Home Buyers Guide to Credit

Navigating Homeownership: A Former Mortgage Broker's Guide to Credit Success

The journey to homeownership is often a mix of excitement and anxiety, especially when it comes to understanding the complex world of mortgages and credit scores. As a former mortgage broker, I've seen firsthand how crucial credit is to this process, and I want to share my insights to help you navigate it successfully.

The Pre-Approval Myth and the Power of Conditional Approval

When you start house hunting, real estate agents and sellers often push for a pre-approval letter. This is a preliminary step, and while it's helpful, it's not the same as a firm commitment. Agents, particularly those working with new construction, may strongly recommend their "preferred" mortgage broker, offering incentives like closing cost assistance or lower rates. Be cautious: these brokers may be affiliated with the builder, and their priority might not always be your best interest. They also get a commission, and get to know how much home you can afford.

I strongly advise securing your own lender, and going a step further than pre-approval. Aim for a conditional loan approval.

• Pre-Approval: A quick review of your credit, income, and debt.

• Conditional Loan Approval: A more in-depth process involving underwriting, where the lender verifies your information.

Underwriting is where the real scrutiny happens. Underwriters contact your employer, creditors, and utilize secondary credit bureaus like LexisNexis. LexisNexis holds a wealth of public information that might not be on your standard credit report, such as:

• Divorce records

• Arrest records

• Eviction history

• Foreclosures

• Liens

• Garnishments

• Child support obligations

I've seen countless deals fall apart at the last minute because underwriting uncovered issues that pre-approval missed. Divorces with IRS liens, for example, can create incredibly stressful situations, especially if communication with the ex-spouse is strained.

Getting conditional approval upfront gives you:

• Negotiating Power: You're a serious buyer with financing in place.

• Reduced Stress: Everyone involved can proceed with confidence.

• Time to Resolve Issues: You can address any red flags before they become deal-breakers.

The Crucial Importance of Monitoring All Three Bureaus

Here's a critical point: It is imperative that you monitor all three credit bureaus (Equifax, Experian, and TransUnion) when considering buying a home.

The information in your credit file can vary significantly between each bureau. It's not uncommon to see discrepancies in:

• Credit scores: You might have a 770 with Equifax, a 690 with Experian, and a 580 with TransUnion.

• Reported accounts: Some accounts might appear on one report but not another.

• Negative information: A late payment or collection might be listed with only one bureau.

Lenders use a tri-merge credit report, which means they pull your credit data from all three bureaus. In many cases, they use the average of the three scores to determine your overall creditworthiness. Therefore, a scenario with widely varying scores (like the 770, 690, and 580 example) can seriously jeopardize your chances of approval and the loan terms available to you.

Proactive Credit Management: The Key to Success

This is why reviewing your credit reports monthly and preparing well in advance of your home search is so important. You need to know exactly what's on each report to address any potential issues.

Beyond the Credit Score: A Holistic View

Lenders don't just look at your credit score. Underwriters dig deep, assessing your overall financial picture. Here's a breakdown of what they consider:

• Tax Returns: Lenders will typically request your last two years of filed tax returns. Any unresolved issues with the IRS can be a major hurdle. Be upfront about any payment plans or back taxes owed.

• Bank Statements: Expect to provide statements for the past year, showing account activity, balances, and deposit history. Underwriters may even see your highest balance and how much you have in your account when it closed.

• Pay Stubs: Recent pay stubs (last 2-3 months) verify your current employment and income.

• W-2s: Your W-2s from the past two years provide further income confirmation.

• Asset Statements: Brokerage accounts, savings accounts, and other asset statements demonstrate your financial stability.

Credit Cards and Debt Ratio: A Delicate Balance

Your credit card usage also matters:

• Number of Cards: Lenders prefer to see several high-limit credit cards, demonstrating responsible credit management.

• Debt Ratio: Keep your overall debt-to-income ratio (DTI) low.

• Credit Utilization: Ideally, maintain a credit card utilization rate of 30% or less on each card. If you have a $10,000 limit, don't carry a balance over $3,000.

• Premium Cards: Cards like American Express, Chase Sapphire, and Citi Gold can be a positive signal, as they often indicate a strong credit profile.

Inquiries: Proceed with Caution

Avoid applying for new credit during the home buying process. Underwriters monitor your credit until closing, and new inquiries can raise red flags. Too many inquiries within a short period (especially more than 4 in a year or any within the last 3 months) suggest impulsive behavior and increased risk.

Prepare for the Long Haul: Financial Stability is Key

Homeownership is a significant financial commitment. Lenders want to see not just a good credit score, but also evidence that you can comfortably afford the mortgage, even during financial hardship.

• Budgeting: Create a realistic budget that accounts for mortgage payments, property taxes, insurance, and potential maintenance costs.

• Emergency Fund: Build a substantial emergency fund to cover unexpected expenses like job loss, illness, or major home repairs.

• Realistic Expectations: Don't buy the most expensive house you can qualify for. Leave room for financial flexibility.

Ten Dollar Credit Repair: Your Partner in Preparation

I created Ten Dollar Credit Repair because I've seen firsthand the stress and heartbreak that credit issues can cause during the home buying process. This eBook is designed to empower you with the knowledge and tools you need to:

• Understand the Credit System: Gain a deep understanding of how credit works and what lenders look for.

• Improve Your Credit Score: Implement proven strategies to boost your score and present yourself as a strong borrower.

• Navigate the Underwriting Process: Learn how to prepare your documentation and avoid common pitfalls.

• Address Potential Red Flags: Proactively resolve any credit issues that might arise during underwriting.

By investing in your credit health and preparing thoroughly, you can approach the home buying process with confidence and secure the home you truly desire.

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