Before you begin looking for a new home, you should check your finances and determine how much home you can realistically afford. At this time, do not incur any large debts such as purchase of a new car. Do not open any more charge accounts or add any significant purchases to old ones. And most importantly, this is not the time to change jobs!
Pre-Qualification vs. Pre-Approval
Many people think these two terms have the same meaning which is not so. Pre-Qualification only shows the amount of house you can afford but does not analyze what you are capable of buying and is by no means an approval. Real estate agents in some parts of the United States can pre-qualify buyers for home loans and in other areas, this is done by the lender.
Pre-approvals can only be done thru a lender or thru a mortgage broker working with a lender. What this means is that a lender has verified that you are qualified to purchase a home within a specific price range. However, it does not mean that the lender has given you a stamp of approval and guarantees to give you a loan for any particular amount.
Your actual loan rate is based upon your FICO credit score which takes a number of factors into consideration, such as:
· Length of credit history
· Payment information on credit cards, retail accounts, car and mortgage loans
· Public information such as foreclosures, bankruptcies, liens, lawsuits, etc.
· Late or missed payments
· Accounts that show no late payments.
FICO scores range from 300 to approximately 850. The higher your score, the better credit risk you are considered and of course, the lower the score, the more you are considered a poor credit risk. Mortgage lenders reserve their best rates and fees for those borrowers who score 700 or more. Applicants who score in the low 600's and below are charged higher rates and fees.
A longer credit history will increase your FICO score. You may be surprised to know that an applicant with only one credit card, no car payments and a mortgage loan that is paid on time does not necessarily shoot to the top of the list. It is apparently best to have a few credit cards with low balances which are paid on time rather than to pay cash for most of your purchases.
If you are having financial difficulties and are unable to pay your credit card debts on time, it is best to contact your creditors and attempt to work out payment arrangements. Another option is to work with a legitimate credit counselor to help you get your finances back on track. While neither of these solutions will show an immediate improvement in your credit score, making your payments on time from that point on will be beneficial after a few months.
While FICO information only takes into consideration the items in your credit report, mortgage lenders look at many other aspects of your financial life. Factors they consider important include your current income, the length of time at your present job and the type of credit you are requesting.
