The Three Biggest Mistakes People Make When Refinancing
Or Purchasing A New Home
Mistake #1
- Failure To Examine and Repair Any Credit Problems Prior To Applying For Your
Loan
99.9% of potential new homeowners and borrowers have no idea what type
of credit they have or how to repair any adverse credit which may exist. They
fail to realize that credit is one of the key factors in acquiring a mortgage or
refinancing a current mortgage. Credit problems not only slow down the
processing of getting a home loan, but can damage your ability to make numerous
other purchases.
What is Good Credit?
Good credit usually means a person has about five or six solid pieces of
seasoned credit. In other words, a car loan, a current mortgage, a VISA card,
etc., which are at least two years old and indicate no late payments. Of course,
rarely is anyone's credit history perfect. One 30-day late payment on your
credit report won't necessarily keep you out of this category. Most underwriters
- those who approve your loan - are looking for trends. Isolated incidents do
not carry as much weight as an established history of paying bills well past
their due dates.
How Can I Repair My Credit?
In most cases, a simple letter or phone call to the credit card company or
business that originally gave you the credit can put you on the right track for
having the "scar" removed from your report. Sometimes the company will
require you to pay off the balance of your debt or send in a letter explaining
why you were late with your payment. However, if you have a history of late
payments, you may have to let time take its course, waiting while you build up a
record of timely payments on outstanding debt.
Can High Levels Of Debt Affect My Ability To Buy A Home?
Yes. And there is an easy way to determine if you have too much. Most loan
programs will not allow your monthly mortgage payment (plus housing expenses) to
exceed 28% of your total gross monthly income. Also, they will not allow your
total monthly debt (mortgage payments, car loans, installment loans, credit
cards, rental losses and alimony/child support) to exceed 36% of your total
gross monthly income. (Note: these are guidelines only. Special circumstances
and special programs may be able to overcome excessive ratios) If you exceed the
28% and 36% guidelines, you may want to consider paying off some of your debt in
order to lower your monthly obligations before you apply. Remember, however,
that some loan programs have more lenient ratios (such as FHA, VA, FNMA
Community Homebuyer and Jumbos).
Mistake #2 - Failing To Realize (In Advance) How
Much Money A Lender Is Willing To Loan You
Whether you are planning on refinancing or purchasing a new home, most lenders
have strict guidelines on how much money they are willing to lend. The lender's
decision is typically based on the loan-to-value ratio. In other words, lenders
have limits on how much money you can borrow based on the value of your home.
For example, if you are refinancing, most lenders will not lend more than 90% of the appraised value of your home. So, if your house appraises for $100,000, you would be eligible for a $90,000 loan, assuming your current loan balance and closing costs equal $90,000 or more so that you are not getting cash out of the property.
On the other hand, if you are planning to buy a home, most lenders will allow your loan-to-value ratio to go as high as 95-97%, or even 100% with a VA loan.
So, if you are planning on buying a new home, make sure you have at least 3%
of the purchase price - your own funds, not gifts or loans - available for the
downpayment, plus closing costs. Closing costs include discount points,
origination fees, attorney's fees, etc. They often run anywhere between 4% and
8% of the loan amount, depending upon your location and loan amount. The larger
the loan, the smaller will be the percentage of that loan required to cover
closing costs.
Is It Possible For Me To Take Cash-Out When I Refinance And Pay Off Some
Credit Cards?
Yes, but in most cases, this means you cannot borrow more than 75% of the
appraised value of your home.
What Can I Do If I Can't Come Up With A 5% Downpayment?
The vast majority of loan programs look to the borrower to make a downpayment
from his or her own funds of 5% of the value of the house. As mentioned, some
will accept only 3%. Some of these still require 5% down, but will allow the
remaining 2% to come from a gift from immediate family members, grants or
unsecured loans from your employer, non-profit organization, government agency
or first mortgage lender, like Crestar. In addition, if you are eligible for a
VA loan, you can qualify for a 0% down payment loan (provided that you have
sufficient VA eligibility)!
I Am Self-Employed and Earning A Good Living, But My Tax Returns Are Complex,
Usually In Some Stage Of Completion, And Difficult To Put My Hands On - Can I
Get A Loan ?
Yes. There are a number of "no income verification" programs available
for people like yourself. Under the guidelines of these programs, most lenders
will not loan you more than 80% of the appraised value of the property . They
will require that you have strong credit, a substantial amount of liquid assets
and have been self-employed for a minimum of two years (with some exceptions).
If you fit this criteria, there's a good chance you'll get approved for the loan
you need.
Mistake #3 - Failure to Find A Reputable and
Experienced Mortgage Lender To Help Finance The Home
Associating yourself with a quality, honest service-oriented mortgage banker is
probably the most important ingredient in finding home financing. This is an
important decision in your life - it is probably one of the largest financial
transactions you will make. It s not something you want to treat lightly.
Dealing with the right lender can mean the difference between having your loan
application approved or rejected.
So, how do I find the ideal person to handle my loan?
This shouldn't
be too difficult. There are many reputable, knowledgeable professionals. Just be
sure to ask a few good questions before choosing one. We recommend asking:
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