Getting a Loan
How Much Do I Qualify For?
What is the standard debt-to-income ratio?
Can someone who is unemployed get a loan?
Will bad credit prevent someone from getting a home?
What can I do if I have bad credit?
What exactly is bad credit?
How do I find out what my credit report says?
How do you clear up bad credit?
How long do bankruptcies and foreclosures stay on a credit report?
Understanding Credit Scores
What do I do about bad credit?
Where do I get information on consumer credit laws?
How bad is a previous foreclosure on credit?
Where do I get a copy of my credit report?
What if there is a credit reporting mistake on my report?
Fixing Credit Report Errors
What do I do if I get turned down for a loan?
What options are there after Chapter 11?
Can I refinance after bankruptcy?
Do states offer help to home buyers?
Are there programs for fixer-uppers?
Do I have to disclose a parent's gift?
What is a gift letter?
How Much Do I Qualify For?
The first step is for you and your family to set up a monthly budget to determine how much you feel comfortable spending each month for housing. You should decide what that amount is before moving forward with the process of seeing how much you qualify for. Ultimately, it is not how much of a mortgage or monthly house payment the guidelines allow you to qualify for, it needs to be an amount that you feel comfortable paying each month.
Debt-to-Income Ratio Your gross monthly income and recurring debts, together with your proposed house payment are evaluated to calculate your debt-to-income ratio. This is the primary factor that will determine the amount of house you can afford to purchase.
Front-End Ratio This calculation considers your proposed total house payment (Principal, Interest, Taxes, Insurance, Mortgage Insurance and Homeowners Association Fees), and divides this number by your gross monthly income.
Back-End Ratio This calculation considers your total house payment combined with your minimum monthly payment on your debts (automobile payments, credit cards, lines of credit, student loans, etc.) and divides this number by your gross monthly income.
Almost every home loan program has specific guidelines set for "front-end" and "back-end" ratios. There may be exceptions and on occasion these ratios may be exceeded with a strong credit profile, assets or extenuating factors. This is something that an experienced loan officer can assist you with.
Standard Ratio Guidelines
- Conventional Front-end of 28%, and a back-end of 36%
- FHA Front-end of 29%, and a back-end of 41%
- VA Back-end of 41%
What is the standard debt-to-income ratio?
A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower's gross income and the mortgage payment, combined with all other debts, to 36 percent of the total.
The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income.
Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.
Can someone who is unemployed get a loan? Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments. However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These "no-doc" loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower. Borrowers should check directly with lenders when seeking a no-doc loan. If specific lenders do not offer them, ask for a referral.
Will bad credit prevent someone from getting a home?
There are numerous types of credit report problems (which may or may not be your fault) that would cause a lender to reject your application for a loan.
Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity.
If you feel that your credit report is wrong, experts say it's best to take it up with the organization or company claiming you owe them money.
But if you've been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.
You can order a copy of your own credit report by calling the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1077.
What can I do if I have bad credit?
While some people have rebounded from a foreclosure to buy another home within several years, credit problems stemming from a foreclosure can continue much longer for others.
Real estate experts say you should be candid with your lender in discussing these issues. If your bankruptcy resulted from losing your job due to your employer's financial difficulties, a lender probably will look upon your situation more favorably than if your bankruptcy was caused by overextended credit cards.
Resources: *"Rebuild Your Credit: Law Form Kit," Nolo Press, Berkeley, Calif.; 1993.
What exactly is bad credit?
There are numerous types of credit report problems that would cause a lender to reject your application for a loan.
Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity.
If you feel that your credit report is wrong, experts say it's best to take it up with the organization or company claiming you owe them money. But if you've been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.
You can order a copy of your own credit report by calling the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1077.
How do I find out what my credit report says? For a copy of your own credit report, call one of the three main national credit reporting agencies: Equifax, (800) 685-1111; Experian, (800) 311-4769 or Trans Union, (312) 408-1077.
How do you clear up bad credit? There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual's credit record from 7 to 10 years. Now, many states have specific timeframes if you challenge a credit blemish.
The first step is to check your existing credit record. Anyone can obtain copies of their own credit report free of charge if they have been turned down for credit recently.
