Tag Archives: Credit

Link

Will your debt stop you from getting a mortgage? By Terence Loose

Do you carry debt and worry that it may stop you from buying a home someday? Well, you’re not alone.

“An alarming 35 percent of people with credit files have debt in collections,” according to a July 2014 report by the Urban Institute, a nonprofit organization that conducts research on social and economic policy.

If you’re in that group, it’s important to know how that will affect your ability to get a mortgage and even more importantly, what you can do to lessen the impact.

And even if you don’t find yourself behind in your debt payments, keep reading to find out how exactly your credit and payment history affect your ability to qualify for a mortgage.

If I Have a Delinquency or Bankruptcy, Can I Still Get a Mortgage?

It’s not news that being in poor standing with creditors or having the B-word associated with your finances will hurt your ability to get a mortgage. But the details do matter.

First, being behind on payments and placed in collections for anything from credit card debt to medical bills or having a bankruptcy will hurt your chances at qualifying for a mortgage.

“Simply put, banks are trying to determine whether or not you will pay them back. If your credit history shows evidence of irresponsibility or an inability to manage your finances, you aren’t a good bet for a bank,” says Ken Lin, CEO of CreditKarma.com, a site where consumers can access their free credit reports.

In addition to looking bad, a delinquency or bankruptcy can lower your credit score, which lenders use to determine your eligibility and the interest rate they’ll offer you, Lin says. That’s because a delinquency is when you are behind in your credit card or other loan payments – exactly what lenders are trying to make sure you avoid with them.

A bankruptcy is much more serious and a little more complicated, says Lin. Basically, it is a legal proceeding in which you declare that you are unable to pay your debts and need a “fresh start,” he explains.

However, your creditors do get a portion of what you owe them from any assets you may have, says Lin. Obviously, that will worry potential future lenders, he adds.

According to Lin, most lenders use your FICO score, which runs from 300 to 850, and the higher the better.

To get the best interest rates on a mortgage, you’ll want a score of 760 or above, according to FICO’s website. To qualify for a mortgage, even at a higher interest rate, you’ll want at least a score of 620 to 640, says Lin.

A bankruptcy and the delinquencies that lead to it can really take a toll on your score, says Lin. A delinquency and bankruptcy will stay on your credit report and hurt your score for seven years, he says.

“The amount will seem diminutive, though, because the actual bankruptcy itself only lowers your score by about 50 to 150 points, which might not seem like that much,” says Lin.

But don’t let that fool you. Bankruptcy is merely the final blow to your credit report after what was surely a long and damaging road, says Lin.

On the road to bankruptcy, you’ll have gone through being 30 days delinquent on payments, then 60 days, then 90, and so on, explains Lin. As that happens, your score gets hammered down for months or years. Hence, by the time you file for bankruptcy, you’re not going from 800 to 700 – likely you’re going from 600 to 500 and now can’t qualify for any mortgage, he says.

“There may be opportunities out there to get a mortgage without good credit, however potential buyers need to be careful. Those mortgage structures and rates may defeat the purpose of the mortgage, and you may end up paying a lot more for your house than you should,” he says.

Does My Credit Limit Matter?

According to Lin, there’s a commonly spread myth that if you have too high a credit limit – even if your outstanding balance is low – lenders don’t like it.

“The convention was if you’ve got all of this available credit it’s a little bit like a loaded shotgun, right? You might go off at any point in time and buy a whole bunch of stuff [and get into debt]. But what the statistics show and what the credit scoring companies have disclosed is that is not the case,” says Lin.

In fact, he says having a high limit can be a good thing, if you’ve handled it well.

“Say you’ve had $30,000 worth of credit for the last 20 years, and you’ve never abused that. How else could you attest to a better credit situation than someone who knows how to manage that much money for that period of time?” says Lin.

And mortgage lenders see that logic, he says. So Lin says don’t worry too much about your limit – worry instead about how well you’re managing it.

How Much Credit Card Debt Can I Have and Still Qualify?

This is actually a tricky question since the answer might vary greatly from person to person, depending on other factors, such as the home you want to buy, other types of debt, and your payment history, says Lin.

However, there are some general rules you may want to live by, such as the rule of 30 percent. In a nutshell, Lin says data shows that once your outstanding balance goes above 30 percent of your available credit, it can start to adversely affect your credit score, and therefore your ability to get a mortgage.

“If you go over [30 percent] for a short time – a month or so – a few times, that’s okay as long as you pay your balance down,” says Lin. But you shouldn’t go over 30 percent regularly, and especially when a lender is about to check your credit, he says.

So, for example, if you have a $1,000 credit limit, try to keep your outstanding balance below $300. For a $2,000 limit, the target number is $600, and so on.

