First-time Buyer or Have Not Applied for a Loan Lately?

Late in 2008, the world of home mortgage finance was shaken to its foundation. Banks, other lenders and mortgage insurers learned the hard way that they had been assessing risk poorly for years. One of the consequences today is that any prospective home mortgage borrower is now facing a much more demanding process to secure a loan. Still, it is navigable if you know what you are doing and do not have serious flaws in your credit history.

A crucial concept to acknowledge is that you are wasting your time looking at homes to buy if you cannot qualify for a loan. That point hit home when my sister-in-law recently found the "home of her dreams" in Las Vegas but then learned she could not qualify for a loan. The problem may be the individual's, or it may be caused by local market decline, or it may be caused by both.

A key player in the world of home mortgages is Republic Mortgage Insurance Company (RMIC). They issue guidelines to Fannie May and Freddie Mac regarding what loans they are willing to insure against default. Key factors are the borrower's Debt to Income Ratio, the amount of down payment and whether the area market is considered stable or declining (most of Northern Virginia is considered "declining" by RMIC.) The rules change often, so it is crucial that you sit down with a highly-experienced loan officer to size up your situation correctly.

I can recommend several excellent loan officers that you can "shop around" with and come to a clear understanding of your purchasing power.

In the meantime, here are some factors to consider:

The importance of a "credit score" has become widely known over the past decade. It is actually called your FICO (Fair Isaac COmpany) Score. It is considered anytime you apply for an installment loan of any type. Do you know your credit score from all three major repositories: Equifax, TransUnion, and Experian? It is always wise to have an idea of what those databases show about your credit experience. You can learn a lot about your personal situation by using Annualcreditreport.com. At no cost, it will show you what TransUnion records about your credit history. For Experian, go to experian.com/reportaccess/. We do not recommend Equifax, because they try to sell you too much enroute to getting their free report.
Warning: be careful because multiple requests for credit reports can lead to a reduced score.


Would you rate your credit: Good, Fair, Poor, or Excellent? AND, Why?

Have you been more than 30 days late on your rent or mortgage?
Have you been more than 30 days late on your car payment?
Have you been more than 30 days late on your credit cards?
Do you have any collections, judgments, or liens?
Do you have any bankruptcies, foreclosures or repossessions?
Do you have student loans?
Do you have any debts from a previous marriage?
Do you have four lines of credit that are at least 2 years old?

How Is My FICO Score Calculated?

The formula used to calculate your FICO score includes information based on several factors:

~ 35% on your payment history
~ 30% on the amount you currently owe lenders
~ 15% on the length of your credit history
~ 10% on the number of new credit accounts you've opened or applied for (fewer is better)
~ 10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)


How Can You Improve Your Credit Score?

The best way to improve your credit score is to pay your bills on time and manage your credit wisely. The most important item is your mortgage. Make sure you pay it on time every month. Installment loans, where you borrow a set amount to buy new furniture or appliances, for example, are given more weight than credit cards.

Keep your borrowing well below your credit limits, because your FICO score will be lower if you are maxed out on your credit cards. Don't have more than two or three credit cards because a large number of credit cards also lowers your FICO score. Don't apply for several credit cards at one time; it makes lenders nervous and will lower your FICO score. Other factors also affect your score, such as home ownership, which raises it, and moving frequently, which lowers it.

A good loan officer can often help you with programs that may carry a higher interest rate but are still within your reach ("buying power.") Pat Fales Associates can get you started on the right foot.

Copyright Pat Fales.