Answers to the most Frequently
of real estate professionals!
The 3 Biggest Mistakes
Three Biggest Mistakes People Make
When Refinancing Or Purchasing A New Home.
Mistake #1 -
Failure To Examine and Repair Any
Credit Problems Prior To Applying For Your Loan
99.9% of potential new homeowners and borrowers have no
idea what type of credit they have or how to repair any adverse credit
which may exist. They fail to realize that credit is one of the key
factors in acquiring a mortgage or refinancing a current mortgage. Credit
problems not only slow down the processing of getting a home loan, but can
damage your ability to make numerous other purchases.
What is good credit?
Good credit usually means a person has about five or six
solid pieces of seasoned credit. In other words, a car loan, a current
mortgage, a VISA card, etc., which are at least two years old and indicate
no late payments. Of course, rarely is anyone's credit history perfect.
One 30-day late payment on your credit report won't necessarily keep you
out of this category. Most underwriters - those who approve your loan -
are looking for trends. Isolated incidents do not carry as much weight as
an established history of paying bills well past their due dates.
How can I repair my credit?
In most cases, a simple letter or phone call to the credit
card company or business that originally gave you the credit can put you
on the right track for having the "scar" removed from your report.
Sometimes the company will require you to pay off the balance of your debt
or send in a letter explaining why you were late with your payment.
However, if you have a history of late payments, you may have to let time
take its course, waiting while you build up a record of timely payments on
Can high levels of debt affect my ability
to buy A home?
Yes. And there is an easy way to determine if you have too
much. Most loan programs will not allow your monthly mortgage payment
(plus housing expenses) to exceed 28% of your total gross monthly income.
Also, they will not allow your total monthly debt (mortgage payments, car
loans, installment loans, credit cards, rental losses and alimony/child
support) to exceed 36% of your total gross monthly income. (Note: these
are guidelines only. Special circumstances and special programs may be
able to overcome excessive ratios) If you exceed the 28% and 36%
guidelines, you may want to consider paying off some of your debt in order
to lower your monthly obligations before you apply. Remember, however,
that some loan programs have more lenient ratios (such as FHA, VA, FNMA
Community Home buyer and Jumbos).
Mistake #2 - Failing To Realize
(In Advance) How Much Money A Lender Is Willing To Loan You
Whether you are planning on refinancing or purchasing a new home, most
lenders have strict guidelines on how much money they are willing to lend.
The lender's decision is typically based on the loan-to-value ratio. In
other words, lenders have limits on how much money you can borrow based on
the value of your home.
For example, if you are refinancing, most lenders will not lend more than
90% of the appraised value of your home. So, if your house appraises for
$100,000, you would be eligible for a $90,000 loan, assuming your current
loan balance and closing costs equal $90,000 or more so that you are not
getting cash out of the property.
On the other hand, if you are planning to buy a home, most lenders will
allow your loan-to-value ratio to go as high as 95-97%, or even 100% with
a VA loan or Pledged Asset Mortgage.
So, if you are planning on buying a new home, make sure you have at least
3% of the purchase price - your own funds, not gifts or loans - available
for the down payment, plus closing costs. Closing costs include discount
points, origination fees, attorney's fees, etc. They often run anywhere
between 4% and 8% of the loan amount, depending upon your location and
loan amount. The larger the loan, the smaller will be the
percentage of that loan required to cover closing costs.
Is it possible for me to take cash-out when I refinance and pay off some
Yes, but in most cases, this means you cannot borrow more
than 75% of the appraised value of your home.
What can I do if I can't come up with a
5% down payment?
The vast majority of loan programs look to the borrower to
make a down payment from his or her own funds of 5% of the value of the
house. As mentioned, some will accept only 3%. Some of these still require
5% down, but will allow the remaining 2% to come from a gift from
immediate family members, grants or unsecured loans from your employer,
not-for-profit organization, government agency or first mortgage lender.
In addition, if you are eligible for a VA loan, you can qualify for a 0%
down payment loan (provided that you have sufficient VA eligibility)!
I am self-employed and earning a good
living, but my tax returns are complex, usually in some stage of
completion, and difficult to put my hands on - can I get a loan ?
Yes. There are a number of "no income verification"
programs available for people like yourself. Under the guidelines of these
programs, most lenders will not loan you more than 80% of the appraised
value of the property . They will require that you have
strong credit, a substantial
amount of liquid assets and have been self-employed for a minimum of two
years (with some exceptions). If you fit this criteria, there's a good
chance you'll get approved for the loan you need.
Mistake #3 - Failure to
Find A Reputable and Experienced Mortgage Lender To Help Finance The Home
Associating yourself with a quality, honest service-oriented mortgage
banker is probably the most important ingredient in finding home
financing. This is an important decision in your life - it is probably one
of the largest financial transactions you will make. It's not something
you want to treat lightly. Dealing with the right lender can mean the
difference between having your loan application approved or rejected.
So, how do I find the ideal person to
handle my loan?
This shouldn't be too difficult. There are many reputable,
knowledgeable professionals. Just be sure to ask a few good questions
before choosing one. We recommend asking:
1. Can you provide any references? If they do, then, call!
2. How long have you been in business?
3. How - and when - can I get in touch with you? Your loan officer should
through many channels (phone, fax, pager, e-mail) at times that are
convenient for you.