When’s the last time you checked out your credit scores? A lot of us don’t think much about our credit until it’s time to purchase a home and then it may be too late. Avoiding these five common financial fiascos can save you money and headaches.
- Not knowing your credit history.“Not investigating whether the credit problem is accurately reported on the credit report; 95 percent of them aren’t,” said John Ramsay, Senior Loan Officer at Mortgage Partners Inc.
Bankruptcy, for instance, is hardly ever reported correctly. Bureaus will frequently still report that a person owes money, even if it was paid off in the bankruptcy, but somehow it was filed incorrectly.
Ramsay said, “If you have a credit problem, fix it if you can.”
- Not getting a written estimate.When borrowers are shopping around loans, one of the biggest mistakes they make is not asking for a written estimate. It’s hard to compare loan programs if you don’t have them in writing.
“It’s a bad sign if they won’t give it to you in writing … If you get three written estimates you can compare apples to apples,” Ramsay said. Otherwise clients may not be able to ask the exact same questions so that they can compare different sources.
- Not having a seasoned downpayment.This is very important, especially when a buyer is getting a gift from parents, a family member or anyone else. Banks like to see that the buyer has had control of the downpayment for at least a couple of months prior to closing escrow.
“You can’t have 100 percent gift, you have to have some of your own money,” Ramsay said. Buyers should have the money in their own account, even if it was gifted to them. If it’s gifted just days before the buyers want to borrow money from the bank, it will make the loan more expensive.
“60 days is the minimum if you want to do business with the best bank,” Ramsay said. If you have the cash and the downpayment isn’t seasoned (in your bank account), then it’s likely you won’t get the best rate.
“You can avoid the whole process by just seasoning the downpayment and being able to show two bank statements with the money just sitting there,” Ramsay explained.
But if you’re selling a property and the money is coming from the house, then the downpayment is typically coming from the home you’re selling and, of course, would not need to be seasoned.
- Thinking that 100 percent financing means no money out of pocket.“Buyers always have to pay interest, taxes, insurance — the recurring closing costs. They always have to be paid by the borrower; that’s a legal thing,” Ramsay said.
So even if you plan to do zero down, buyers still need to have enough money to pay for these other costs. You must have a reserve.
“The bank doesn’t want to loan to anybody who spent their very last dime to buy the house,” Ramsay said.
- Thinking that your bad credit will stop you from getting a home.“You have to have a 580 credit score to do 100 percent finance, but, with a downpayment, I can get you financed with a 500 credit score, which is a very low score. That’s bankruptcy, foreclosures, car repossessions, major bad stuff,” Ramsay said.
But if there’s a downpayment it makes lenders more comfortable with loaning money.
Also keep in mind that if you have bad credit a co-signer won’t help it. But a downpayment might.
“Co-signers don’t make bad credit good credit; they make no credit some credit,” Ramsay said.
Co-signers need to be blood relatives in the same area or living together in the home and on title.
Written by Phoebe Chongchua