Mortgage Qualification
#1 Mortgage Rate Pick
Are you considering applying for a mortgage loan to purchase your first
home? If so, you should read the following tips below that will make the
process easier!
If You Have a Good Credit History It Is Easier To Qualify For a
Mortgage
By far the easiest way to qualify for a home mortgage loan is by
establishing a good credit history. To establish a good credit history
you need to be able to demonstrate responsible repayment of smaller
loans, such as credit cards and car loans. The building of your credit
history begins the day that you put the very first debt into your own
name. For many Americans, this is at the age of eighteen.
Having a good solid credit history, shows the home mortgage lender
that you take financial responsibility seriously. This makes you, what
the lender terms, a low risk borrower. That is to say that you as a
borrowers are a relatively low risk in comparison to other borrowers.
In return for your good credit history, the lender will approve your
home mortgage loan application. In addition, he will offer you a lower
interest rate on the loan than would be offered to other borrowers who
are classified as higher risk.
How Is Credit History Determined
Most people do not realize how pervasive and thorough the industry
that accumulates and tracks individual credit histories is. There are
three major credit repositories. They are: Experian, Equifax and
Transunion. Among these three, they have a history on almost every
person in the United States that has ever had a credit card, car, or
mortgage loan.
A mortgage lender almost always orders a history from each of these
repositories. This report is call a three bureau merged credit report or
a tri-merged report. The word merged means that the bureau's consolidate
the individual trade items in the report and eliminate duplicate items.
The lenders always order a credit score with the tri-merged report.
Each bureau has its own score and the general name for the score is
called a FICO or Fair Isaac score.
Most lenders make their loan decision based on the middle of the
three FICO scores. Generally lenders use the following as guidelines for
credit approval.
SCORE RATING
720+ Excellent
680 to 719 Good
620 to 679 Average
Below 620 Subprime
Below 500 Few loans available
If your credit history is not as strong as you would like, that
doesn't mean that you will have to give up on getting a home mortgage
loan. There are other things that you can do to increase your chances
for mortgage approval.
Save a Sizeable Down Payment
Having a substantial down payment on the home that you wish to
purchase and applying for a smaller home mortgage loan is another
way to increase your chances of getting mortgage approval. Again, this
goes back to the risk involved to the lender for financing your loan.
Some mortgage lenders will require that you have a 20% down payment
on the home, and then they will grant mortgage loan approval for the
remaining 80% of the purchase cost. This helps to offset the lender
risk. In the event that you are unable to keep up with monthly mortgage
payments and you default on the loan, the lender will have a better
chance of recovering his money through foreclosing on and selling the
home if the loan is a smaller percentage of the market value of the
home.
Therefore, if you can save 20% or more towards a down payment on your
home, you will be lowering the risk to the lender and increasing your
chances of getting mortgage approval.
Mortgage Insurance is used by lenders when you can not make a 20%
down payment on your purchase. The lender is the entity that is insured
and borrower pays a monthly premium of as little as .3% of the loan
amount to over 1%. (i.e. $200,000 loan has month premium of $50 at a .3%
rate.) The amount of the insurance premium is determined by the amount
of the down payment. That is, the less the down payment, the higher the
mortgage insurance premium.
Another technique to minimize your down payment is to ask the seller
of the property to carry back a second mortgage in lieu of receiving all
the sale price in cash. Your should talk to a Realtor or to a mortgage
broker/banker about this technique as it is tricky.
You May Have To Accept a Higher Interest Rate on Your Mortgage
Loan
If you wish to secure a mortgage despite your bad credit history, and
you do not have a sizeable down payment saved up, you may have to agree
to a mortgage at a higher interest rate than that which is being offered
to low risk borrowers. This is because the lender will want to be
compensated for his increased risk level.
This should not necessarily prevent you from taking the loan, though.
If you secure the mortgage and are diligent about making timely
payments, after paying on it for awhile you will improve your credit
history. Then you may refinance the mortgage at a later date with a
better rate offer.
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