Your First Home Purchase Part I

 

by Jonathan G. Cameron, CFP®

So you’re getting ready for your first home purchase.  Congratulations! This is the first in a two-part series that should be helpful to you. Your First Home Purchase Part II is all about the criteria lenders use when evaluating your application. 

Down Payment and Qualifying for a Mortgage

In buying your first place you’ve got two main considerations: Coming up with a down payment is #1.  #2 is being able to qualify for a mortgage loan. This post assumes you're on track to save your down payment, and that you're looking into credit and mortgage qualification issues.  Specifically, you’ll learn how to get a good credit score in order to qualify for a mortgage.

Good Credit is Accurate Credit

Your first mission is to make sure that your credit report is accurate. I say project, because it may very well be just that – a mission. There are three major credit bureaus: Experian, Transunion, and Equifax. Each time you make a reportable event with one of your credit grantors – say Macy’s – that event shows up on your credit report.  You want to be sure that that report is 100% accurate. Don’t spend any money on this: simply go to annualcreditreport.com, and you can obtain each one of your three credit reports there once a year free of charge. The strategy, then, on an ongoing basis is to pull one of the credit reports every four months. Check all three for accuracy.

Challenge Credit Report Errors

On your credit report you will see, by credit grantor, the credit limit, the high balance, the current balance, and your payment history. If you see something there that is inaccurate you have every right to challenge it. You notify the credit bureau in writing, usually online, and they will take your challenge back to the credit grantor.  Remember, the 3 bureaus only report the information they are given by the credit grantors.  The credit grantor then has 30 days to substantiate the information.  If it cannot be substantiated, the bureau removes it from your credit report. This project – getting your credit report squared away – is your first step in qualifying for a mortgage loan.

Avoid Credit Repair Scams

I believe most credit repair services that offer to “fix” your credit for a fee are a consumer rip-off. They don’t do anything that you can’t do on your own, at no charge to you, as I’ve described above. Follow the steps in this post to build up good credit and that will usually be enough.

A Good Credit Score

Next you want to look at your credit score. The range of credit scores is from 350 to 850.  The terms credit score and FICO score are often used interchangeably. FICO is simply an acronym for the Fair Isaac Company. Fair Isaac calculates the score that 90% of credit grantors use. 700 is considered a good credit score. With a higher score you’ll have mortgage offers at lower interest rates than otherwise.  What happens if your credit score isn’t so terrific? It doesn’t necessarily mean that you’re locked out of the mortgage market – just that you may not qualify for the most favorable interest rates.

How is Your Credit Score Determined?

Over time you can affect your credit score greatly. You’ll want to know how your credit score is calculated and what credit grantors think are most important. In other words, how is a good credit score determined? Here it is:

35% of your credit score calculation is based on your payment history

Whatever you do – even if it’s just the minimum payment – get it in on time every month.

30% of your score is reflected in the amounts you owe

Keep the amounts you owe as small as you can relative to the credit line. Try not to use more than half of the available credit. Lower is better.

15% of your score is the length of your credit history

Keep accounts open and active! If you don’t have much history, you can gain some by charging a purchase each month, waiting till the bill comes, and then paying it off. Maybe use one card for all gasoline, and another for your Sunpass.  In this way you build favorable credit history, assuming you pay the balance when it comes due!

10% of your score is your credit mix

You want a balance of credit cards, department store cards, installment loans (such as auto loans), and mortgage loans.

10% of your score comes from new credit

Don’t open up a lot of accounts in a short period of time. This makes you look sketchy to a lender.

Where Can I see My Credit Score?

At CreditKarma.com.  You can register there, and see your Transunion score with no charge.  You'll also see a list of credit cards for which you may qualify.  

What if I Don't Have Any Credit?

You've got to build some.  You can apply for new credit.  If your score prohibits this, obtain a guaranteed card through your bank.  Essentially they link a credit card with a deposit account, and your initial credit limit is equal to your balance.  Use the card for some purchases each month, and then pay the bill in full when it arrives.  Over time the limit will go up.  The point is that you have favorable reporting occurring  each month.  

Take These Steps

Your credit score is calculated only on what is in your credit report. If you have a private loan, say to a family member, that won’t do anything for you in terms of raising up your score. If you need to see your score rise, take these steps:

  • Bring everything up to date
  • Never miss a payment.
  • Pay on time
  • Bring all your balances down to 50% of the credit line.
  • Then bring them all down to 33% of the credit line.
  • Then begin paying them off.

Once you’ve got yourself a good credit score, you are ready to shop yourself out to mortgage lenders. Notice I didn’t say shop around: You are now creditworthy and with a down payment. They need YOU! You are in a strong position, so go see what the market has to offer you.

In the next post I’ll talk about what banks look for when they lend mortgage money.

Get in touch! 

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