Mortgage

How to Organize Your Files Before Applying For A Mortgage

Here you’ll find everything you need to organize before applying for a home loan, how to get your Credit Report, your Beacon score, clean your credit report. You’ll find tips on files and paperwork you need to have ready to increase your odds of getting approved for a home mortgage. For more thorough information on credit reports & credit bureaus, visit our other site DebtWizards.com and read the chapter: How To Get Your Credit Report and improve your credit score.

Can you even afford a house right now?

Assuming you can afford a house, how much can you afford? These are important questions that many people don’t research, focusing on what their mortgage payments will be, ignoring other monthly payments. This oversight puts many people down the wrong path to bad debt. For example, your monthly expenditures will be more than just the home loan, there will also be homeowners insurance, flood insurance, mortgage insurance, utilities, garbage, cable TV, groceries, unexpected auto repairs, lunch money, and many other obligations. They must all be accounted for in your budget spreadsheet. What’s that? You don’t have one? Are you nuts?

Start planning 6 Months before you apply for a home mortgage

You should start planning 6 months before you expect to buy. You need this time to clean up your credit report, and get funds that are contributed by family into your account long before the lenders go looking for it. Most lenders do not allow money given to you by family members to count toward a down payment, so you have to bury it early in your account. You can get your credit report from sites like Experian and Equifax. If you plan on buying in June and July like many families, you need to start planning your finances in January. You should get your credit report at least once every year to verify it for accuracy, and make certain your credit score is up to par. If your credit is clean and you have your down payment ready to go, you won’t need as much time to plan. Buying a home is a very serious investment that must work right on the first try with no mistakes. Patience and planning wins this game, do not be impulsive. Make sure your credit is clean, and then apply for a home mortgage on the web at online mortgage sites like Quicken Loans. Be sure to read our chapter All About Mortgages, Home Loans & Avoiding Scams.

Why is your credit score so important?

Everyone has a credit score calculated at the time your credit report is requested. It’s based on over 100 different proprietary variables and algorithms developed by Fair Isaac (FICO). The range is 300 to 850. You can get your credit score from Experian or Equifax. Most lenders consider people above 650 to be prime borrowers, meaning they will most likely be approved at favorable rates. According to my credit report from Equifax, 71% of the people with a credit score from 500-550 will default on their credit. Another 51% of buyers with a credit score from 550-600 will default on their credit. That’s pretty scary. This is why lenders run your credit report and head straight for your FICO Beacon score.

What A Low Credit Score Means To You

Your credit score is the single most important factor determining whether you’ll get approved for a mortgage, car loan, refinance loan, or credit cards, and what your APR will be. If your score is low, you’ll pay very high interest rates, up to 23%. Most people are also unaware that their credit score also affects how much you’ll pay for car insurance rates too. Many insurance companies run a credit check on you before selling you insurance.

The most important factors affecting your credit score

The most important factor affecting your score is the length of your credit history. This is why college students have low scores, while us 30 somethings have high scores. If you have too many accounts open, this can drag down your credit score also. Opening up all those department store credit card accounts and excessive financing accounts points you in the wrong direction, so your beacon score takes a hit. My credit score would have been higher if I did not have the excess luggage of a department store credit card, an appliance store credit card, and 2 different computer store finance cards that I no longer used. What’s worse, one computer store is defunct, yet my account still appeared on my credit report as open. I called all 4 sources and closed these accounts since I never use them. It takes about 30 days for it to appear on your credit report. Once you successfully dispute and remove negative items from your credit report, wait 30-60 days and order another copy of your credit report to verify, and you should also see a higher score.

The house you can afford depends on your current income and debt obligations. You must be able to pay your mortgage, satisfy all your current debt, and still have money leftover each month to put in the bank. For many people this will actually put them in a lower priced house than they anticipated. Don’t play the game of expecting to get raises every year, thinking that eventually you’ll be able to afford the higher payments, most raises are 4% to 7%. In bad times you won’t get a raise, while inflation overtakes you. What can happen is you’ll get laid off and you won’t be able to afford your monthly bills. If you don’t have a budget worked out on a spreadsheet, you have a serious debt problem waiting to happen. If you cannot recite from memory all the creditors you owe and how much you owe them, you have a credit problem.