But as we all know, life has a funny way of making us use credit – for everything from medical emergencies and car repairs to big screen TVs and big nights out. But fret not, because if you do go over 30 percent and can’t pay your balance down, there is an alternative: increase your credit limit.

There is one caveat to this “solution,” however, says Lin. The larger outstanding balance will likely result in a higher monthly credit card payment, which could adversely affect your chances at securing a mortgage by contributing to your overall debt.

How Do Student Loans, Car Loans, and Other Debt Factor In?

The short answer is that they factor in heavily. But there is actually a way to figure out how much – your debt-to-income ratio (DTI). It is simply the percentage of your gross monthly income that goes toward paying for your debt (credit card, car, and student loan payments, etc.). Food, gas, and incidentals are not included, but the monthly payment and taxes on your potential mortgage are. Ideally, your DTI should be 40 percent or lower, says Lin.

Every mortgage lender has a keen eye on your DTI, says Ellen Davis, a senior mortgage banker with Corridor Mortgage Group in Columbia, Maryland. In fact, Davis says your DTI is usually much more important than the type of debt you carry.

So, say your total debt obligations for credit cards, car and personal loans, and the mortgage for which you’re applying came to $1,500 a month. Your gross monthly income would have to be at least $3,750, making your DTI an acceptable 40 percent.

Your DTI is one important number that lenders use to decide not only if you qualify for a mortgage, but for other things such as how much they can safely lend you and at what interest rate, says Davis. Additionally, they use your DTI to determine how large your monthly payment can be.

It’s also an important number for you, says Lin, because, like the bank, you want to know that you can afford your dream house without it becoming a huge financial burden on you.

A Few Final Tips

Courtesy of Lin, here are some useful tips on credit, whether you land on the higher or lower end of the credit score range.

• Know your credit score and credit record, and if there are errors, dispute them. According to Lin, one in four credit reports have a meaningful error.

• If you’re not happy with your score, identify why it’s low. It could be due to any combination of the following: your payment history, your credit utilization, new credit cards (and applications), and the length of your credit history.

• Keep credit card balances to 30 percent or less of your available credit.

• Avoid applying for new credit cards more than once a year – credit checks can negatively affect your score.

• Keep and responsibly use up to three credit cards by paying on time and avoiding maxing out your cards. This establishes your credit and shows that you can manage credit responsibly.

• If your score is lower because you are younger and haven’t established credit, consider opening a secured credit card to start building credit. This is a credit card that has a limit that is a percentage of or equal to an amount of cash you place in an account, such as an interest-bearing savings account.

https://homes.yahoo.com/news/mortgage-with-debt-201625199.html

Link

Three ways to qualify for the cheapest mortgage possible By Terence Loose

https://homes.yahoo.com/news/Things-to-qualify-for-cheapest-mortgage-173655653.html

Do you want to buy a home now or in the future, but fear that it’s too expensive? Well, there may be ways to make it more affordable.

And while you may not be able to do much more than haggle over the asking price of your dream home, there are things you can do to make your mortgage cheaper.

“It’s all about showing the lender that you are financially solvent and a low risk to loan a large amount of money,” says Ellen Davis, a senior mortgage banker with Corridor Mortgage Group in Columbia, MD. In short, your lender wants to feel confident that you’ll pay them back.

So, keep reading for three things you’ll need to get the best deal on your mortgage.

1. A High Credit Score

You may feel that you are more than just a number, but according to Davis, your credit score is one of the first things a potential lender checks when going over your loan application. Most lenders use the FICO credit score, she says which ranges from a low of 300 to a high of 850.

To qualify for a mortgage at all you’ll probably need a credit score of at least 620, maybe even 640, says Ken Lin, CEO of CreditKarma.com, a site where consumers can access their free credit reports.

But to qualify for those great rates that are splashed all over lenders’ ads, in addition to other requirements, you’ll probably need a score somewhere above 720 and possibly as high as 740, says Davis.

In other words, the higher your score is the lower your interest rate and the cheaper your mortgage.

And the difference between a poor and strong credit score and your resulting interest rate could mean a lot over the course of your mortgage. In fact, according to an example provided by Credit.com, a website that educates people about credit, it could be enough to pay for your kid’s education or a nice new car.

Their example looked at the difference between interest rates offered to borrowers in three different credit ranges for a 30-year, fixed-rate mortgage of $200,000 in May 2014. Here’s what they found:

Credit Score Interest Rate Monthly Payment
(Principal & Interest)
Lifetime Cost Total Savings with Great Credit
740 and above 4.025% $958 $344,778
680-699 4.974% $1,070 $385,368 $40,591
620-639 5.481% $1,133 $407,950 $63,173

As you can see, having good or excellent credit could save you tens of thousands of dollars over the life of your mortgage.

