Why Get Pre-Qualified?
1. Pre-qualification acts as a dry run of the loan application process. Your mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much mortgage you can afford. The whole process may take only minutes or a few hours at most, and is free.
2. While a "pre-qual" is non-binding to the lender (because the information you provide has not been verified), it does serve as a good indication to potential sellers of your general creditworthiness.
3. These days most sellers will NOT accept an offer without at least a pre-approval letter, so if you are serious about buying this is the first step towards getting you in your new home.
Credit Dos and Don'ts when applying for a home loan
As you know, having good credit is absolutely critical to obtain the best interest rate and terms on a mortgage.
Do stay current on existing accounts and obligations. One 30-day late notice can compromise your ability to be approved.
Do continue to use your credit as normal. Changing your pattern will raise a red flag and can lower your credit score. Only use your credit cards for normal purchases as you have done in the past. A new credit report will be ordered at the close of escrow. Your approved loan could be affected if your credit ratios increase.
Do call your mortgage loan professional first. If you have any questions or concerns, always contact your mortgage professional.
PLEASE Don't purchase or lease a new car! Lenders scour your debt-to-income ratio. A large payment such as a car lease or purchase can greatly impact those ratios and could prevent you from qualifying for a home loan.
PLEASE Don't purchase new furniture or major appliances for your "NEW HOME"! If your new purchases increase the amount of debt you are responsible for on a monthly basis, there is the possibility this may disqualify you from getting a loan, or cut down on the available funds you need to pay for closing costs.
Don't apply for new credit. Each time you have your credit run by a potential lender or creditor, you lose points from your credit score. This includes applying for new credit cards or co-signing for a loan.
Don't max out your credit cards. Do not use more than 30% of your available credit limit during the entire loan process. If you pay down balances, do it across the board.
Don't consolidate your debt. When you consolidate all of your debt onto one or two credit cards, it will appear that you are maxed out on that card, and your credit scores will be penalized. Consolidate your accounts after your loan has closed.
Don't close credit card accounts. Closing a credit card account negatively impacts your credit history.
Don't payoff collections or 'charge-offs'. If you wish to pay them off, do it through escrow at closing.
Don't move assets between accounts. These transfers show up as new deposits and complicate the application process. The source of all funds must be disclosed and documented. Don't transfer money unless receiving complete documentation from your bank itemizing all transfers. Your lender can verify each of your accounts as they currently exist.
Don't deposit or withdraw large sums of money. Don't do this unless it is absolutely necessary. Please consult your mortgage professional with all questions.
Don't make career moves. Don't change jobs while obtaining mortgage financing. A new job may involve a probation period which must be satisfied before income from the new job can be considered for qualifying purposes. Should an opportunity arise, discuss the details with your mortgage professional.
Don't let your bank accounts go in the red. Any accounts with insufficient funds cannot be used. Keep all accounts in good standing.
Don't have a relative or friend pay for anything related to the purchase of your new home. Gifts are allowed but under very specific lending guidelines and must be documented. This includes your appraisal, down payment, earnest money, etc.
Don't keep your cash in an overseas account or in a safe. If you are planning to use these funds as a down payment, inquire about how and when it would be best to put funds into your U.S. bank account if needed.
Don't give your personal information to anyone else who might run your credit report. Be protective of your credit while purchasing or refinancing your home. Additional credit inquiries will damage your credit scores. Each time your credit report is run, it will show as an inquiry on your lender's report. Each inquiry must be explained in writing.
Don't pack or ship information needed to complete your loan application! Important paperwork such as W-2 forms, divorce decrees and tax returns should not be packed with your household goods. Duplicate copies can take weeks to obtain and could possibly stall the closing date of your transaction.
Understanding Credit Scores
What exactly is a Credit Bureau Score? Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan. A credit bureau score is based on the data available in the loan applicant's credit report. The score measures the relative degree of risk a potential borrower represents to the lender or investor. It is not a measure of a loan applicant's income, assets, or bank account, although those and many other factors are still considered by lenders and investors independent of the score. A credit bureau score doesn't include any of the following in the score calculation as this would be considered discrimination by FCRA (Fair Credit Reporting Act) guidelines: gender, race, age, or zip code.
Fair Isaac Corporation (FICO) scores range from approximately 300 to 850 points and are available through the three national credit data repositories:
Each bureau calculates its own score, based solely on data within its individual credit file.
A FICO is calculated by a system of scorecards. In developing these scorecards, FICO uses actual credit data on millions of consumers and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance. Each pattern corresponds to a likelihood that a consumer will make his or her loan payments as agreed in the future. The score is based on all the credit-related data in the credit bureau report, not just negative data such as a missed mortgage payment or bankruptcy.
How are Credit Scores Calculated? Scores are calculated based solely on information in consumer credit reports, taking the following categories into consideration:
Payment History 35% The first thing any lender wants to know if if you've paid past credit accounts on time. This is seens as the best predictor of future behavior and therefore one of the most important factors in a credit score. The main types of accounts considered for payment history are: Credit cards, Retail accounts, Installment loans and Mortgage loans. Payment history also includes public records and collection items such as bankruptcies, foreclosures, lawsuits and liens.
Amount Owed 30% The percentage of a person's available credit that has been used usually matters more to lenders than the actual account balances. Being 'maxed-out', or even close to it can be a sign that a person is overextended and more likely to miss payments. Factors considered include: The total amount owed on all accounts, The amount owed on specific accounts such as credit cards and installment loans, Credit utilization on revolving (credit card) accounts and How many accounts have balances.
In-Use & New Credit 20% FICO scores consider the mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. New credit is monitored because multiple accounts being opened in a short period of time is a potential red flag, especially for people who don't have a long credit history.
Length of Credit 15% A lengthier credit history generally results in increased credit scores, but depending on other factors even people who haven't been using credit long may have high scores. Scores take into account: How long you've had credit, Oldest and newest accounts and the average age of all accounts, Length of history for specific accounts.
Types of Mortgage Loans Available
Your Guide to the Home Loan Process
Understanding Title & Escrow
Commonly Asked Finance Questions
Glossary of Financial Terms