1. Why is credit rating important?
Credit scoring or rating is the process whereby a lender determines how much of a risk you present. Several factors are used to tabulate your score, including:
- Promptness or lateness of payment
- How much credit you carry
- How many times credit reports have been requested and various other factors
Mistakes to avoid before applying:
- Applying for additional loans or credit just before applying for a home loan
- Purchasing large ticket items
- Authorizing credit reports on your credit
- Using up all of your cash reserves to pay off your debt
- Switching or quitting jobs just before, after, or during the application process
2. What is earnest money?
Earnest money shows intent to follow through with the buying process. It is deposited by the buyer at the time a contract is presented, to show you’re “earnest” about buying the seller’s home. Earnest money checks range from a few hundred dollars to several thousand.
The earnest money is held in a trust account by either the listing or selling broker, and is credited to you at closing for your down payment or closing costs. The down payment , on the other hand, is the cash the buyer pays at closing to make up the difference between the sales price and the loan amount. Down payments range from from zero to 20% or more depending on the type of loan. Usually, the lower the down payment, the higher the the monthly payment for the loan.
3. How can I cover down payment/closing costs if I don’t have cash reserves?
Down payment and closing cost funds can come from several resources. First of course is your own savings or equity from the sale of your old home. For some buyers, especially first-time buyers, that is a difficult task. That’s why many lenders and government agencies allow purchasers to receive money from sources other than their own credit report.
Co-signer: A co signer on a loan is a person who applies with you for a mortgage. It also means that person will take on risks associated with a loan, such as being held accountable for the payments if you default on the loan. In addition, this debt will appear on their credit report.
Loans: You can borrow from your 401k or Individual Retirement Account (IRA) for down payment money. While you will lose the investment dollars until they are paid back into the account, you are allowed to pull that money out without penalty and then repay it over time. Keep in mind that the loan is calculated in your debt/income ratios. Check with your financial advisor on any tax consequences before pulling your money out of retirement savings plans. Many lenders offer 100% programs or gift assistance programs.
Personal assets: Cash can be drawn from other investments and assets you may own. Stocks can be sold for cash, as items such as a second car, boat, etc. If you want to hold onto those items but still need the equity out of them, you can approach your bank or credit union and apply for a loan secured by those items. Again, the monthly payment will be added into your debt/income ratios. It is advisable to consult with your lender before obtaining any additional loans.
Seller: As your buyer’s agent, we may be able to negotiate seller subsides in the contract negotiating process. Many loan programs will allow the seller to assist the buyer with up to 3% of the sales price. Sellers can also pay for points or a number of items paid for before settlement. It is very common in our marketplace for sellers to contribute to the buyer’s closing costs. The purchase price is adjusted to cover the needed costs; the only catch is the appraisal must be at least the purchase price.