Working as a lending officer, I have come to the realization that most people’s biggest stumbling block in their quest to homeownership is one of two things—lack of cash for down payment and closing cost and/or bruised credit. In an earlier column, I wrote lenders evaluate mainly three areas known as “The 3 C’s of Credit”—character, capacity and collateral. In short character evaluates your willingness to repay (credit history) and capacity evaluates your ability to repay (income). Collateral evaluates the instrument securing the loan and your liquid assets—home, savings, stocks, bonds, etc. (things you own that can be sold for cash). From my observation, credit is the biggest component of the three. There is an assortment of mortgage programs that exist. Some don’t require income verification. Some don’t require asset verification. I have yet to come across a program that does not require credit verification.
As mortgage lenders, mortgage companies are mainly concerned with whether or not you pay your rent/mortgage payments on time. To get around this question it is very important that you make rent payments by check or money order. Rent receipts from landlords are disputable and often times manipulated. Rents receipts do not hold weight in the court of Mortgage Underwriting. Cancelled checks and money order receipts on the other hand are indisputable proof that rent payments were made. Another source of verification for rent payments that are acceptable is a payment history on a computer generated payment ledger provided by a rental agency. Mortgage Lenders like to see a clean rental payment history over a 12-month period. If you can provide proof of clean payments over a longer period of time, it will strengthen your file. I stress the importance of rental payment history because there are programs available that will turn a blind eye toward consumer credit history and base its underwriting decision solely on rental payments. However, to get the most favorable terms and the most attractive interest rate, a clean rental history and proof that all consumer debts are current is needed. Below are some tips to help you retain or regain good credit scores:
Correct Errors on your credit report
Pay off delinquent accounts
Pay your bills on time
Don’t max out your credit cards (Keeping balances around 30 percent or below the limit will do the trick)
Don’t apply for credit to often (a lot of inquires and new account can reduce your scores)
Don’t have an abundance of open credit cards and installment loans (three trades is sufficient)
Use credit wisely
Saving for down payment tips:
People generally plan to pay more for their mortgage than they pay for rent. For example, a person may be paying $400 per month in rental payments. Upon purchasing their home, they are willing to take on a mortgage payment (including taxes and insurance) of $600 per month. One tip that I give to my clients is to save the difference (in this example, $200 per month) up until they close on their new home. Saving the difference ($200) per month prepares them for their future mortgage payments plus it helps them to save money for their down payment and closing cost.
There are many government-sponsored programs and non-profit organizations that offer closing cost and/or down payment assistants. Generally speaking, these programs are offered to those whose household incomes is 80 percent of the median (average) income or lower. In Allegheny County the median household income is approximately $36,000. Those whom household income is approximately $28,800 or lower will qualify for many of those programs. These programs still require a clean rental payment history and that consumer accounts be current prior to approval.
Creative financing alternatives are Land Installment Contracts, Lease with the option to buy and Seller Financing. These create a vested interest in property and reduce or eliminate the need for down money upon transferring ownership. I will provide detail on each in an upcoming article. I will suffice it to say all payments for Land Installment Contracts, Lease with option to buy and Seller Financing should be paid by check and/or money orders.
Make the necessary spending and saving adjustments that will help you to prepare for homeownership. There is no place like YOUR HOME!
(Damon is the owner of ACE Financial. He can be reached at 412-856-1183.)
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