To attain that great credit score, Lin says you’ll want a few things. One is to have a few credit cards.

“You are not born with good credit – you have to earn it,” says Lin. People sometimes believe that because they don’t have any debt or have never used credit that they must have great credit. Not true, says Lin. “You have to use credit to get good credit,” he says.

Next, in addition to never being late on your payments, keep your outstanding balance to 30 percent or less of your available credit limit, he says. So, if you have two credit cards with an available credit limit of $5,000 each, keep the outstanding balance on each below $1,500.

Finally, check your credit and correct any mistakes. Lin says 25 percent of all credit reports have a meaningful error on them, which could range from inaccurate late payment records to identity theft.

Lin also suggests checking your score at least six months before you apply for a mortgage, so you have time to work on improving it by doing a few of the things listed above.

He says that while a few late payments or a delinquency can lower your credit score fast, it takes time to raise your score more than a few points. He adds that six months before applying for a mortgage is not the time to close cards or get new ones – both can lower your score.

2. A Big Down Payment

A big down payment may sound like the opposite of “saving money,” but putting a lot of money down on your home could save you a bunch in interest and reduce your monthly costs.

First, it’s merely a math equation to see that a bigger down payment – and therefore, borrowing less – saves money. That’s because you will pay 30 years of interest on every dollar you borrow.

A larger down payment also helps with the interest rate you’ll be offered, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc. Just like with credit scores, the percentage you put down could affect the amount of risk the lender sees in you, he says.

The numbers are not as straightforward as with FICO scores, but a good rule of thumb for most loans is to shoot for 20 percent down. If your other factors hold up – good credit report and score, good income, etc. – Duffy says this is the magic number to get the best rates.

That’s because your down payment is the lender’s “cushion” against you defaulting on your mortgage, says Duffy.

Finally, putting 20 percent down gets you out of having to pay private mortgage insurance (PMI), for exactly the same reasons as outlined above: under 20 percent down and lenders begin to get nervous about you defaulting on your mortgage.

Calculating PMI is complicated and varies widely based on the amount you borrow, the amount you put down, as well as other factors, says Duffy, but it can really add up. In fact, it can range from .5 percent to 1 percent of the amount of the mortgage per year, he says.

Run those numbers for a $300,000 mortgage, and PMI could ding you for $1,500 to $3,000 a year, or $125 to $250 per month.

To see how much all this could cost, let’s look at a simple example of two 30-year mortgages. We’ll keep the sales price of the home ($300,000) and the interest rate the same (4.20 percent*), but change the amount of down payment.

Mortgage A Mortgage B
Down Payment Percentage: 20 10
Down Payment Amount: $60,000 $30,000
Total PMI (@.75 percent/year):* $0 $11,981 ($168.75 for 71 months)
Monthly Mortgage Payment: $1,174 $1,320
Total Cost of Interest and PMI: $182,511 $217,306
Total Cost of Home: $482,511 $517,306

Bottom Line: As this example clearly shows, that 10 percent extra in down payment pays off overtime to the tune of savings of nearly $35,000.

3. A Low Debt-to-Income Ratio

The amount of debt you have compared to the amount of income you have is another key area of interest for any lender. Remember, the thinner you are stretched financially, the more risky you are perceived to be by lenders.

One way lenders assess this is by calculating your debt-to-income ratio (DTI), which is simply the percentage of your gross monthly income that goes toward paying your debt.

“Any monthly payments on credit cards, student loans, car loans, personal loans, etcetera, is used in the underwriting process to help calculate the debt-to-income ratio,” says Davis. In addition, the mortgage payments, taxes, and PMI on the home you are trying to buy will also factor in.

When all that is calculated, you’ll want your DTI to be 40 to 43 percent or lower to qualify for a mortgage, depending on the institution, says Davis.

However, for the best rates, you’ll want your DTI to be in the mid 30s or below, all else being equal, says Duffy.

So, say your total debt obligations for credit cards, car and personal loans, and the mortgage for which you’re applying came to $1,500 a month. Your gross monthly income would have to be at least $4,286 to be considered for the best rates. That would be a DTI of 35 percent. Again, it’s not exact, but it’s a good start.

*According to Freddie Mac, one of the nation’s largest mortgage holders, for the week of September 25, 2014. In the PMI example, this figure is based on the fact that with most mortgages, you can stop paying PMI once you reach 20 percent equity in your home. Make all scheduled payments in the above example, and that happens after 71 payments.