Before you can apply for a home mortgage and buy a house, you must determine if you are creditworthy. Don’t think that just because you have a good income and never missed a payment that you will get approved. Many people with great credit and income are not mortgage worthy and get rejected for a mortgage because they are self employed, or their debt to income ratio is too high for the bank. For example, if you have a good salary, but lots of credit card debt, chances are you’ll get rejected for a mortgage. It seems like they just look for reasons to reject you. If you have always been a cash buyer and have not established any credit, good luck getting a mortgage. You must have a credit history or you’ll be rejected for a mortgage. You don’t want to have too few credit accounts, or too many on your credit report either, or you’ll get rejected.

Where is your down payment coming from?

Most banks don’t want you to use money from family as a down payment. They figure that without that money you can’t afford the house. So if you plan to get money from your family, put it in your bank account at least 6 months before you apply. This is because most mortgage lenders only check 3 months worth of bank statements, and you’ll be hiding below the radar.

When is your income not considered income?

Items that you think will help you get approved will often prevent you from getting approved. For example, if you derive income from a corporation, many banks will not acknowledge it as an income basis for a mortgage if the corporation has not filed at least 2 years of tax returns. So if you earned $100,000 from your corporation, it will not count if the corporation is a only year old. This is because many companies are fly by night and go out of business. Also, self employed people have a real tough time getting approved, and often must put down 25-35% to be approved for a mortgage. Pay down your credit card debt as low as you can, then get your Credit Report.

Being Self Employed Is A Bad Thing To Do To Your Credit

This is one reason why I recommend that you never list yourself as self employed, it’s the worst thing you can do for your credit rating. Many banks won’t even touch you for home or auto loans if you’re self employed. Talk to your tax advisor about this, but I felt better off incorporating, now I’m an employee with a verifiable W2 form, not a self employed person. This makes all the difference in the world. Also, if you’re self employed, all liabilities flow through to you, but in a corporation, the corporation usually assumes all the liabilities.

Before you plan for your future, you better get in touch with your past

Your Credit Report is the single most important item. If you’re going for a mortgage, don’t get the free credit reports or the $8 reports you see on the Internet, they simply do not have enough information for you. The “merged comprehensive reports from the big 3 credit bureaus” are the ones to get, from sites like Experian or Equifax. These Credit Report cost a bit more, but remember you are about to make the biggest purchase of your life and you only get one shot at getting it right, so get a 3 Bureau Online Credit Report, the banks do it and you do it also.

Get The Credit You Deserve

When you order your Online Credit Report from online sites like Experian or Equifax, be sure to also select the option to get your credit score. Many sites now offer the Fair Isaac score that the banks receive when they check your credit. Knowing your score up front can give you a good idea of your chances of getting approved for a mortgage. Many people also call this the “Beacon Score”. A score of 660-680 or higher is considered good, and you’ll most likely get approved with favorable financing terms.

Online Sites To Get Your Credit Reports

Experian is a great place to get your credit report instantly online. We send all our friends and family there, because it’s so easy to use.

  • 3 Bureau Online Credit Report in 30 seconds from one of the big 3 credit bureaus.
  • Single Credit Report With Credit Score Appears online in 30 sec.
  • ConsumerInfo Credit Monitoring Includes unlimited free credit reports, alerts, tools.

Equifax Instant Online Credit Reports & Score Power

  • Score Power credit report with your FICO Credit score. Online investigation request.
  • Credit Watch credit monitoring service, email alerts of changes to your report.

