“You are not alone,” I told him. “Most first-time homebuyers feel nervous about the entire home buying process. Would you feel more comfortable if you could attend an informational homebuyer seminar with valuable information about the buying process?”
“That would be great,” Jose said. “How much is the seminar?”
“No charge at all,” I told him. “Most mortgage lenders hold these seminars regularly to provide information to buyers.”
Jose went on to tell me about a newlywed couple he knows who recently bought a home. When Jose was visiting the couple’s new home and saw their joy in being home buyers, he started to wonder if he could buy his first home. At times, he thought he would have to rent forever. Now, observing his friends’ happiness, Jose felt hope.
Most first-time homebuyers have questions about the entire home-buying process. Who can blame them? New experiences create fear of the unknown. That is why Jose signed up for a free homebuyer seminar the following week where he learned how to qualify for a home loan.
What do lenders look for?
If someone you didn’t know asked to borrow money from you, what would you need to know before you took the risk of making the loan? You would want to know that this person had borrowed money before and had a good track record of repaying it, right?
Lenders are no different. They decide whether or not to loan you money based in part on the history they see on your credit report. They use your credit score to determine how much of a risk you are — the lower your credit risk, the lower the interest rate they charge you.
So, what are lenders looking at when sizing you up?
1. Your payment track record: Whether you are applying for a credit card, cell phone service or new utilities hookup, creditors want to see that you have a history of making regular, on-time payments. A single missed payment can lower your score. Bankruptcies, collections, judgments, defaults, liens, foreclosures or repossessions also can result in a decline.
2. Your current debts: The less you owe the better. What you spend each month on credit payments shouldn’t be more than 40 percent of your total after-tax income. This is known as your debt-to-income ratio.
3. Your credit history: Naturally, lenders want to see that you have a long, consistent track record of repaying what you borrowed.
4. New accounts: Lenders also want to see how much new debt you’re taking on. So, it’s important to remember that each application you submit, whether you’re approved or not, will show up on your credit report and potentially lower your score.
5. Types of credit. Creditors want to see that you’ve had experience using different types of credit. But, they look more favorably on some types of credit than others:
• A mortgage looks good as long as you’ve kept up your payments.
• Vehicle loans and bank loans can show a history of repaying a significant amount of money consistently over time.
• Credit cards can be a plus, as long as you’ve made regular payments and don’t apply for multiple new cards in a short period of time. But, always avoid using more than 35 percent of your total available credit.
Jose came away from the seminar a confident, changed man ready to invest in his first home. He met with a local loan officer who ran his credit and discovered two minor collections. When Jose moved from California to Nevada, two small utility bills went unnoticed and unpaid. He made arrangements with the loan officer’s help to pay them off. Jose also applied and got approved for a credit card. These simple actions quickly boosted Jose’s credit score and he was subsequently approved for his first home loan. Jose has made an offer on his first home and is waiting for the offer on his short sale to be approved.
Home buying can be a simple process once you understand what lenders are looking for. And in the end, you are rewarded with your first home sweet home.
Annie Christian is owner of The Annie Christian Real Estate Group and is a real estate broker. She helps clients with everything from buying and selling to foreclosure and short sale. To submit a question to her, call 351-5117. Her website is www.anniechristian.com.