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Plan Ahead for Your Mortgage
There are a few financial tricks to know and traps to avoid when you are
thinking about buying a house. Qualifying for a mortgage is far more
difficult than qualifying for a credit card or a car loan. Although there
are literally hundreds of different mortgage programs available, they are
almost all based on the same qualification information - some combination
of income, monthly expenses, and credit history. Planning ahead, in some
cases as far as one year, can help many people avoid hassles.
Using "Gift" Funds
If you are receiving a gift for all or part of your down payment,
arrange to receive the funds six months before mortgage application. Place
the funds in your own bank account. Reason: many mortgage lenders place
restrictions on the amount (percentage of down payment and the source of
gift funds). However, when you make mortgage application, the lender
checks only three months' bank statements. If the funds are present on the
oldest statement, they are "your" funds, not a "gift".
If your parents plan to give you a gift just in time for closing, they
must be prepared to show your lender that the funds actually exist in
their bank account at the time you apply for your mortgage. All parents
are different, but many of them strongly resent having to supply their own
bank statements to prove the gift.
Large Purchases
Okay, you are excited about buying your house but you need new
furniture and appliances. Your car is falling apart. Defer any
purchases--particularly credit card or installment contract
purchases--until after closing on your new home. Monthly credit card
obligations can ruin your expense ratio very quickly. Your idea of the
debt you can handle and your lender's idea of the debt you can handle may
be two entirely different numbers. Unless you have a VERY high income, do
not buy a new car or a new boat prior to applying for a mortgage. Car
leases count just as car payments do.
Current Mortgage Payment History
Lenders check your credit history. If you currently own a home, make
sure you do not have any late mortgage payments for 12 months prior to
applying for your new mortgage. If your budget is tight, ALWAYS pay your
mortgage first. According to Fannie Mae guidelines, lenders cannot issue
you a new mortgage if you violate the 12 month rule. Mortgages belonging
to consumers with a sloppy payment record do not meet Fannie Mae
guidelines and therefore cannot be sold into the mortgage market. The
lender must keep those mortgages for its own loan portfolio, something the
lender probably won't want to do. Portfolio loans usually have much higher
interest rates than do Fannie Mae loans.
Avoid Credit Disputes
If you get into a credit dispute over a small sum, just pay it. It may
be against your principles to do so, but the incredible hassle involved in
trying to clear it up isn't worth it. Unfortunately, the credit bureaus
are powerful; individuals are not. Hospitals are particularly notorious
for reporting small unpaid balances to credit bureaus. Frequently, these
are amounts people assume have been paid by the insurance company but for
one reason or another are not covered by the insured's policy. Credit
bureaus do make mistakes, but unfortunately the burden of proof is on you,
not on them. Check your own credit several months prior to even looking
for a house. This will give you time to clear up any problems or
misunderstandings. A little financial planning and detective work prior to
house hunting can go a very long way in making your mortgage application
easy and stress free.
Helpful Links
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The links and
information on this page are provided for your convenience only. Never take any
action based on advice at a web site without first checking with a professional
in that field, especially your attorney and/or tax advisor when financial
decisions are involved.
