Needless to say, there are swarms of people inquiring with lenders right now about buying their first home in New Jersey. Smart move. With low rates, low home prices AND a tax credit, it would be foolish to wait – if you qualify and if buying makes sense.
Many of the calls I receive are very similar. People buying a home for the first time tend to have the same questions and concerns, and the same fears. Getting information and getting educated is my best suggestion for smoothly moving through the process.
The most common questions from new buyers revolve around credit scores and how much house they can afford.
I spoke to a couple recently where both had low credit scores and a very minimal downpayment. They were under the impression they could get an FHA mortgage because FHA was more lenient with low scores and they thought they could get 100% financing with FHA.
This information was partly correct – more outdated than anything else. There was a time (not too long ago) when someone could get a mortgage loan with a 500 credit score. “500” is a very low score. Those days are gone. FHA loans can be done with lower scores, but not “low”scores. These days, scores under 620 are “low” scores. And for the record, FHA does NOT have a 100% financing program. The minimum down payment as of November 2009 is 3.5% of the purchase price.
READ THIS AND DON’T FORGET IT: There is a HUGE “borrower” misunderstanding about FHA and what “FHA” allows and how FHA works. FHA has rules and regulations and requirements that outline when FHA will “insure” a mortgage loan. And then lenders have their own rules and guidelines as to when they will actually put that big check in your hands so you can close that loan. You see, FHA does NOT loan you money. FHA only “insures” the money that a bank or mortgage company opts to lend to you. And since this bank or mortgage company is actively engaged in this loan process, they will also establish their own lending criteria. There is not a bank on the planet that will approve an FHA loan for a borrower with a 500 score regardless if FHA will insure it.
Here’s the best analogy I can give you. When we buy a car, we get insurance to cover something that goes wrong. But just because we can get insurance on the car doesn’t mean we will buy any car on the lot. We will still be selective and try to get a decent, insurable car that we can rely on.
Similarly, with FHA, though the lender knows FHA might insure the loan, the bank still wants to get a good, reliable loan on their books from the beginning. Make sense?
If you want to buy a new home with an FHA loan, keep these Top 10 Qualifying and Credit Facts in mind:
- Seek to get yourself a minimum credit score of 620.
- If your score is NOT at least 620, ask me for help on how to raise your score. Using the wrong startegies can cause your score to drop.
- Your credit should show you have paid your bills on time for at least the past 12 months – with strong explanations for anything paid late. After all, if the $450.00 car note was late three times, a lender will be reluctant to approve a mortgage loan for $1500.00 per month.
- Obtain your own credit report to get a feel for your credit long before you apply for a mortgage. Federal law allows you to get a copy for free once per year from each of the 3 major credit bureaus – (you may have additional rights in some states). To get your free copy, go to www.annualcreditreport,com. Avoid using services with similar names and avoid the services you see advertised on TV. Pour through your report to see what’s there. Make an effort to correct anything that is wrong. If you see chargeoffs, collection agencies, seek advice before contacting creditors or making payments.
- Find out your credit scores. The customary credit report will not show you a score. You must subscribe to a service or pay a fee to see your credit scores. But be aware that many companies will give you a credit score created by a third party scoring system with scores totally different from the scores used for mortgage purposes. You can go here for reliable credit scores and credit monitoring.
- Set a goal to have at least 3 strong, current, active accounts on your report.
- For credit cards, try to keep your balance no more than 40% of your available credit limit. So, if your limit is $1,000.00, keep your balance at $400.00 or less. This will give you a higher score.
- Show stable, verifiable employment for the past 24 months. If you earn bonuses or commissions, this part of your income will be averaged. Do not quit or change jobs if you plan on buying a home.
- Refrain your applying for credit, transferring accounts or closing accounts until after you have closed your loan.
- Do not co-sign for anyone else to buy anything. Unlike years ago, accounts you co-sign for show up on your credit report. So, however the other person pays this debt will show up on your credit report each month. Not only that, without validation that someone else is totally responsible for paying the debt, the monthly payment may have to be included in “your” debts for mortgage qualifying purposes.
Proceed with caution and good advice. Soon, that new home will yours.
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