The next step on the road to home ownership is getting pre-approved for a mortgage. This determines the size of the mortgage you qualify for, and therefore, decides the price range for the homes you can look at.
Pre-approval helps you to:
- Know how much you can borrow.
- Confirm your ability to qualify for a mortgage based on your credit, financial and employment information.
- Strengthen your position to make an offer on a house. A seller will be more willing to accept an offer if the buyer is pre-approved.
To become pre-approved, you’ll need to work with a mortgage lender. The mortgage lender will review your credit history, earnings information, employment history and assets. You will need to provide certain documents to the lender to verify this information.
Pre-approved vs. Pre-qualified
After the review, the lender will give you a “pre-approval letter.” The pre-approval letter tells home sellers that you have the ability to qualify for a certain mortgage amount. Getting pre-approved is not the same thing as getting pre-qualified. Pre-qualification simply states that the borrower qualifies for a loan based on some preliminary questions but does not commit the mortgage lender to approve the mortgage. The mortgage lender will still have to conduct a complete review of your financial situation, including your credit report and your income and employment history.
The pre-approval process is more thorough. The lender does most of the work for the full approval except for the appraisal and title search because there is no property identified to buy. The pre-approval letter is important to sellers because they do not want to accept an offer that is likely to fail because financing cannot to secured.
How do you get pre-approved?
The loan officer will carefully review your financial situation, including your credit report and other information. The lender will then suggest programs which most-closely meets your needs. For instance, a first-time buyer may qualify for first-time homebuyer mortgage programs with less than 20% money down and low interest rates, while a repeat purchaser (someone who has bought a home before) with more equity (money invested in a home) might want to get a 15-year loan and the lower overall interest costs it offers. Typically, first-time buyers opt for the traditional 30-year loan, with either a floating interest rate or a fixed rate of interest over the life of the loan.
Do you qualify for a first-time homebuyer program?
There are various first-time homebuyer programs operated by state of California and various municipalities. Two of the largest programs, the Affordable Housing Partnership Program (AHPP) and the California Homebuyer’s Downpayment Assistance Program (CHDAP) are operated by the California Housing Finance Agency (CalHFA). Click on the links to get details and requirements for each program.
What you should know about credit
Next to the down payment, credit “issues” are the biggest impediment to homeownership. Many people encounter life situations (i.e. loss of job, divorce, death, unexpected emergencies, etc.) that negatively affect their income and credit. But we believe that knowledge is half the battle to correcting credit problems and getting yourself positioned to buy a home. The goal of this section is to make you aware of what lenders are looking for when considering you for a home loan and to provide you with information to assist you in improving your credit standing. Knowledge is power, so let’s get started!
The Credit Report
When you look for a mortgage a first step in the process is that the lender will review your credit report. Your credit report is a history of how you have managed your finances and repaid debt. It provides information on money you have borrowed and history or your payments.
Your credit history is compiled into a credit report by three private companies: Equifax, Experian and TransUnion. These companies sell your credit report to banks and other creditors so they can review mortgage and loan applications.
Your credit report includes:
- A list of debts, such as credit cards and car loans, and a history of how you have paid them.
- Any bills that have been referred to a collection agency. This can include items like phone and medical bills.
- Public record information, such as tax liens or bankruptcies, even if these happened several years ago.
- Inquiries made about your creditworthiness. An inquiry is made when you request credit. Many times your report will show if you were given credit based on the inquiry.
Most of the information in your credit report is deleted after 7 years (a bankruptcy is deleted after 10 years) and is continuously updated to reflect the latest information. It’s important to look at your credit reports from each of the three companies to make sure they are correct. Your credit report may vary from one company to the other.
To obtain your credit reports, contact the three companies listed below. Click here to see:
Sample Experian credit report
Sample TransUnion credit report
A credit bureau is a company that gathers information on consumers who use credit and sells that information in the form of a credit report to credit lenders. The 3 credit bureaus are:
Equifax
PO Box 740241
Atlanta, GA 30374
Phone: (800) 685-1111
www.equifax.com
Experian
National Consumer Assistance Center
PO Box 2002
Allen, TX 75013
Phone: (888) EXPERIAN
www.experian.com/consumer
TransUnionLLC
Consumer Disclosure Center
PO Box 1000
Chester, PA 19022
Phone: (800) 888-4213
www.transunion.com
Under the Fair Credit Reporting Act (FCRA), you can get a free credit report once during any 12-month period if you certify it in writing that:
- You are unemployed and intend to apply for employment within 60 days, or
- You are receiving public benefits, or
- You believe that your credit report contains inaccurate information due to fraud.
