Changing mortgage practices
Up until recently any one could buy a house, even with FICO score of 580, and recent bankruptcy as long as it has already been cleared. Stated income, no documents and no money in the bank - one could still get a kind of loan. Over lending by mortgage industry caused their own failure.
All above do not apply any more; lenders are changing their guidelines daily. We are heading back to traditional lending. For many banks, borrowers need to have decent FICO score, first time borrowers will need money down 5-10 percent even with a score of 700. Because it is difficult to borrow money, we can call this a tight money market, in this case caused by stricter underwriting guidelines. Many borrowers are sitting on the sidelines waiting for the market to stabilize.
As lending guidelines revert to the late 1990's and early 2000's, even with some downward slide in the pricing, it will be much harder to qualify for a loan. It was much easier to have a 10 percent down payment of 200,000 in late1990's vs. now, saving 10 percent of 600,000 to buy the same house. Yes, salaries have gone up since then but gas and electricity, including the cost of renting, has gone up as well.
Buyers who want to buy in the near future and do not have a high cash balance, should prepare themselves for this tight money market and should start taking the necessary steps to be able to qualify when they are ready to buy.
Buyers Home Work
1. Down payment
Start saving some money for the down payment, for 100% financing does not exist. Think of yourself as a homeowner starting right now, the money that you would have used to pay the mortgage could go straight into your savings account starting now.
2. Credit Score
Get a full three Beuro credit report as soon as possible, some places will give you a Free Credit Report. Look for any late payments, delinquents, or collection accounts, etc. Talk to an advisor to see how to resolve those issues, so when it comes time to buy a house you will have a much better credit score, saving you money in the long run in interest rates.
3. Establishing history
Establish at least five credit lines, if you already have these, keeping the length and history of these is very important. If you have five credit cards, two of which have bad credit and three of which have good credit, do not close all of them. By closing them you will be left with no credit history, or if you close credit cards with good history you are then left with a 100% bad credit history.
4. Employment
If employed with a company, work history in the same work line for two years is valuable. If self employed, your business should to be registered and your yearly taxes should be able to support your income.
5. Amount to borrow
Do not be house poor, buy with in your means. When buying your first house think long term. Although nothing is fool proof, a reasonable optimistic approach is a very valuable tool in life. If you are a new graduate and will be getting a decent raise and promotion in your career or will be adding spousal income, you can afford to overstretch your finances. On the other hand, if you have matured in your line of profession and have hit the salary ceiling, stay within your limits.
6. Getting a loan
There is so much advertisement on the radio, internet, billboards, etc. for cheap money and no closing cost. Many borrowers become confused and fall for one only to find out the truth later when signing the loan documents. Just remember one thing: a dollar costs a dollar, if some one is offering a dollar for 98 cents, they are going to make those two cents somewhere else in the loan. Ask your mortgage originator if you qualify for FHA program. Choose someone who is honest about all the fees and is knowledgeable and professional. You do not need to pay any upfront fees to anybody. Ask for a copy of GFE (Good Faith Estimate). Pre qualify in advance.
7. Its all about being responsible
If you want to be homeowner, be responsible, discipline your self, pay all your bills on time, and do not be late with payments. Keep a tab on your credit score; you may have to put off that dream vacation or a dream car for some time to save up money. In the end, it will be worth it just to be able to call somewhere your own ‘Home Sweet Home'.
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