For a fee, people can request copies of their own credit report from the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1077. The bureau also should provide instructions on how to read the report and how to dispute any inaccuracies it contains. If the credit report is correct, take care of any outstanding delinquent obligations first.
Resources: * "Rebuild Your Credit: Law Form Kit," Nolo Press, Berkeley, Calif.; 1993.
How long do bankruptcies and foreclosures stay on a credit report? Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider an borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.
Understanding Credit Scores
Many times, the decision to offer someone credit is made by a computer program that is heavily weighted towards evaluating your credit or FICO score. A FICO score is a system for evaluating your credit worthiness. It is a number that lenders use to decide to grant you credit.
Each credit reporting agency calls their credit score something different, but they are all based on the FICO (Fair Isaac Company), system. Equifax is BEACON, Trans Union is EMPERICA and Experian is FICO. However, most of the time, when someone uses the term FICO Scores, it is synonymous with the term credit scores.
Even though each credit reporting agency uses the same basic model to score your credit, they usually come up with different credit scores. This is because not all creditors report to every agency. For example, a collection agency may only report to one agency. So you may have a collection account that reports to one agency and not the others. This will result in one lower credit score. For this reason, most mortgage lenders will use the middle of the three credit scores when deciding whether or not to approve a loan.
Your credit scores are made up of information compiled from three consumer reporting agencies, Trans Union, Equifax and Experian. They report how you, as an individual or a married couple (if you have signed jointly for credit), have paid back the companies from whom you have borrowed money.
What Your Credit (FICO) Scores Consider:
1. Payment History - Approximately 35% of your score is based on this Payment history takes into account how you have paid on specific types of accounts (mortgages, credit cards, retail accounts, installment loans and finance company accounts), amounts past due on delinquent accounts or collection items. It also includes the presence of adverse public records (bankruptcy, foreclosure, judgments, suits or liens), collection items and charge offs. Lastly, it looks at the recency and number of accounts paid as agreed and past due items on file. The primary thing any lender wants to know is if you have paid your past credit accounts on time. The fewer late payments, the better although (one or two late payments will not totally ruin your credit scores). If you have enough positive credit ratings, it should outweigh the few late payments. What you don't want is a long history of late payments.
2. Amounts Owed - Approximately 30% of your credit score is based on this. Amounts owed looks at the proportion of balances to total credit limits on revolving accounts, proportion of installment amounts still owing and total number of accounts with balances. The highest credit ratings show an extensive history of owing money in the past and paying on time. You may have a perfect payment history but have 15 accounts that have balances owing on them. While your credit is excellent, your score will be negatively impacted because of the amount of debt owed. It will be even worse if you are at the maximum available credit on those accounts. For example, if you have 10 credit cards all with $5,000 credit limits and you owe $5,000 on each of them, this may be an indication that you are overextended, and will have a negative effect on your credit score.
3. Length of Credit History - Approximately 15% of your score is based on this Generally speaking, the longer your credit history, the better your score, assuming it's a good history. Credit scores consider both the age of your oldest account and the average age of all your credit accounts. New accounts will lower your average account age, which will have a larger effect on your credit score if you do not have a lot of older credit to off set the new. In addition, if you obtain a lot of credit in a relatively short time period (i.e. 3-12 months), this can look risky to a new potential creditor.
4. New Credit - Approximately 10% of your score is based on this People tend to have and use more credit in this day than they did 20 years ago. However, research shows that opening several credit accounts in a short period of time does represent a greater credit risk, especially for those who do not have a long established credit history. The number of recently opened accounts and recent credit inquiries are reviewed along with re-establishment of positive credit following past payment problems. In addition, when you have only had credit for a few years or less, all of the other factors weigh much more heavily on your credit profile than someone with a 10-year history.
5. Types of Credit - Approximately 10% of your score is based on this The credit score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgages. It is not necessary to have all of these since the credit mix won't be a huge factor in your score, unless you don't have a lot of other information on which to base a score.
