If you’re in the market for a new home, before you see a single property you should get preapproved for a loan. This will save you from delays that could put your dream home out of reach, or from dropping to the bottom of the list of prospective buyers when more than one offer is on the table.
When reviewing your application for a home loan, lenders consider many factors: your time on the job, your time in the industry, the likelihood of your continued employment, your income now and whether it is likely to remain at that level. All of this information is compared to your financial obligations.
Financial obligations mostly refer to debt in the form of other loan payments like car payments, credit card debt, student loans, and other real estate loans. They might also include judgment debts—which you should take care of immediately if you want a home loan with the best possible terms.
Judgment debt is typically a debt owed to someone for an unpaid bill or a liability you incurred, perhaps in an accident. The fact that you have a judgment debt should not be a surprise to you, but its amount might be. For a judgment to come into existence, someone went to court and convinced a judge that you owed them money. And what may have been an insignificant charge that you didn’t feel obligated to pay can mushroom with attorneys’ fees and court costs into an unreasonably large sum.
If you have any other ongoing financial obligations like spousal or child support, a lender will also consider those in determining your loan. If you can’t think of what your ongoing obligations are, review your check register—who do you pay each month?
After reviewing your whole financial picture, your lender will determine the monthly payment you can support. Because this has become a legal requirement for lenders, your assurances of, “But I can afford more! I’ve been paying more in rent already!” will fall on deaf ears.
Now that the lender has determined how much you can afford, he or she will attempt to determine the likelihood of whether you will make those payments. To do this, they’ll use a credit score; the most common of which is the Fair Isaac and Company score (FICO). A FICO score considers a huge amount of credit history, including the number of real estate loans and car loans. It also reviews credit card information: outstanding balances, whether you pay them off each month, and how close they are to the maximum credit limit. The score also reviews how recently and frequently your credit check has been run, and whether closed accounts were closed based on customer requests or vendor requests.
Once all this data is compiled, you will receive a FICO score between 350 – 820: the higher the score, the more likely you’ll make payments on time. Good scores are usually above 680, but lower scores can be acceptable. If your score comes in below 450, plan to borrow from your mother, because she’s the only one who will loan you any money.
If you think your credit score is wrong, be prepared to explain why and prove it. If you’ve had a short sale, foreclosure or bankruptcy, talk to your lender to determine how long it will remain on the credit report and what the lender’s policy is for disregarding it.
The bottom line is this: you’ll save time and hassle getting preapproved for a loan, and if you start the process early, you’ll have time to address any blemishes long before they come between you and your dream home.
If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.