With the Consumer Financial Protection Bureau’s (CFPB) new Ability-to-Repay rule, and lenders still leery after the real estate crash, how can you best show a mortgage lender that you can handle a home loan? The CFPB now makes home loan lenders consider a borrower’s income, assets, debts and credit history, so keep these tips in mind…
Start with your credit
Get your credit reports from all three credit reporting agencies, Tran Union, Equifax and Experian. Every year you’re entitled to get a free annual credit report through www.annualcreditreport.com. Be sure to scrutinize the reports for inaccuracies. Little things can be considered against you. Did you apply for credit under an alias, or was that a misspelling caused by a data entry clerk wrestling with an unfamiliar name? Be sure to dispute anything that is wrong. Identity theft is on the rise. If you find a credit card on the report that has never been in your wallet, cancel it and file a police report. After you get any errors removed, you are entitled to another free report to ensure that the mistakes were corrected.
A person’s FICO score is calculated by software supplied by Fair Isaac Corporation. So far we can’t get it for free but can buy it from MyFico.com. Yours should be at least 740 to get the best mortgage interest rates.
The simplest way to better your score is to faithfully pay your bills by their due dates every month, even if you can only afford the minimum. If you’re late by a few days once every couple of years, pay the bill as quickly as you can and ask for a waiver of the late fees, because these can mount. Before buying a home, it’s imperative to pay down the principal owed on your credit cards and start living within your means. Don’t cancel any cards. Instead, start using less of your credit. When you do, annually ask for credit limit increases. To get the lowest mortgage interest rate, your unsecured debt should be under 20 percent of your credit limit.
The time to check out your credit reports and audit your FICO score is before you look for a home, not when the lake house on the corner lot finally comes available.
Save for a down payment
Put yourself on a budget and see where you can cut to save. Don’t eat out every lunch—brown-bagging can easily save you $1,250 a year, $6,250 in five. If you scrutinize your budget with a gimlet eye, you can find other places to cut.
Delay buying a new car if you’re looking for a home. It can wait. For real estate agents, their autos are extensions of their offices, so don’t be intimidated by asking someone to ferry you around in their fancy car. The agent won’t think any less of you if you’re driving an older model; she’ll think better of you if you did your homework to impress a mortgage lender into backing your quest.
Accumulating the funds for a large down payment will lower your mortgage interest rate. True, you might be able to finance a home with as little as 3.5 percent down through the Federal Housing Administration (FHA), but you’d have to pay both an upfront and an annual mortgage insurance premium. If you save at least 20 percent for a deposit, you can put all that insurance money into purchasing the house itself.
Gather all of your proof of income for the past couple of years and all of your bank statements for the last couple of months. Armed with this information, go to the mortgage calculator on MyBankTracker.com and plug in the numbers. CFPB rules require that anybody who receives a conventional mortgage cannot exceed a debt-to-income ratio of 43 percent—your total monthly debt divided by your monthly gross income. The loan must qualify to be purchased or guaranteed by a government-sponsored enterprise like Fannie Mae or Freddie Mac, making it a lot easier for you to find financing.
Rates from different lenders do vary, so compare not just the interest rate but the annual percentage rate (APR) which takes into account points and fees. When you’ve found a lender whose rates you like, set an appointment, clean up, dress your best and make your pitch. Remember that you probably won’t be able to lock in rates until a purchase agreement is signed, but getting pre-approved strengthens your negotiating position with a home seller.
Find the best HELOC rates here.