Two critically important factors in obtaining a mortgage to buy a home are showing the lender you have both the willingness and the ability to repay the loan they give you to purchase your home.
The first step in buying a home is to know what your credit score is. Nothing affects your mortgage rate more than your credit score. The difference of a few points on your credit score can affect your monthly payments by hundreds of dollars.
The lender looks for a trend showing you have established a pattern of paying your debts, on time, month after month. The more trade lines you have paid, on time, every month, the higher your credit score will be. The higher your credit score, the lower your interest rate. This is because rates are determined based on the risk level of the loan. The more willing you are to repay the loan, the lower the risk factor you represent and the more willing the lender is to make you a loan. Your credit history is the one indication a lender has to judge your willingness to repay the loan.
Credit scores range from 300- to 850-point range, Generally, a score of 800 or higher is rare and considered exceptional; 740 to 799 is really, really good and provides for the best possible mortgage interest rates in most situations; 670 to 739 is good and will generally get you a good interest rate; 620 to 640 is typically the lowest possible rate to obtain a mortgage, below 600 means you have some work to do before you can buy a home and you may benefit from some credit counseling. Don’t pay for this, there are many resources out there to help you increase your credit score.
What if you’d had some hiccups in your history causing you to miss some payments? If that is the case, you are in the same situation as many other people who are doing they’re very best to make everything work. Your mortgage professional (LO or loan officer) is there to be that liaison between you and the decision makers, the underwriters. The LO’s job is to paint a picture for the underwriter, who will never get to meet you in person, of your ability and willingness to repay the loan. They are your best allies in getting the mortgage approval. Ultimately its up to you to provide the information to be able to present your application for the loan so the underwriter will determine you are a good risk.
Your job is to explain those hick-ups in such a way that make sense. They understand situations frequently come up that are beyond your control and are not likely to happen again. If that is the case, you simply have to show them you learned and have taken measures to prevent it from happening again. You’re only tool to demonstrate this is to write a letter explaining what happened, why it happened and what you’ve done to correct the situation.
In mortgage terms they call this a Letter Of Explanation (LOX). For example a LOX might go something like this. “I was in the hospital wasn’t even thinking about my bills. I was concentrating on getting better. As soon as I got back to work I made every effort to get all my payments caught up, it took a few months to get everything current. In the meantime, I made sure my rent was always paid on time. I have set up auto withdrawal for my car loan and credit cards so if I am ever in this kind of a pickle, payments will be made. I’ve also established a savings account by depositing $25/month for emergency funds. Please see the attached hospital bill showing the dates I was incapacitated. I sincerely appreciate your understanding and trust you can see I learned from this mistake and will make my house payment my number one priority. I plan to set up my house payment on auto withdrawal as soon as I get my loan.”
Another example; “I did not act responsibly in paying my first credit card when I was younger. You can see I missed a few payments and even have a medical collection that never did get paid. At the time I didn’t understand the importance of paying on time and my credit score was bad as a result. I have worked really had the past 12 months making sure I never miss a payment on anything, while making my apartment rental payment my top priority so I will carry that habit over to my house payment when I buy a house. I really want to be a homeowner now and have worked diligently to prove I clearly understand the importance of making payments on time. This is now more important to me than going out to the movies or out to eat. I have been managing my budget so I feel comfortable in the increased housing costs and maintenance of buying a home. I sincerely appreciate your understanding and trust you can see I learned from this mistake and will make my house payment my number one priority.”
If your recent credit is unacceptable then it only takes some time to make improving that a priority for you to show you are serious about being a successful homeowner. Sometimes there are some minor adjustments you can make to improve your score. That’s were your mortgage professional (LO) can help. Once they see your report they can advise you how to most efficiently work to get your score up. For example, paying off a collection will temporally decrease your score because it shows recent activity on that account. After a while, in many cases, no activity may be better than paying off a collection. In some situations, paying it off now so you can show your willingness to repay, while you work on decreasing your credit balances on your revolving accounts would be a smarter move. LOs have tools they can run scenarios to see what your most beneficial action would be. You don’t need to hire someone to help you improve your score. Seek guidance from the mortgage professional such as myself. I’ve helped many people work out a plan to get their credit score to an acceptable level for mortgage loan approval.
Stay tuned for my next blog with will go in-depth how to show your ability to repay the loan. In the meantime if you’d like help getting pre-qualified to obtain a mortgage to buy a home in Ankeny, Des Moines or Altoona, call me, Dorothy Mathis at Lincoln Savings Bank 515.327.9938. I have a long history of helping underwriters see the strong character of potential homeowners.