Plan Ahead for Your
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
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.
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.
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.
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