- You can also get a free copy of your credit report if you have been the subject of an adverse action—such as being denied credit—within the last 60 days.
You can request your free copy online at https://www.annualcreditreport.com/cra/index.jsp . You can also purchase a copy of your credit report for about $8.
Many of the credit reports can be complicated to read and understand. Click here to view a document to help you read your credit report.
What If Your Credit Report Contains Errors?
If you believe that any one of your credit reports contains mistakes and you wish to dispute or correct the mistake, contact the company that developed the report. Under the Fair Credit Reporting Act (FCRA), the company must complete an investigation, usually within 30 days. Within 5 days of completion, the company must provide you written notice of the results, including a copy of your credit report if it has changed based upon the dispute.
Click here to see a sample letter to a credit bureau requesting correction of an error
Credit Scores
When you apply for a mortgage, the lender may request a credit score as well as a credit report. A credit score is a computer-generated number that indicates your ability and willingness to repay a debt based on you credit record. Your credit score is part of the mortgage information that will decide if your application is approved. Your credit score may also be used to determine the mortgage interest rate.
For example, if you charged up to the limit on the credit cards—even if combined they don’t add up to a lot of money—this might hurt your credit score. Or, if you have recently applied for a number of credit cards—even if you haven’t begun to use them yet—your credit score might be affected.
Get your Credit Score
The most commonly used credit score today is know as a FICO® score. Developed by Fair, Isaac & Co. Inc, FICO scores are ranked on a scale of approximately 400 to 900 points. Statistically, consumers with higher credit scores are more likely to repay their debts than consumers with lower credit scores. Click here to see how your FICO score is calculated.
Go to www.myFICO.com to get more information about FICO scores.
Credit Scores Don’t Last Forever (thank goodness!)
If your credit score is low, remember that no credit score lasts forever. A credit score is a snapshot based on current information in your credit report. There are things you can do today to improve your credit score in the future. Paying one of your bills a few days late one time usually will not impact a credit score immediately or significantly. Credit scores reflect credit patterns over time. However, an adverse action, like a tax lien or bankruptcy filing, can immediately and significantly impact a credit score.
So manage your credit responsibly. A strong credit history will give you a strong credit score.
What about Credit Repair Companies?
You’ve probably seen ads for companies that claim they can fix your credit, qualify you for a loan or get you a credit card. Their pitches are tempting, especially if your credit is bad and you desperately want to buy a new car or house. However, you should be careful when dealing with credit repair companies. Many engage in illegal practices. Some have been caught stealing the credit files or Social Security numbers of people who are under 18, have died or live in out-of-the-way places like Guam or the U.S. Virgin Islands, and substituting these for the files of people with poor credit histories. Others have been identified as breaking into credit bureau computers and changing or erasing a bad credit file.
But even if the credit repair company is legitimate, most of the services that they offer you can do yourself and save hundreds, even thousands of dollars. These companies can’t do anything that you can’t do yourself. Many of these credit repair companies charge fees between $250 and $5,000 for things that you can do yourself.
How to spot credit repair scams
Although there are reputable credit repair companies in existence today, there are also many scams being perpetrated on unsuspecting consumers. Like most scams, credit repair scams prey on those people who are feeling desperate and willing to believe even unreasonable promises. The first sign that a company may be a scam rests in the unreasonable promises and guarantees they give. Anyone who guarantees anything in the credit repair industry should be viewed with a skeptical eye. There are no guarantees and no one, not even you, can eliminate truthful, timely information contained in a credit report.
Be mindful of any company that wants money up front. Credit repair scams are infamous for taking money up front and disappearing with it.
Look for the following warning signs when considering any credit repair company. They:
- Suggest that you do not contact a credit bureau directly.
- Want you to pay up front for services not yet rendered.
