5 Facts Home Buyers and Sellers Should Know About Credit
Understanding how credit works is a very complicated matter, but home buyers must be well versed in credit matters if they hope to secure a home loan. There are a wide variety of factors that impact your credit score, and even small changes in your score leading up to the closing date can have an impact on your ability to buy the home of your dreams.
Pre-Qualifying, Pre-Approval and Your Credit
One of the most popular home buying tips you will read online and hear from your realtor is that you need to get pre-qualified before you shop. It is important to understand that a pre-qualification gives you a rough estimate of what a bank will loan you, but it is not a guarantee. It is based on your current credit score, and your estimated income, and may be sent to you without you filling out a single application. Whereas a pre-approval requires some documentation to verify your income and information before the bank gives you a number, and still is not a guarantee of final approval of the loan.
You Must Keep Your Credit In Check
The home buying process can take months. One problem we see is that couples get pre-qualified or pre-approved at the beginning of the shopping process, but their credit score drops before they reach the closing table. The fact is that the bank will check your credit score repeatedly, including in the final days before closing. If you take out another loan, buy a car, or miss a payment during that period, you may not qualify for the loan in the end, and they will let the deal fall through. It is never safe to assume that the bank will go through with the deal just because you’re in the last days. We always encourage our future homeowners to NOT take out any other loans and to use credit cards sparingly. You’ll thank us in the end.
All Income Must be Provable
If you regularly receive undocumented income of any kind, it may not be usable on your loan application. If this is the case, you may have to come up with more of a down payment to offset the lower loan amount. In addition, most banks and credit unions want to see at least the last two years of income statements, not just a few months. If you haven’t been at your job very long you might have to wait to qualify. There are exceptions to this rule, but check with your lender to see if there are any exceptions.
Learn About Debt to Income Ratio
Banks will not just loan you any amount on a house based on a large income. They follow strict guidelines regarding your debt to income ratio, which includes any other monthly payments you make. The best way to increase your loan capacity is to pay off other debts before you apply for a mortgage.
You Can Shop Around
Some banks have different loan policies and interest rates than others. You are allowed to shop around for a mortgage rate that you feel comfortable with while you shop for a house. A pre-approval is a good start, but it is not your only option once you’re under contract unless the contract specifies only one banking institution. If you have unusual income or other hangups in your application, shopping around can help you get the loan you need.
These are just five of the most important home buying tips that you should know before you buy. The earlier you start planning for a new home purchase, the easier it will be to get through the process quickly and sanely. For more home buying tips, visit us online or speak to one of our agents.