Special Situations Can Have an Impact on Your Credit Scores While not every creditor you owe money to will report your prompt payments (rent/medical & hospital bills/banks where you have your checking account/credit unions), most will find a way to report your failure to pay, which will effect your credit score. Hospitals and medical providers do not report to credit agencies as long as you pay them on time for any balance that your insurance company didn't cover. However, if you have difficulty paying the debt, or have a dispute with your insurance company over who is responsible for the debt, (meanwhile the debt remains unpaid), and it ends up with a collection company or attorney, that "bad debt" will wind up on your credit profile and negatively impact your credit scores. Another example of this is that you could go 20 years and never bounce a check and your credit profile will never reflect it one way or the other. But let a $15 bounced check remain unpaid and it will be reflected on your credit report. Even if you pay the debt immediately after you become aware, it can take months to reflect as "paid" and then that "paid collection" will remain on your credit for years.
Get a Copy of Your Credit Report Get a copy of your credit profile that includes your FICO credit scores, so that you know exactly what is on your credit profile. Experian 800.311.4769 or www.experian.com Equifax 800.685.1111 or www.equifax.com Trans Union 800.888.4213 or www.transunion.com
What do I do about bad credit? Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. For a copy of your report, contact one of the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1077. The bureaus should provide instructions on how to read the report and how to dispute any inaccuracies it contains. If your credit report is correct, take care of any outstanding delinquent obligations first. Lenders usually won't consider any borrower who has had a delinquent payment in the past year.
Where do I get information on consumer credit laws? For information on consumer credit laws, contact the National Foundation for Consumer Credit, 8701 Georgia Ave., Suite 507, Silver Springs, MD 20910; call (301) 589-5600.
How bad is a previous foreclosure on credit? A property foreclosure is one of the most damaging events in a borrower's credit history. In terms of the effect on credit history, a deed in lieu of foreclosure or a short sale is not as adverse an event as is a forced foreclosure.
Where do I get a copy of my credit report? For a copy of your own credit report, call one of the three main national credit reporting agencies: Equifax, (800) 685-1111; Experian, (800) 311-4769 or Trans Union, (312) 408-1077. The bureaus also should provide instructions on how to read their report and dispute any inaccuracies it contains.
What if there is a credit reporting mistake on my report? There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual's credit record from seven to 10 years. Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. Some states now have mandatory timelines to respond to your inquiry or remove the blemish.
The bureaus should provide instructions on how to read the report and how to dispute any inaccuracies it contains. If your credit report is correct, take care of any outstanding delinquent obligations first. Lenders usually won't consider any borrower who has had a delinquent payment in the past year.
For a copy of your report, contact one of the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1077.
Fixing Credit Report Errors Your credit has a dramatic impact on your financial stability. Strong credit provides you with many benefits such as obtaining home mortgages, equity lines, lower interest rates, apartment leases, auto loans, and low interest credit cards with ease. If you have a poor credit history, then many of these financial options may be unavailable to you.
It's one thing to have late payments or delinquencies on your credit; everyone has forgotten a payment at one time or another. But it can be very frustrating when errors or mistakes place inaccurate information on your report. Studies have shown that many times credit files contain inaccuracies that can have a negative effect on your credit rating. This can result in rejections for home or auto loans, insurance and in some cases, even employment. Errors on a credit report can be caused by human or clerical error and possibly computer glitches.
Account delinquencies are reported for 7 years, bankruptcies for 10, credit over $150,000 and criminal convictions are reported indefinitely. This is why it is so important that you review your credit files and monitor them for mistakes.
Types of Errors
- Late or delinquent payments may be a result of an error on the part of the creditor
- Accounts that aren't yours can be the result of creditor error, identity fraud or mix up
- Accounts that have been paid off but still report a balance owing
- Duplicate account information
- Unpaid collections or judgments
- Bankruptcies
Correcting the Errors To correct an inaccuracy on your credit report, you must write a letter to the credit bureau that produced the erroneous report. - Provide your complete name and address, stating each item in your credit report that you believe is incorrect and why.
List the facts and request that the mistakes be corrected or deleted. Include copies (keep the originals) of documents that prove your claim such as cancelled checks or payment receipts. Include a copy of the credit report with the items in question circled.
