Most mortgage loan ... promise ... rates, low down ... and ... ... approval within justa few days. But for many ... ... the trip from adve
Most mortgage loan advertisements promise rock-bottom
interest rates,
low down payments, and virtually guaranteed approval within just
a few days. But for many prospective homeowners, the trip from advertising promises
to “sign-on-the-dotted-line” reality can be a long and confusing one.
Is it all just one big roll of the dice or are there quantifiable
factors that a lender uses to qualify you for a loan and determine your
interest rate? Let’s take a look and see.
Understanding mortgage rate advertising campaigns
Generally the qualifications for these “almost too good to
be true” low interest mortgage programs are quite high. Many are so high that most
people who respond to the advertising won’t qualify for them.
Why do lenders even bother spending money on advertising a
mortgage program that most people can’t qualify for? Mortgage promotions bring
in large numbers of applicants. Some will qualify for the promotional rate and
others will not. The lender hopes to place everyone who applies into some
mortgage program that they offer even if it wasn’t the one the borrower
responded to.
Navigating the Home Mortgage Qualification Process
The lender reviews your credit and overall financial
condition when qualifying you for a particular mortgage program. Most lenders
consider these items:
- Stability – Length of time on the job and the number of
jobs held.
- Liquidity – Availability of down payment and other on-hand
and reserve funds necessary to close the loan.
- Credit – Previous loan repayment history as well as certain
credit-related scores.
- Income – Ability to service the loan by making the
required payments.
- Liabilities – The total amount of money that you owe other
than your current mortgage or rent payments.
The credit investigation causes borrowers the most concern
and that’s probably because it’s the most misunderstood of the approval steps. There
is nothing
secret going on here and mortgage lenders are very up front
about what they will be checking.
Shining the light on your credit history
Credit bureaus use a rating of zero through nine for each of
your credit lines. They put either an “I” (for Installment loan) or an “R” (for
Revolving loan) in front of the number. I0 or R0 indicates that the credit line
is “too new to rate”. I1 or R1 is the best rating and R9 or I9 is the worse.
This worked fine for years until credit usage became more widespread
and the amounts borrowed became significantly greater. That’s when lenders
began looking for a statistical model which could
predict how you would
perform on a loan based upon measurable factors. This evolved into the
FICO score
which plays a prominent role in determining if you get a home mortgage as well
as what the terms of the mortgage will be.
FICO stand for “Fair Isaacs Corporation”, the name of
the company that developed the software that calculates the score. FICO scores
can range between 250, the highest degree of risk and 850, the lowest degree of
risk. All else being equal, the higher your FICO score the better the loan
terms will be.
Taming your FICO Score
If you are turned down for a loan, or are required to pay a
“risk premium” because of your FICO score, all is not lost because you can
improve your FICO score. Since you are never going to be approved for a
mortgage if your FICO scores are so low than lenders are scared away, it is
worth trying to get your score up. If you were given a mortgage at a high rate
because of your score then it’s worth raising your scores and refinancing for a
lower rate in the future.
How your FICO score is calculated.
10% is determined by the number of open credit accounts that
you have and the mix of types (revolving, installment, and mortgage).
35% is derived by measuring your repayment history and looking
at adverse credit items such as foreclosures, judgments, bankruptcies and
negative public records including tax liens and wage garnishments.
30% is based upon a formula that includes your balance due
across all open loans, the types of loans and the number of loan or credit card
accounts that have an open balance.
15%
is based upon the length of you credit history
or how long you have had a credit history on file.
10% is based upon the amount of new credit in your account
including how long it has been since you opened a new account, how long since
your last new credit inquiry and how good your most recent credit history is
.
Here’s how to improve your score:
- Get a copy of your credit report and review it for errors.
Use the credit bureaus error reporting and correction system to address
any serious errors.
- Pay all of your bills according to the payment schedule
that you agreed to.
- Avoid opening a lot of new accounts in a short period of
time and especially avoid opening any new accounts before applying for a
mortgage.
- Don't apply for credit cards that you have no intention of
using, and close any accounts that have zero balances and that you do not
intent to use again.
- Keep your credit balance low in ratio to your overall available
credit.
- Pay off credit card bills instead of transferring them to
lower interest cards and closing the previous account. It could actually
hurt your score by disturbing the ratio of open debt to number of cards.
- Monitor your FICO score by getting a new copy of your
report every six months. Once your score moves into an acceptable range
then either refinance your existing mortgage, if interest rates warrant,
or apply for a mortgage if you have been turned down in the past.
Additional ways to improve your chances of getting
approved.
While your FICO score is the key determining factor in
getting approved for a home mortgage, there are some other factors which affect
the approval process.
Show good prospects for continued employment
If your job prospects are a bit hazy then a lender may
choose not to fund your mortgage even though you have high scores. Try not to
change jobs within 6 months of applying for a mortgage if you can possibly help
it.
Have a large down payment
Although some mortgage lenders advertise low or no down
payment programs, they are the exception to the rule. Most lenders want to see
20% down. If you have less, then you may get passed over or, at the very least,
be required to pay expensive PMI (Personal Mortgage Insurance) each month until
you do have 20% equity in your home.
Stay in a realistic price range
Don’t try to buy more house than you can comfortably afford.
A lender is inclined to say “no” if he sees that too much of your income is
going to be taken up by your mortgage payment.
Be Honest
Don’t try to hide any “bad news” including a pending job
layoff, strike, etc. If you lie to your lender you probably will get caught.
Now that you know all about the mortgage approval process,
are you ready to buy a new home? It can look like a complicated process, but
you can do it if you have your financial affairs in order.
