest mortgage programs are quite high. Many are so high that most people who respond to the advertising won’t qualify for them.
Why do lenders even bother spending money on advertising a mortgage program that most people can’t qualify for? Mortgage promotions bring in large numbers of applicants. Some will qualify for the promotional rate and others will not. The lender hopes to place everyone who applies into some mortgage program that they offer even if it wasn’t the one the borrower responded to.
Navigating the Home Mortgage Qualification Process
The lender reviews your credit and overall financial condition when qualifying you for a particular mortgage program. Most lenders consider these items:
Stability – Length of time on the job and the number of jobs held.
Liquidity – Availability of down payment and other on-hand and reserve funds necessary to close the loan.
Credit – Previous loan repayment history as well as certain credit-related scores.
Income – Ability to service the loan by making the required payments.
Liabilities – The total amount of money that you owe other than your current mortgage or rent payments.
The credit investigation causes borrowers the most concern and that’s probably because it’s the most misunderstood of the approval steps. There is nothing secret going on here and mortgage lenders are very up front about what they will be checking.
Shining the light on your credit history
Credit bureaus use a rating of zero through nine for each of your credit lines. They put either an “I” (for Installment loan) or an “R” (for Revolving loan) in front of the number. I0 or R0 indicates that the credit line is “too new to rate”. I1 or R1 is the best rating and R9 or I9 is the worse.
This worked fine for years until credit usage became more widespread and the amounts borrowed became significantly greater. That’s when lenders began looking for a statistical model which could predict how you would perform on a loan based upon measurable factors. This evolved into the FICO score which plays a prominent role in determining if you get a home mortgage as well as what the terms of the mortgage will be.
FICO stand for “Fair Isaacs Corporation”, the name of the company that developed the software that calculates the score. FICO scores can range between 250, the highest degree of risk and 850, the lowest degree of risk. All else being equal, the higher your FICO score the better the loan terms will be.
Taming your FICO Score
If you are turned down for a loan, or are required to pay a “risk premium” because of your FICO score, all is not lost because you can improve your FICO score. Since you are never going to be approved for a mortgage if your FICO scores are so low than lenders are scared away, it is worth trying to get your score up. If you were given a mortgage at a high rate because of your score then it’s worth raising your scores and refinancing for a lower rate in the future.
How your FICO score is calculated.
10% is determined by the number of open credit accounts that you have and the mix of types (revolving, installment, and mortgage).
35% is derived by measuring your repayment history and looking at adverse credit items such as foreclosures, judgments, bankruptcies and negative public records including tax liens and wage garnishments.
30% is based upon a formula that includes your balance due across all open loans, the types of loans and the number of loan or credit card accounts that have an open balance.
15% is based upon the length of you credit history or how long you have had a credit history on file.
10% is based upon the amount of new credit in your account including how long it has been since you opened a new account, how long since your last new credit inquiry and how good your most recent credit history is .
Here’s how to improve your score:
Get a copy of your credit report and review it for errors. Use the credit bureaus error reporting and correction system to address any serious errors.
Pay all of your bills according to the payment schedule that you agreed to.
Avoid opening a lot of new accounts in a short period of time and especially avoid opening any new accounts before applying for a mortgage.
Don't apply for credit cards that you have no intention of using, and close any accounts that have zero balances and that you do not intent to use again.
Keep your credit balance low in ratio to your overall available credit.
Pay off credit card bills instead of transferring them to lower interest cards and closing the previous account. It could actually hurt your score by disturbing the ratio of open debt to number of cards.
Monitor your FICO score by getting a new copy of your report every six months. Once your score moves into an acceptable range then either refinance your existing mortgage, if interest rates warrant, or apply for a mortgage if you have been turned down in the past.
Additional ways to improve your chances of getting approved.
While your FICO score is the key determining factor in getting approved for a home mortgage, there are some other factors which affect the approval process.
Show good prospects for continued employment
If your job prospects are a bit hazy then a lender may choose not to fund your mortgage even though you have high scores. Try not to change jobs within 6 months of applying for a mortgage if you can possibly help it.
Have a large down payment
Although some mortgage lenders advertise low or no down payment programs, they are the exception to the rule. Most lenders want to see 20% down. If you have less, then you may get passed over or, at the very least, be required to pay expensive PMI (Personal Mortgage Insurance) each month until you do have 20% equity in your home.
Stay in a realistic price range
Don’t try to buy more house than you can comfortably afford. A lender is inclined to say “no” if he sees that too much of your income is going to be taken up by your mortgage payment.
Be Honest
Don’t try to hide any “bad news” including a pending job layoff, strike, etc. If you lie to your lender you probably will get caught.
Now that you know all about the mortgage approval process, are you ready to buy a new home? It can look like a complicated process, but you can do it if you have your financial affairs in order.
About the author: © Copyright 2005 by Best-Internet-Mortgage-Loans.com. Please visit Best Internet Mortgage Loans for more on mortgage basics and tips on finding the mortgage you seek. This article may be freely posted as is on the Web as long as this message and the live link remain intact.
No comments:
Post a Comment