Tips for young first time home buyers

First time home owner tips post noteIf you have previously purchased a house, you know what lies ahead, however, if you're a young first time home buyer . . . you have questions.

You probably have friends or relatives who anguished over the mortgage process. The reason is probably due to inadequate preparation on their part or the failure of the mortgage loan officer to properly prepare them. So here's some tips to make the mortgage application and your home buying uneventful.

Tip #1 Get your free credit report!

The Fair Credit Reporting Act (FCRA) requires the three largest credit agencies, Experian, Equifax, and TransUnion to provide you with a free copy of your credit report every 12 months at your request. Go to the annualcreditreport.com web site and obtain your free credit report from Equifax, Experian and TransUnion. 

At this point, you're probably thinking, "I pay my bills on time, why should I bother".  Talk to any mortgage loan officer with years of experience and he or she will tell you that it's common for collection accounts and erroneous information to appear on a consumer's credit report. Inaccurate information can devalue your credit score. A low credit score can jeopardize your ability to obtain a mortgage.  Working through an inaccurate credit report . . after you applied for a mortgage is to say the least - is stressful. Credit agencies are permitted to include negative information on your credit report for seven years and bankruptcy information for 10 years.

What should I do if I find incorrect information on my credit report?

If you discover any incorrect information on your credit report, dispute it immediately with the three credit bureaus. By federal law, the credit agencies have 30 days to investigate a dispute. Contact each of the credit bureaus directly:

Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
(800) 685-1111
TransUnion
P.O. Box 2000
Chester, PA 19022
(800) 888-4213
Experian
P.O. Box 2002
Allen, TX 75013-0036
(888) 397-3742

EXTRA TIP
Don't close or payoff any credit cards, installment loans or any other credit obligation unless advised by the loan officer. Credit scoring takes into consideration available credit, the number of open accounts, the age of the accounts and other factors. When you close out accounts, you may actually lower your credit score, and you don't want that. Don't open or apply for new credit, that can hurt too.


Tip #2 Get your papers in order!

Messy desk with unorganized papersAt mortgage application (or pre-approval) you will provide the mortgage lender with your pay stubs for the previous 1 - 2 months, your checking, savings, 401K account(s) statements - all pages, even the last page for check reconciliation, divorce decrees, child support, and settlement agreements. Underwriters want it all.

The mortgage company will need the full address, phone numbers and employment dates for all employers for the previous 2 years. Do you still have your first grade class picture? Dig it out, the underwriter might want that too. They want it all. It's the bank's money, if you want a loan, you have to abide by their rules, whether the rules make sense or not.

Do you have a compete copy of your income tax returns and W-2's for the previous two years?

If you lost your W-2"s, obtain copies. If you don't have copies of your income tax return, call the IRS at 1-800-908-9946 and request a transcript of your income tax return for the previous 2 years. Most likely, you will only need a transcript, not a full copy. Are you a union tradesman? If so, make sure you have ALL of your pay stubs and documentation for the previous two years and year to date earnings.

The lender will need the full address, phone numbers and employment dates for all employers for the previous 2 years. Do you still have your first grade class picture? Dig it out, the underwriter might want that too. They want it all. It's the bank's money, if you want a loan, you have to abide by their rules, whether the rules make sense or not.  Loan Application.pdf

Tip #3 Get PRE APPROVED - not PRE QUALIFIED

Two ink stamps. One is approved the other is deniedThe words pre-approval and pre-qualification are often used interchangeably, but have two distinctively different meanings. Pre-qualification means that someone has reviewed your finances (i.e. assets, income, and debt); and based upon his or her opinion, you are eligible to purchase a home in a specific price range. Pre-qualification is nothing more than an "opinion" that you will obtain a mortgage. A pre-approval goes beyond pre-qualification and includes a verification of your income, debt, income and credit score. The lender will review your pay stubs, W-2s, bank statements, and credit report. The pre-approval mimics an actual mortgage application. The lender will want to review your W-2's, bank statements, most recent paystubs and other documents. Once approved, the lender can accurately determine the amount you will be able to borrow and determine the "best" loan program based on your finances. The lender will usually provide you with a pre-approval letter that states your financial qualifications. The pre-approval letter is usually valid for 60 days. After 60 days, the lender may want you to update the bank statements and paystubs. A pre-approval put you in a strong position with the seller when you make an offer. Pre-approval means you are nearly quarantined to a mortgage. Learn more about pre-approvals

Tip #4 Find a lender who uses the rapid rescore program in conjunction with a credit simulator.

A few points on your credit score can make a huge difference in the interest rate and loan program. Right or wrong, your credit score is one element that determines your interest rate and possibly the loan programs available to you. Some lenders will use credit score simulators along with credit rescoring updates to raise your credit score. Read more about credit rescoring

Tip #5 Ask the seller the cost of their homeowner's insurance policy - before making an offer!

You might be surprised to know that the cost of homeowners insurance can be affected by an insurance claim by the previous owner. That's right, if the seller made a claim against their homeowners insurance carrier, you could be paying an higher premium because of their claim. The location, age and construction style can significantly affect the cost of the homeowners insurance policy and monthly cost. Ask the seller who their insurance company/agent is and ask the agent the cost to insure the house. Learn more about homeowners insurance

Tip #6 Find out if the house requires flood insurance

Did you know that the lenders require flood insurance for residential properties located in a flood zone? And did you know that the average annual cost for flood insurance is $750? That cute little creek in the backyard could cost an extra $100 every month. Before you make an offer on a house, take a few minutes to see if the house lies in an area that requires flood insurance. Learn more about flood insurance

Tip #7 Get an estimate of the closing costs before making an offer

Prior to application and making an offer on a home, ask the mortgage lender (or lenders) to provide you with a loan estimate. The loan estimate is the form that itemizes all of the fees associated with the home purchase. Learn more about closing costs

Tip #8 Get a home inspection with hazardous substance testing

Having a professional check out the house is in your best interest, no doubt, but you should get a home inspection that includes testing for asbestos, radon, mold, and any other hazardous condition. You will pay a little extra for testing, but consider the consequences if you (or your family) becomes ill due to an unsafe condition. Learn more about home inspections

Tip #9 Seek out a first time home buyer program

There are numerous first time home buyer programs. Some first time programs (and non-first time) programs offer down payment and/or closing cost assistance grants. Seek out a HUD counselor to guide you through the purchase process. The Federal Reserve Banks also offer assistance to first time home buyers. See Federal grants for first time home buyers

Tip #10 Be careful when shopping for an interest rate


Shopping for a low interest rate or loan program should be confined to a short time period. When a lender accesses your credit report in response to an application for credit, it results in a “hard inquiry.” Hard inquiries can impact credit scores. Applying for multiple credit accounts in a short time may impact credit scores and cause lenders to view you as a higher-risk borrower. In addition, some credit scoring models may take your recent credit activity into account.

There’s one caveat: if you are shopping for an auto or mortgage loan or a new utility provider, the multiple inquiries for that purpose are generally counted as one inquiry for a given period of time (typically 14 to 45 days, although it may vary depending on the credit scoring model). This allows you to check different lenders and find out the best loan terms for you. It’s important to know that this exception generally doesn’t apply to other types of loans, such as credit cards. SOURCE: Equifax.com

Tip #11 And always remember . . . if it's too good to be true, it probably is! Good Luck!