- Do not advise you of your legal rights and the laws that protect you.
- Recommend that you create a ‘new’ credit report
- Recommend that you create a ‘new’ credit identity
- Recommend that you dispute all information contained in your credit report.
- Suggest any fraudulent activity or engagement in any illegal activity.
It is important that you understand these facts:
- Only you can request a copy of your credit report.
- By law, credit repair companies can only require you to pay for services after they have been received.
- Providing false information on any credit or loan application is illegal.
- Using the telephone or mail service to apply for credit using false information constitutes fraud.
- Requesting an Employer Identification Number from the IRS under false pretenses is illegal.
- Misrepresenting your social security number in any way is illegal
The Credit Repair Organizations Act prohibits making false claims about credit repair. It makes it a crime for companies to collect credit repair fees from an individual prior to services being rendered. It requires that these companies inform you about your legal rights. It demands that a credit repair company provide information about your legal rights in a written contract, that also must detail the services the company will provide you with, the duration of the services, the timeline before results can be expected, the total cost of the repair and any guarantees that are offered. The written contract must also clearly state that an individual has three days to cancel the contract and services at no charge.
Any problems with credit repair companies should be reported to a local consumer affairs office, Better Business Bureau and State Attorney General. As well, contact the Federal Trade Commission and tell them about the company. The FTC does not investigate individual claims against a company, but can investigate the company for legal violations.
Where can you get help with credit and financial challenges?
Credit counseling agencies can provide you with the tools necessary to get by on the road to financial health and improved credit. If your answer is “yes” to most of the following questions, you could benefit from financial and credit counseling:
- Are you arguing over your bills and always playing catch-up?
- Are you living from paycheck to paycheck?
- Can you only make the minimum payments on your charge accounts?
- Do you charge more than you repay each month?
- Are you unable to build a savings emergency fund?
- Do you borrow to pay regular expenses, such as food and utilities?
- Would you be in immediate financial difficulty if you lost your job?
- Are your creditors calling because your payments are late?
- Are you afraid to add up your total debt?
- Is more than 20% of your take-home income going to pay bills?
- Are your credit lines all used up?
- Do you find yourself paying late charges and over limit fees?
If this is your situation, there are resources to help! One resource is Clearpoint Credit Counseling Solutions (formerly ByDesign Financial Solutions) www.bydesignsolutions.org, a non-profit organization established in 1966. Clearpoint helps thousands of consumers each year to prevent and solve personal money management difficulties and to develop personal finance knowledge through education, confidential counseling and debt repayment plans. Check out their website and schedule an appointment with one of their counselors. Put yourself on the road to financial good health!
What else is the lender looking for?
Mortgage lenders look at other information besides your credit score and credit record before deciding whether to give you a mortgage. They look at:
- Stability of your income
- Employment history
- Monthly debt payments (credit card bills, car loans, etc.) in relation to your income
- How you save money and hoe much you have saved
- The type of mortgage you are considering
- The type and value of the property you want to buy
- The amount of the down payment you plan to make
- On-time payment of rent and utilities.
The key is to have a good balance between your capacity, credit and collateral—the three C’s.
What are the three C’s?
Mortgage lenders look at the three C’s when approving mortgage applications:
Capacity: Your ability to make your mortgage payment on time. This depends on your income and income stability, your assets and reserves, and the amount of your income each month that is available after you have paid for your housing costs, debts and other obligations.
Collateral: Property that is pledged as security for a debt. In the case of a mortgage, the collateral would be the land, the house, and other buildings and improvements.
Credit: The ability of a person to borrow money, or obtain goods with payment over time, as a consequence of the favorable opinion held by a lender as to the person’s financial situation and reliability.
Now that you have your financial house in order and pre-approval letter in hand, what’s next? Finding that perfect house.
Sources:
“Knowing and Understanding Your Credit”, FannieMae Foundation 2003
“Borrowing Basics: What You Don’t Know Can Hurt You”, FannieMae Foundation 2004
“Choosing the Mortgage That’s Right for You”, FannieMae Foundation 2004
http://www.experian.com
http://www.transunion.com
http://www.equifax.com
http://www.myfico.com
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Homeowners 