In some cases the credit bureau may provide you with a form to complete. You also need to write a letter to the company or lender where the mistake originated, informing them of your dispute and include the same documents that prove your claim. Both letters should be sent by certified mail, return receipt requested. Be sure to keep copies for your own records. According to the Fair Credit Reporting Act, both the credit bureau and the company or lender are responsible for correcting errors or incomplete information on your report, but you are responsible for making them aware of errors.
Investigating the Claim The credit bureau must investigate the items in question within 30 days, they will also forward your dispute to the creditor who must also investigate your claim and report back to the bureau. If the creditor agrees there is a mistake, they must notify each credit bureau so the information can be corrected. If the disputed item cannot be verified, it must be deleted from your report. When the investigation is complete, the credit bureau must provide the results in writing as well as a free copy of your credit report. You may also request that correction notices be sent to anyone having received your report in the prior six months. If the credit bureau does not resolve your dispute, you can request to have a statement added to your file that will show up in future credit reports.
Request Your Credit Report - Experian call 800.311.4769 or online www.experian.com - Equifax call 800.685.1111 or online www.equifax.com - Trans Union call 800.888.4213 or online www.transunion.com
What do I do if I get turned down for a loan?
Increasing numbers of loan applicants are finding ways to buy their own home despite past credit problems, a lack of a credit history or debt-to-income ratios that fall outside of traditionally acceptable ranges.
Ask the lender for a full explanation, then appeal the decision in writing.
What options are there after Chapter 11?
A previous bankruptcy can remain in a credit file for seven to 10 years.
Depending on when the bankruptcy was discharged and what kind of credit a borrower has reestablished since then, it needn't be an obstacle to obtaining loan approval. The longer ago the discharge occurred, the better off a loan applicant will be.
Many lenders also will take into account the circumstances surrounding a bankruptcy. For example, they may look more favorably upon you as a borrower if your bankruptcy was due to financial reverses you suffered due to your employer's own financial difficulties. On the other hand, if you declared bankruptcy because you overextended your personal credit lines and lived beyond your means, a lender probably won't be as forgiving. If you are in the latter category, you may want to contact a mortgage broker who may qualify them for a "b" or "c ," loan, which usually comes at a higher interest rate.
Resources: "Rebuild Your Credit: Law Form Kit," Nolo Press, Berkeley, Calif.; 1993.
Can I refinance after bankruptcy?
Refinancing may be prudent but could be difficult after a bankruptcy. If you're considering bankruptcy, you may want to go to your current lender first and explain the situation. If you have been current on your payments, the lender may be accommodating and refinance your loan, easing your financial situation.
Do states offer help to home buyers? Most states have a housing finance agency, usually located in the state capital, which offers help for first-time home buyers.
Are there programs for fixer-uppers?
If you need home loan to buy a "fixer-upper" and remodel it, look at the U.S. Department of Housing and Urban Development's Section 203(K) loan program. The program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.
A 203(K) loan is usually done as a combination loan to purchase a "fixer-upper" property "as is" and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan. Investors no longer may participate - only owner-occupants. Owner-occupants are required to come up with only 3 to 5 percent. HUD requires that a minimum of $5,000 be spent on improvements. Two appraisals are required. Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.
Do I have to disclose a parent's gift?
Having generous parents is nothing to hide. An estimated one-third of first-time buyers purchase their home with a loan or a money gift from their parents.
Lenders will ask for a gift letter stating that no repayment of the "gift" is expected. In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well.
Resources: "The Homebuyer's Survival Guide," Kenneth W. Edwards, Dearborn Financial Publishing, Chicago; 1994.
What is a gift letter?
If someone is willing to make a gift of funds in order for you to purchase a home, lenders will ask for a gift letter stating that no repayment of the "gift" is expected. The amount of the gift and the date funds were transferred should be spelled out in the letter, along with the donor's name, address, telephone number and relationship to the borrower.
In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well. Gifts -- with the proper documentation -- can be from relatives, friends, an employer, church, municipality, or nonprofit organization. Lenders often have stricter restrictions on gifts from friends and relatives other than parents. Also, if you put less than 20 percent down, some lenders may require that a portion of the down payment be your own cash, not a gift. If you want to use a gift as part of your down payment, check with individual lenders to learn the restrictions of specific private or government-insured mortgage programs.