Plan Ahead
for Your Mortgage
There are a few financial tricks to know and
traps to avoid when you are thinking about
buying a house. Qualifying for a mortgage is far
more difficult than qualifying for a credit card
or a car loan. Although there are literally
hundreds of different mortgage programs
available, they are almost all based on the same
qualification information - some combination of
income, monthly expenses, and credit history.
Planning ahead, in some cases as far as one
year, can help many people avoid hassles.
Using "Gift" Funds
If you are receiving a gift for all or part
of your down payment, arrange to receive the
funds six months before mortgage application.
Place the funds in your own bank account.
Reason: many mortgage lenders place restrictions
on the amount (percentage of down payment and
the source of gift funds). However, when you
make mortgage application, the lender checks
only three months' bank statements. If the funds
are present on the oldest statement, they are
"your" funds, not a "gift". If your parents plan
to give you a gift just in time for closing,
they must be prepared to show your lender that
the funds actually exist in their bank account
at the time you apply for your mortgage. All
parents are different, but many of them strongly
resent having to supply their own bank
statements to prove the gift.
Large Purchases
Okay, you are excited about buying your house
but you need new furniture and appliances. Your
car is falling apart. Defer any
purchases--particularly credit card or
installment contract purchases--until after
closing on your new home. Monthly credit card
obligations can ruin your expense ratio very
quickly. Your idea of the debt you can handle
and your lender's idea of the debt you can
handle may be two entirely different numbers.
Unless you have a VERY high income, do not buy a
new car or a new boat prior to applying for a
mortgage. Car leases count just as car payments
do.
Current Mortgage Payment History
Lenders check your credit history. If you
currently own a home, make sure you do not have
any late mortgage payments for 12 months prior
to applying for your new mortgage. If your
budget is tight, ALWAYS pay your mortgage first.
According to Fannie Mae guidelines, lenders
cannot issue you a new mortgage if you violate
the 12 month rule. Mortgages belonging to
consumers with a sloppy payment record do not
meet Fannie Mae guidelines and therefore cannot
be sold into the mortgage market. The lender
must keep those mortgages for its own loan
portfolio, something the lender probably won't
want to do. Portfolio loans usually have much
higher interest rates than do Fannie Mae loans.
Avoid Credit Disputes
If you get into a credit dispute over a small
sum, just pay it. It may be against your
principles to do so, but the incredible hassle
involved in trying to clear it up isn't worth
it. Unfortunately, the credit bureaus are
powerful; individuals are not. Hospitals are
particularly notorious for reporting small
unpaid balances to credit bureaus. Frequently,
these are amounts people assume have been paid
by the insurance company but for one reason or
another are not covered by the insured's policy.
Credit bureaus do make mistakes, but
unfortunately the burden of proof is on you, not
on them. Check your own credit several months
prior to even looking for a house. This will
give you time to clear up any problems or
misunderstandings. A little financial planning
and detective work prior to house hunting can go
a very long way in making your mortgage
application easy and stress free.
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