Q: I am hoping to be a first-time homebuyer in the next year or so, and would like to enhance my chances of qualifying for a home loan by beefing up my credit. Currently I have very little credit established – just a car loan and a credit card. Are there things I can do to help my situation when I’m ready to buy?
A: Yes, you can help your credit score simply by keeping up with your monthly obligations and making your payments on time. That’s the most important factor affecting your credit score (35 percent). Second is the amount of debt you have based on your income. You want to avoid overextending your available credit (30 percent). Third would be how long you’ve actually had credit. Lenders want to see a track record of consistency (15 percent).
Your credit score is only one component of your credit picture, however. Lenders will also consider your income, how long you’ve been at your current job, amount of down payment, savings and type of financing. Be mindful of these suggestions, and you should have no problem qualifying for your first home.
Q: What are the differences between pre-qualification, pre-approval and final loan approval?
A: Pre-qualification is the opportunity to discuss and evaluate your ability to borrow based on your income, assets and debt. No documentation is collected or verified during the pre-qualification phase. The first step is simply to make sure you’re on the right track, which gives you the confidence to begin shopping for a home.
The pre-approval process begins with the collecting of documents. The lender will want to see copies of pay stubs, bank statements and a credit report. This is then packaged with a loan application and sent off to the lender. Once the lender is satisfied with all the documents and verifies employment, the pre-approval process is complete. The pre-approval is typically valid for 60 days; beyond that time, the lender will want updated information.
For final loan approval the lender needs a copy of the purchase contract and the appraisal report. The loan package must be complete with all conditions satisfied and contingencies met in order for the loan documents to finally be prepared.
Q: We were recently pre-approved for a home loan with 100 percent financing. This seems like a great option for us since it limits our out-of-pocket expenses to just closing costs. Is there a drawback for a seller accepting an offer with 100 percent financing?
A: No, I don’t think so. As a seller considers the particulars of all offers (i.e. price, terms and financing), it may be obvious based on the seller’s needs which offer is best. In the case where there are multiple offers that appear to be similar in every way and the only difference is financing, will the seller be more comfortable choosing the offer with 80 percent financing or 100 percent financing? You might lose out.
But the key here will be how effective your agent was at selling the seller on the fact that you are the right buyers for the home. Since you’re already pre-approved, include the commitment letter from the lender(s) with the offer and the full 3 percent good faith deposit to show the seller that you’re serious. Also, I understand that baked goods such as cookies can make a good impression on sellers!
Mike Silvestri is founder and managing partner of Los Altos Mortgage Co., specializing in residential lending. Send your questions to [email protected].
