SO YOU WANT TO BUY A HOME: Step One - Know What's On Your Credit Report & Get Your Free Credit Report

Throughout my week, I will get calls from people that were either referred to my by a friend, relative or someone they work with or they came across my website or some other internet marketing I'm doing or some social media website I belong to and typically, one of the first things these people will often ask me is what do they have to do to get pre-approved for a loan.

Chocking down the urge to say "be independently wealthy and have gobs of money to put down on a house", I usually begin by rattling off a series of questions, that to some may sound a little like an interview for their life story (lenders are very nosy people), but in doing so, this will allow me to not only tell if I am going to be able to help them but it will also tell me if there is going to be a chance in the world that they will even be qualified to apply for a loan. 

For anyone who has had their head in the sand for the last 18 months, we're in a recession, the mortgage industry is in a shambles and the real estate industry is absolutely devastated from the wreckage. 

The media is spewing at us everyday that the economy is tanking and unemployment is at an all record high all the while, our friends and family and co-workers are buying these great deals while your landlord just notified you of a rent increase when your lease expires in 60 days.

What does this all mean for many prospective home buyers hoping to purchase their first home?  Well for starters, it means that getting approved for a home loan will prove to be much more challenging than they had ever imagined it would be. 

Secondly, just because their friends, relatives and/or co-workers got the deal of a century doesn't mean they will.  They might, but unless their situation is exactly like their friends, relatives and/or co-workers (and they rarely are), then they may not have the same options available to them that their friends, relatives and/or co-workers had available to them. 

But all hope is not lost.  There are still programs available for the financially responsible first time buyer as well as products available for other types of buyers with less than perfect credit (for now - but act quickly, they may be gone before you know it).  For anyone wishing to buy a home this year and possibly take advantage of that tax credit (for first time buyers only), then I suggest you do a little homework before you jump in with both feet. 

The first thing I suggest you do is get a copy of your credit report.  This will cost you nothing (yes, that's right - it's FREE).  In the nearly eight years that I've been a mortgage professional, it still never ceases to amaze me at the amount of people who have never seen their credit report.  THIS IS ABSOLUTELY ATROCIOUS PEOPLE! 

In this day of computer technology and instant information, there is no reason that each and every one of us should not be checking our credit reports at least once a year.  If you don't know where to get your free credit report, here you go: 

www.annualcreditreport.com 

www.freecreditreport.com 

www.freecreditreportsinstantly.com 

These are just three, there are dozens of others.  They will all give you a free report and some will give you a free tri-bureau report (the best) and while most will charge you for an actual score (that's your choice if you want to pay for that), the important part is to just get the report(s) and look it over to see what's on it.  At this point, don't get too hung up on the score, personally, I wouldn't pay to get the score because the score that we (lenders) use will be different than the score that you buy from these sites.

As I said, the point is to just look at your report and see what your financial position is.  Some things that will be deal breakers for most lenders will be a recent foreclosure, bankruptcy and/or tax lien.  If you have any of these, the only thing between you and a home loan is time, typically, at least 36 months worth of time.  For what it's worth, the older these items become the less effect that they will have on your overall credit standing and score. 

Other obstacles can be open and active collection accounts and some of these can be tricky when it comes to whether or not you want to pay them off before you apply for a loan or pay them off at the close of escrow.  If you have any of these, it's best to talk to an experienced mortgage professional who can advise you on the best strategy for taking care of these particular accounts and debts.

Other things that can affect your approval rating are high levels of debt, no savings, no history of housing payments and, of course, the dreaded low FICO score.  However, none of these things are necessarily deal breakers in eventuallygetting approved for a home loan. 

I say eventually, because with a little work, you can turn these negative factors into positive factors.  For instance, just recently, I helped someone who was referred to me to get pre-approved for a home loan that had previously been deemed ineligible.  Four months ago, when he first came to me, his situation was as follows: 

October, 2008 

• 576 median FICO score
• Approx. $2,000 in savings
• Debt-to-income ratio of 65%
• Three open collection accounts
• One open public record  

Back then, I suggested that he speak to his tax advisor about tweaking his W4 withholding deductions based on the fact that he told me every year for the last seven years, he received a tax rebate check anywhere from $2,000 - $3,000 from his state and federal income taxes. 

This client was obviously having too much taxes being withheld from his W4 and I explained that by tweaking his W4, he could take that money home every payday and have that much more to put down towards buying a house.

Secondly, I suggested that he get proof of payment for the collection accounts that he said he already paid off.  By having proof of payment for these accounts, we could then get his reports corrected and exclude these liabilities from his debt-to-income ratios. 

Lastly, he needed to go to the county courthouse and take care of the public record by getting it dismissed and/or discharged.  This would require that he pay a small fine (that he owed and never paid) and to quit worrying about the "principle" of paying the debt because if he didn't he would never get the loan.  Once he did everything I suggested for him, his current situation is now as follows: 

February, 2009 

• 629 median FICO score
• $10,000+ in savings*
• Debt-to-income ratio of 43%
• No open collection accounts
• Discharged public record 

*  Approx. $5,000 was derived from a year end bonus and the sale of some personal property

Pre-Approval Status - Approved/Eligible for an FHA loan amount up to 200,000! 

The lesson here for anyone hoping to purchase a home here in Ventura & Los Angeles Counties in the near future is to know what's on your credit report and if you have any derogatory credit, it will need to be addressed.  Also, align yourself with an experienced mortgage professional who will advise you on what you need to do to get approved for a loan in today's market. 

Just because you can't get approved today doesn't mean that you'll never get a loan.  More times than not, it's just a matter of putting a little time and energy into improving your situation and listening to the advice of professionals (starting with your mortgage professional).