Equifax is one of the big 3 credit bureaus, used by most creditors who run your credit profile. When you apply for mortgages and car loans, banks get your credit report from the big 3 credit bureaus. By using the same credit reporting agency as the bank, you’ll be in sync with what they see. Inferior credit bureaus may not have all the information that the Equifax report has, and this could lead to you getting rejected on your loan. The Score Power Package includes your Equifax Credit Profile, the FICO score based upon that profile (also known as your BEACON score), plus a personalized analysis that provides tips on how to improve your score over time, how you rank among other consumers, and how lenders interpret your score.

When you get your credit report, look it over good for errors, and incorrect previous addresses, as well as old revolving credit accounts that you no longer use or have gone out of business. The beauty of your instant online sites like Experian or Equifax is, with your credit score you have the ability to dispute it online after your credit report appears. You can check off the accounts that should be closed and dispute any item on there, then submit, and they report back to you within 30 days per federal law.

Tips for obtaining a high credit score

I’m not just blowing steam, I’m living proof of what works. Don’t open a lot of credit accounts. All you really need is a couple of credit cards and nothing else. Stay away from department store cards almost all of which are 21% APR, you already have other lower APR credit cards. The stores entice you with free gifts or 10-20% off your purchase if you sign up, but don’t fall for that trick. Once you sign up they have you and you’ll be paying 21% APR, because few people pay their department store bills in full. Don’t sign up thinking “I’ll just get the free gifts or discounts then close the card.” Most people don’t end up closing it.

If you finance a car, a computer, or furniture, make sure the account is marked CLOSED on your credit report when it’s paid off. You don’t want any excess luggage lingering around on your report. Pay all your bills on time, and always pay more than the minimum or it will take you up to 10 years to pay it off. Try to keep your balances low, especially when you are applying new for credit. Don’t apply for new credit within 6 months after you move to a new address or accept a new job, as you may be rejected. Many creditors will turn you down if they can’t verify your address in the phone book or if you have not been at the same job for 6 months. Also, don’t apply for new credit if you have recently been approved for credit somewhere else. Stick with no more than two credit cards that you opened in college, and don’t open new credit cards for no reason. Pay them on time, and keep them in good standing. Accounts that have been in good standing for your entire credit history help bring your beacon score up.

What if you find an error or a black mark on your credit report?

Why is my bankruptcy from 5 years ago still on my credit report?

If you have a bankruptcy, it stays on your credit report for 10 years. Other bad marks like credit card defaults will remain on your report for 7 years. If these are legitimate, then neither you, nor me, or even God can have them removed. But if you find mistakes you can contest them, and most people are unaware that federal law requires credit bureaus to give you 100 words of your choosing to appear on your credit report, for example, to refute any bad marks on your credit report. Also, you can contest any black mark on your credit report, and by law, the credit bureaus have 30 days to respond or they must remove the bad mark.

Scam Alert!

Avoid “Credit Doctors” like the plague! These companies claim they can erase your bad credit to a squeaky clean history. Any legitimate black marks like bills you ignored, cannot be removed by anyone accept for your creditor for 7 years. Some credit doctors illegally convince you to take out new EIN numbers, which are similar to social security numbers to create a new identification with a clean slate. This is a felony that has landed many unsuspecting bad credit people who did not know any better in jail. Credit doctors charge you $600-$1000 and use the same tricks you can use yourself for free just by making a few phone calls or writing a letter to the credit bureau. Credit doctors prey on people with bad credit histories, because these poor folks are low on self esteem, and want to believe the rosy promises that credit doctors tell them.

Disputing bad marks on your credit report:

How to do it yourself for free.

Try Fresh Start: The Authoritative Guide To Consumer Credit Repair. It’s a very easy to read guide from Horizons Unlimited. We cannot say enough good things about Fresh Start, the best debt resource we’ve seen, covering more topics related to your debt than anyone. It walks you through each of the remedies available to you to remove negative credit. Forget credit doctors who scam you out of $600, this book shows you how to do it free yourself. There are great step by step tips on analyzing your credit report, disputing bad marks with credit bureaus, negotiating tips, common mistakes, laws that work in your favor, well written sample dispute letters, credit bureau phone numbers, web sites, and addresses, settling bad debts AND getting the creditor to remove them from your file. There’s tips for people who default on government student loans, divorce & credit, bankruptcy, judgments, old delinquent accounts, credit card fraud and more. This book is available from them as a CDROM, as a book, or as an instant electronic download. By ordering the download, you can start immediately and it’s searcheable. I just got the download, it’s easier to use.

