Mortgages > Mortgage Preparation

Mortgage Preparation: Plan Before You Borrow

There are a few financial tricks to know and traps to avoid when you are thinking about buying a house. Qualifying for a mortgage is far more difficult than qualifying for a credit card or a car loan. Although there are literally hundreds of different mortgage programs available, they are almost all based on the same qualification information - some combination of income, monthly expenses, and credit history. Planning ahead, in some cases as far as one year, can help many people avoid hassles.

Using "Gift" Funds

If you are receiving a gift for all or part of your down payment, arrange to receive the funds six months before mortgage application. Place the funds in your own bank account. Reason: many mortgage lenders place restrictions on the amount (percentage of down paymentand the source of gift funds.

However, when you make mortgage application, the lender checks only three months' bank statements. If the funds are present on the oldest statement, they are "your" funds, not a "gift". If your parents plan to give you a gift just in time for closing, they must be prepared to show your lender that the funds actually exist in their bank account at the time you apply for your mortgage. All parents are different, but many of them strongly resent having to supply their own bank statements to prove the gift.

Large Purchases

Okay, you are excited about buying your house but you need new furniture and appliances, or your car is falling apart. Defer any purchases--particularly credit card or installment contract purchases--until after closing on your new home. Monthly credit card obligations can ruin your expense ratio very quickly. Your idea of the debt you can handle and your lender's idea of the debt you can handle may be two entirely different numbers. Unless you have a VERY high income, do not buy a new car or a new boat prior to applying for a mortgage. Car leases count just as car payments do.

Current Mortgage Payment History Lenders check your credit history. If you currently own a home, make sure you do not have any late mortgage payments for 12 months prior to applying for your new mortgage. If your budget is tight, ALWAYS pay your mortgage first. According to Fannie Mae guidelines, lenders cannot issue you a new mortgage if you violate the 12 month rule. Mortgages belonging to consumers with a sloppy payment record do not meet Fannie Mae guidelines and therefore cannot be sold into the mortgage market. The lender must keep those mortgages for its own loan portfolio, something the lender probably won't want to do. Portfolio loans usually have much higher interest rates than do Fannie Mae loans.

Avoid Credit Disputes

If you get into a credit dispute over a small sum, just pay it. It may be against your principles to do so, but the incredible hassle involved in trying to clear it up isn't worth it. Unfortunately, the credit bureaus are powerful; individuals are not. Hospitals are particularly notorious for reporting small unpaid balances to credit bureaus. Frequently, these are amounts people assume have been paid by the insurance company but for one reason or another are not covered by the insured's policy. Credit bureaus do make mistakes, but unfortunately the burden of proof is on you, not on them.

Check your own credit several months prior to even looking for a house. This will give you time to clear up any problems or misunderstandings! A little financial planning and detective work prior to house hunting can go a very long way in making your mortgage application easy and stress free.

For more Santa Cruz mortgage information, get in touch with Lauren Spencer today. She'll be happy to answer your questions or point you in the right direction to help you find the answers you need. Send her a message or give her a call at 800.226.4717.

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