Monday, June 27, 2005

FIRST TIME HOMEBUYERS

Lenders first want to know your creditworthiness. To prepare yourself, it's a good idea to check your credit report to find out where you stand before you intend to buy your first home.

Credit History
Your credit history is a collection of records held by the national consumer credit reporting companies: Equifax, Experian and TransUnion. Your record comprises a list of all your relationships with lending institutions and credit card companies as well as tax and court records. Any outstanding fines or late payments will be noted in detail with the most recent issues carrying the most weight in terms of your 'score'.

Free Credit Reports
By law every U.S. citizen can now receive a Free Annual Credit Report. This report is designed for consumers, and gives you the same information your lender sees in an easily readable format: http://www.annualcreditreport.com/
If you find anything on your report that you don't believe is accurate, you are advised to contact the specific creditor (contact details are listed on the last page of the report usually). Check out our article titled Report Fraud and Credit Disputes on this blogspot. You don't need to sign up for monthly credit reporting (for a fee) unless you have some recent concerns about fraud or are currently monitoring your accounts. For ongoing reports visit http://www.myfico.com/

Alternative Credit
A lender will have concerns if you have ' no credit' i.e., no record of traditional 'trade lines' in the form of credit cards or loans. Alternative credit uses phone bills and receipts from regular accounts to build a credit picture.

Qualifying Factors
Your income is key to being a first time home buyer. Stable 2 year employment history is standard requirement for most mortgages. Your lender will want copies of your most recent three months pay stubs and two years W-2's. Self employed borrowers will be asked to submit two tax returns. Other sources must be documented. These help to establish your correct ratios for what you intend to purchase.

Debt to Income Ratios
Debt to Income or DTI literally means how much money you have going out every month for fixed expenses in direct ratio to your income. This helps establish how much money you can afford to borrow. Credit cards, mortgages, auto payments, student loans, and other outstanding debt payments are all part of the picture. If your credit card balances are high, then you can expect to be qualified for a lower mortgage amount than if you had no outstanding debt.

Add your monthly rent plus all your monthly credit card bills (student loans, auto payments, etc) to arrive at your current Debt to Income Ratio. Next, substitute your proposed monthly mortgage payment including property taxes and insurance for comparison. The new Debt to Income ratio will be what the bank will use to 'qualify you'.


Borrower and Co-Borrower Qualifying
If you intend to purchase a home with a partner or spouse, that person will also need to qualify. Some lenders may forgive a lack of credit or lower score for a spouse or partner. Your mortgage lender or bank will advise.

Pre-Qualifying
It's a good idea to be prequalified by a bank or broker prior to looking at homes. Your lender will provide a copy of your credit report and take your application in order to get the ball rolling. This process helps you establish your lending budget. This also you in a better position to negotiate with a seller if they know you are pre-approved. Your lender will provide a letter to your realtor (usually with your offer to purchase) to help prove you are serious.

Once you've conquered these topics, happy house shopping!
Wishing you every credit sanity!Loannetter


©2005 susan templeton loannetter