Credit and Home Buying
Kevin P. Tremblay
Buying a home is a big deal. For most of us it will be the biggest purchase of our lives. It is important to pick a home and location that suits your lifestyle and pocketbook. This is the place you will lay your head down at night.
Most of us need to get a mortgage to buy a home. The bank will determine how high a price a property can be and there are other conditions to a purchase. Lenders consider many factors in determining an individual’s creditworthiness. A numerical score, called the FICO Score is used to rate you. All three major consumer credit reporting agencies, Experian, Equifax, and TransUnion reports are derived from many sources and evaluate your history of payments and borrowing to determine this score. Higher scores get better deals from lenders. For those with the highest scores, banks may pay for all the closing costs, and for the appraisal as well.
There are programs for different kinds of buyers. For example, Maine State Housing Authority, VA and USDA-backed mortgages offer lower interest rates for low income and otherwise qualified buyers. Generally, in today’s real estate marketplace lenders require FICO scores over 600 to offer to finance a purchase, and the lower the score the higher the interest rate.
Conventional mortgages are the market standard and the way most homes are purchased. For these mortgages, banks expect buyers to put down 20% of the purchase price. Conventional insured means that you are not putting down 20% and your interest rate will be higher and most often you will have to pay for Private Mortgage Insurance.
There are several other ways to purchase a home with certain programs and guidelines to follow, and there is always the possibility of owner financing. Each of these programs and offers is contingent on the credit score. Except in rare cases with owner financing.
Buyers using owner financing should expect to put at least 20% down too. Sometimes even higher down payments are required. Also, the seller may want a credit report, and based on that may charge different interest rates as banks do, or not offer to finance. Owner financing is rarer as most sellers need to sell their homes to purchase another one. There are other possibilities such as an option to purchase while you rent the property. Hiring a qualified real estate broker can make the difference between getting into a house, or not.
Something to remember is homeowners that sell may forego capital gains through a One Time Exclusion. Check with an accountant for the tax implications of a sale. Also, with investment properties, there are 1031 Exchanges where capital gains are not paid when a “like-kind” property is sold, and another one purchased. Many rules and timelines apply. As with any field of expertise, it is best to hire a professional such an attorney for a property title search and closing deals.
Each person’s circumstance is unique when looking to purchase a home with credit. Don’t despair if your score is too low, or rather not high enough to qualify for the best rates and programs, there are options for you. Individuals may request a credit report with their FICO score from each of the reporting agencies. Knowing ahead of time if there are issues or misinformation on your credit history and report is important.
There is something that you can do about incorrect and misreported data on your credit report. Factual information cannot be removed, but anything not supported can be such as with a clerical error or a payment incorrectly applied, causing what appears to be a missed payment.
In a divorce where real estate is involved, the court may determine who gets the property. When a property is mortgaged by a married couple and the court awards the house to one of them, the mortgage agreement should be modified if under a court order; but it is not that simple. Many divorcees are shackled by the mortgage as the other party may not be able to obtain a mortgage on their own for a refinance. Also, the banks are not bound to forgive one party the obligation to pay the mortgage because of a court order.
It can take an Act of Congress to get banks to release the party no longer own the property. However, you may append your report with these facts. Send the divorce degree with a letter of explanation to the credit reporting agencies. When applying for a mortgage, explain these details to the bank upfront. They may be sympathetic or have their own money to lend where you might not otherwise qualify due to the “debt to income ratio” used to qualify for a mortgage with the existing mortgage assigned to you.
Most mortgages are backed by government agencies like Fannie Mae and Freddie Mac. Banks must comply with specific guidelines to make a government-backed loan, which is why it is difficult to get a mortgage on foreclosed or otherwise uninhabitable dwellings. There are standards that properties must meet for traditional financing. In addition, appraisers may hold up reports unless certain repairs are completed before the bank will provide the mortgage, or monies are set aside for repairs after closing.
Appraisers can delay real estate deals because of missing handrails, chipped and peeling paint, and many other reasons. Likewise, in order to secure a mortgage, the property must be insured. Insurance companies will refuse to insure a property with knob and tube wiring or that have fuse boxes. Keep in mind that appraisers are working for the bank, and the insurance company is in the business to make a profit. Both the banks and insurance companies always minimize their risks.
If you plan on purchasing a home, your best course of action is to know what your credit report says and save your pennies. Maine law provides that you may obtain a free credit report annually, simply go online to https://www.annualcreditreport.com/index.action to request all three, Experian, TransUnion, and Equifax. Dispute claims which are not true. Work with creditors for reduced amounts to pay debts off and remember to make payments on time.
Talk with the mortgage department at your bank or credit union about your plan to purchase a home. There are several online ways to apply for a mortgage as well. Be very careful online with personal information and if your credit report is pulled three or more times in a month your FICO score is liable to go down. Consider contacting a local mortgage broker. They often know of programs that a local bank may not work with. Shop around for the best rates and ask if they have any special programs or reduced interest rates for first-time buyers, for Veterans, and for certain professions like teachers or firefighters.
There is no place like home. With a plan, perseverance, and expert advice you could be in your own home quicker than you may believe. Take control of your credit report and never take no for an answer. Maybe is halfway to yes. The future can be a dream, with a plan, and an end in sight – going home.