For more great tips on cleaning your credit report yourself and avoiding credit doctor scams, try DebtWizards.com. There’s also great information on establishing credit, dealing with debt collectors and your rights, debt consolidation, and much more.

Consolidating Your Debt And Reducing It

The best way to consolidate your debt is to use a Consolidation Program, not a consolidation loan. Try iDebtAssistance for more info. With their program, they don’t lend you money, they work with your creditors to negotiate lower APR, and you combine all of your unsecured payments into one manageable payment. You get a reduction in your interest rate and monthly payment.

Best Odds Paperwork Requirements

When applying for a home loan, you never want to be caught without the paperwork the lender needs to approve your mortgage. Each missing item will delay your home loan approval. It’s better to over deliver with more than you think they will need, and have it well organized and ready to go. Impress them with your organization and readiness, and your loan approval will go smoothly. Your strategy is to only have to meet with them once to turnover the paperwork, and not have to field any follow up questions later on, that will cause additional delays with phone tag games.

Get Your Financing Ducks In A Row

Start a file now with these items, originals whenever possible.

  • Your Credit Report, Banks run their own copy, but you need to get your own Credit Report to verify that it’s squeaky clean, and fix it if it’s not.
  • Bank statements for the last 2-6 months. 3 months is typical.
  • If you had a bankruptcy, collect all the paperwork together.
  • Last 2 consecutive pay stubs. Get 60 days worth, some banks ask for more.
  • Monthly statements or coupon books from loans you are paying off.
  • Last 2 W2 Forms. Some banks ask for your previous 2 tax filings.
  • Property tax statement from last year if you paid any.
  • If you are a recent graduate, get your transcripts, they will ask for them.
  • A form from your utility company stating that you are current on your bills. Most utilities have a standard form ready to fax out.
  • Income from divorce, alimony, Social Security, gaming, lawsuits, inheritance.
  • Your drivers license & social security card.
  • Car titles, if you own your car 100%.
  • Retirement plan statements for the last 3 months.
  • Statements from your Stock, Mutual Fund, or IRA accounts.
  • Any other 1099 forms that companies sent you for doing work for them.
  • Your last 3 credit card statements showing nice low balances. They will check your credit report for this, but have it ready in case they ask for it.
  • If any income is derived from ownership in a corporation, banks ask for the corporate tax return, even though earnings appear on your Schedule K. They verify income because if your down payment was from an illegal source, the government can seize your house, leaving the bank stranded.

If you are doing a VA (Veterans Administration) Approved Mortgage:

  • A certified copy of your DD Form 214 “Certificate Of Release Or Discharge From Active Duty”.
  • Within about 3 weeks VA will send you Form 26-8329 (CG) “Certificate Of Elegibility For Loan Guaranty Benefits.”

If you do not have these items ready to go, do not bother applying for a mortgage at any financial institution until you have it all ready.

Go Get Financed

Now that you have all the information you need to get qualified, you can go get your pre-approval from either your bank or the online loan sites. Be sure to read the chapter All About Mortgages, Home Loans & Avoiding Scams. If you just want to refinance your house, read our chapter called All About 2nd Mortgages, Refinancing, and Home Equity Loans. Our useful finance guides to home mortgage refinancing and home equity loans include tips on where to find the lowest mortgage rates, mortgage calculators, where to apply for online mortgages, and mortgage company reviews. You’ll also find scams and loan fees to avoid, dealing with mortgage brokers, and tips to increase your approval chances for a mortgage loan or a second mortgage.

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