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| Your Guide to Financing a Home |
Payment History: The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors in a FICO® score. Your payment history accounts for approximately 35 percent of your score.
Amounts Owed: The number of accounts you hold with balances represents approximately 30 percent of your FICO® score. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
Length of Credit History: In general, a longer credit history will increase your FICO® score. However, even people who have not been using credit long may get high FICO® scores depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO® score.
New Credit: Many factors of new accounts impact your score. It considers how many of your accounts are new, how long it has been since you opened a new account and how long it has been since credit-report inquiries were made by lenders. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a FICO® score over time. Your new credit accounts make up for 10 percent of your FICO® score.
Types of Credit Used: Approximately 10 percent of your FICO® score is based on your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO® score also takes into account the kinds of credit accounts you have. Have you had experience with both revolving and installment accounts or has your credit experience been limited to only one type? Your FICO® score also looks at the total number of accounts you have and how many of each kind. The appropriate number and mix varies depending on your overall credit picture.
According to Fair Isaac Corporation, a FICO® score takes into consideration all these categories, not just some of them.Lenders also look at other factors when making a credit decision, including your income, how long you have worked at your present job and the kind of credit you are requesting.
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO® credit score.
Visit www.myFICO.com to select credit calculators to compare loans, determine mortgage payments, see whether a fixed or an adjustable loan makes sense, determine closing costs and assess whether renting or buying is the better option for you.
SAVING FOR THE DOWN PAYMENT
It is recommended to pay about 20 percent or more of the cost of the home for the down payment. This is known as an 80-percent loan-to-value (LTV) ratio. If you put down less than this you will be required to pay private mortgage insurance (PMI), which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. The amount is determined by the size of the down payment, the type of mortgage and amount of insurance; it is paid monthly with the mortgage. Under the federal law, the lender is required to cancel the PMI once the LTV ratio reaches 78 percent or when your mortgage has amortized to 78 percent of the original value of the house. The borrower must be current on all mortgage payments, and the lender must tell the borrower at closing when the mortgage will hit that 78 percent mark.
GETTING YOUR LOAN APPROVED
Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready-to-buy buyer, financially capable of buying the property and more likely to close on it. Getting preapproved also allows you to understand your financial condition and how much you can afford before you begin your home search.
Preapproval is different from prequalification, which is merely an estimate of what you may be able to afford. Preapproval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount based on collected preliminary information. However, neither preapproval nor prequalification represents or implies a commitment on the part of a lender to actually fund a loan.
ANTICIPATING YOUR COSTS
Review the information that follows to anticipate your costs involved in buying a home. It is only a partial list; for more detailed costs, ask your real estate agent to help you create a worksheet that can be updated as necessary.
— Estimating Buyer’s Fees
Whether called a loan origination or a loan service fee, buyer’s fees can be up to 3 percent of the loan amount and can include the following:
CREDIT UNIONS
Many people shopping for home loans forget to inquire at credit unions. There are two major differences between a traditional bank and a credit union. One difference is that credit unions are member-owned, meaning that if you have an account at a credit union, you’re part owner in the enterprise. Being a member can translate into better service since you are more than a customer. The other difference is that credit unions are not-for-profit, which explains why mortgages and interest rates tend to be notably better. Becoming a member is easier than typically believed; you can use the credit union search tool at www.JoinACU.org to find a local branch.
Amounts Owed: The number of accounts you hold with balances represents approximately 30 percent of your FICO® score. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
Length of Credit History: In general, a longer credit history will increase your FICO® score. However, even people who have not been using credit long may get high FICO® scores depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO® score.
New Credit: Many factors of new accounts impact your score. It considers how many of your accounts are new, how long it has been since you opened a new account and how long it has been since credit-report inquiries were made by lenders. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a FICO® score over time. Your new credit accounts make up for 10 percent of your FICO® score.
Types of Credit Used: Approximately 10 percent of your FICO® score is based on your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO® score also takes into account the kinds of credit accounts you have. Have you had experience with both revolving and installment accounts or has your credit experience been limited to only one type? Your FICO® score also looks at the total number of accounts you have and how many of each kind. The appropriate number and mix varies depending on your overall credit picture.
According to Fair Isaac Corporation, a FICO® score takes into consideration all these categories, not just some of them.Lenders also look at other factors when making a credit decision, including your income, how long you have worked at your present job and the kind of credit you are requesting.
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO® credit score.
Visit www.myFICO.com to select credit calculators to compare loans, determine mortgage payments, see whether a fixed or an adjustable loan makes sense, determine closing costs and assess whether renting or buying is the better option for you.
SAVING FOR THE DOWN PAYMENT
It is recommended to pay about 20 percent or more of the cost of the home for the down payment. This is known as an 80-percent loan-to-value (LTV) ratio. If you put down less than this you will be required to pay private mortgage insurance (PMI), which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. The amount is determined by the size of the down payment, the type of mortgage and amount of insurance; it is paid monthly with the mortgage. Under the federal law, the lender is required to cancel the PMI once the LTV ratio reaches 78 percent or when your mortgage has amortized to 78 percent of the original value of the house. The borrower must be current on all mortgage payments, and the lender must tell the borrower at closing when the mortgage will hit that 78 percent mark.
GETTING YOUR LOAN APPROVED
Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready-to-buy buyer, financially capable of buying the property and more likely to close on it. Getting preapproved also allows you to understand your financial condition and how much you can afford before you begin your home search.
Preapproval is different from prequalification, which is merely an estimate of what you may be able to afford. Preapproval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount based on collected preliminary information. However, neither preapproval nor prequalification represents or implies a commitment on the part of a lender to actually fund a loan.
ANTICIPATING YOUR COSTS
Review the information that follows to anticipate your costs involved in buying a home. It is only a partial list; for more detailed costs, ask your real estate agent to help you create a worksheet that can be updated as necessary.
— Estimating Buyer’s Fees
Whether called a loan origination or a loan service fee, buyer’s fees can be up to 3 percent of the loan amount and can include the following:
- Loan application fee
- Lender’s credit report
- Lender’s processing fees
- Lender’s documentation-preparation fees
- Lender’s appraisal fees
- Prepaid interest on loan (prepaid per day until the end of the month in which the closing occurs)
- Lender’s insurance escrow (up to 20 percent of the cost of a one-year homeowners insurance policy)
- Lender’s tax escrow (depending on the time of year you close, this can be up to 50 percent of the yearly property taxes)
- Lender’s tax escrow service fee (to set up the tax escrow)
- Premium mortgage insurance (PMI)
- Title insurance cost for lender’s policy (depending on location, a portion or the full amount may be paid by the seller)
- Special endorsements to the title (lender may require the buyer to pay special endorsements, such as an environmental lien or location)
- House inspection fees (any that remain unpaid)
- Title/escrow company closing fee
- Recording fees for the deed or the mortgage
- Local city, town, village, county or state transfer taxes (vary by location)
- Flood certification fee (to determine whether the home is in a flood plain)
- Buyer attorney’s fee
- Association transfer fee
- Condo move-in fees
- Co-op apartment fees (to transfer shares of stock in the property to the buyer)
- Credit checks by the condo or co-op board
CREDIT UNIONS
Many people shopping for home loans forget to inquire at credit unions. There are two major differences between a traditional bank and a credit union. One difference is that credit unions are member-owned, meaning that if you have an account at a credit union, you’re part owner in the enterprise. Being a member can translate into better service since you are more than a customer. The other difference is that credit unions are not-for-profit, which explains why mortgages and interest rates tend to be notably better. Becoming a member is easier than typically believed; you can use the credit union search tool at www.JoinACU.org to find a local branch.
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