- By Josh Turpin
It takes a lifetime to build perfect credit and only seconds for it to come crashing down. When buying a home or refinancing, the credit factor is quite possibly the most important. It is something you need to understand to avoid paying too much for a home loan.
Credit Basics – Knowing is Half the Battle
First, let’s talk credit basics. It is important you understand how good credit scores are built before you try to comprehend how they can be devastated.
There are three credit bureaus (technically they are called Credit Reporting Agencies or CRAs). The three CRAs are Experian, Equifax, and TransUnion. Each of them is responsible for collecting, analyzing, and disseminating this data to various credit providers like Factual Data. Companies like Factual Data obtain data from all three bureaus and compile it into one report called a “tri-merge” credit report. Various credit providers purchase these reports from the providers and use them to make decisions on whether to extend a consumer credit.
Click Here To Have a Professional Mortgage Lender Do a Custom Credit Review
Quite often I speak to customers and they may say something like, “I have a 700 credit score.” Then, upon investigating further, I find that the score used for mortgage lending purposes is actually much lower. Why? Because they have three scores and people tend to cling onto their highest one. In all reality, when making mortgage lending decisions, we use the middle score. If there is a co-borrower, we use the lowest middle credit score of both borrowers. In the above scenario, the person may have had a 700, 675, and 625 respectively. In that case we would use the score of 675.
Why are the scores different? - Because not all creditors report to every credit bureau. Again, why? Because it costs them money to report to each of them and some creditors choose to only report to one or two of them to save money.
How are credit scores calculated? – The method behind the madness.
This is a tricky question as there are tiny adjustments that can be made to a person’s current credit situation to make significant changes. However, according to this article from Wikipedia, there is some reason to a credit score’s rhyme and credit scores are derived from the following sources:
Time Heals All Things
So, you can see that since a whopping 35% of a person’s credit score is attributed to payment history, sometimes the only thing that can effectively heal a person’s credit is time. Additionally 15% of your score can be attributed to length of credit history. Therefore, a person who has had a solid track record of credit use for 35 years will feel less effect on their credit for one mistaken late payment than someone who has only had credit for a couple years.
Time may heal most things but it is often an unfortunate thing when it comes to buying a home. That is why it is important to talk to a mortgage lender way in advance of buying a home. This way, you can address any issues that may come up before finding your dream home and use time to your advantage.
But What If You Don’t Have a Lot of Time
It is always best to progress slowly and with caution when it comes to home finance. Whether purchasing or refinancing, planning ahead is wise. However, there are circumstances when it becomes necessary to act quickly – otherwise opportunities can be missed. So, if you find yourself in a situation where you need to try to quickly raise your credit scores to qualify for a home loan (or a better one for that matter), there are some things you can do to make it happen faster. Below are a few of those things.
Call In the Professionals
We have mentioned Credit Law Center out of Lee’s Summit, Missouri several times in this article and there is good reason for that. There are TONS of unscrupulous “credit repair” schemes out there. I’ve seen it all. A great many of them do nothing but take your money. Some of them have upfront fees. Some of them have monthly fees. Most of them will make money on the consumer regardless of whether they even help them increase their credit scores. At Credit Law Center, you work with real attorneys - people who can get stuff done. With Paige and the crew, you don’t pay until it goes away. Quite simply, they are the best I’ve have ever seen. Below is their contact information.
Credit Law Center
255 NW Blue Barkway Ste. 200
Lee’s Summit, MO 64063
DO NOT wait until the last minute to know your credit status. It is silly, and quite frankly irresponsible, to wait until you need credit to know your ability to obtain it. Knowing in advance will help you prepare so you can work towards improving your credit rating. Having the best credit rating possible will ensure you that you will get the best possible rates on things like home loan, auto loans, and even insurance. Not knowing is likely to cost you a substantial amount of money over the long haul.
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By Josh Turpin
A decade ago 100% financing options were the norm for buying a home. The thought was, why put any money down if you don’t have to? Although there are pros and cons to putting money down, when it comes to buying a home nowadays, there are very few 100% financing options available. Typically there is a minimum down payment of 3.5% (for FHA loans). This money has to be sourced and seasoned and cannot be borrowed. That being said, there are some crafty ways to raise your down payment with little-to-no money out of your own pocket.
Using Gift Funds For a Down Payment
Not everyone has a rich uncle willing to buy them a home. Likewise, most home buyers will need to use some sort of financing to buy their home. In this case, there are certain rules that apply to the funds involved in the transaction. Making sure the funds are not borrowed in any way is one of those rules. The money has to be gifted.
Rich uncle aside, you might be surprised who may step up to the plate when it comes to helping you get into a home. Quite often I have seen borrowers obtain money from a family member in order to pay for a minimal down payment. Funds obtained by another entity to buy a home typically fall under the category of “gift funds”. Most home loan programs allow gift funds as long as they are from one of the following types of entities:
One imperative requirement of gift funds is that they CANNOT BE A LOAN. This means there can be no expectation of repayment. This also means there will have to be a signed Gift Funds Letter that is a written agreement between the giver and receiver that states the funds are a gift, not a loan, and there is no expectation of repayment. It will need to be signed by both the giver and the borrowers.
Another requirement of the gift funds are that they need to be sourced and seasoned (just like any other money used when obtaining a mortgage). This means the giver will be required to show where the money came from. This money will also have to be tracked as it moves from their account to the closing transaction. So, if they gift the money directly to the receiver, the parties will need to show the money coming out of the giver’s account and going into the receiver’s account. This is why it is very important NOT TO PROVIDE GIFT FUNDS IN THE FORM OF CASH. Therefore, if the giver is sitting on a ton of “mattress money,” they will need to deposit the money into their bank account, let it sit there for at least 30 days, and then gift it to the home buyer.
One way to avoid having to go through the pain of showing all of these transactions is for the giver to pay the funds at closing directly to the title company. They will still have to source it by showing an account statement but there is less paperwork to provide.
Remember, when buying a home, you have to consider not only down payment but also closing costs and pre-paid items. Such closing costs will include lender fees, title charges, the cost of an appraisal, and other various fees. Prepaid items include setting up an escrow account to pay taxes and insurance when they come due. These items add up quickly. For a low down payment program, these costs can even exceed the amount of the down payment. See my article, “How to Avoid Paying Closing Costs When Buying a House,” for more information on how to avoid such out of pocket costs.
Regardless of whether you pay the down payment or closing costs out of pocket or raise it via another means, it is important that the financing you do obtain is competitive. That is where I step in. Contact Me to obtain a free, no obligation, quote on for your next home purchase loan!
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