Three Steps to Getting in the Right Financial Shape to Buy or Refinance a House
Three Steps to Getting in the Right Financial Shape to Buy or Refinance a House
As a loan officer, I engage with a diverse array of clients daily. Regardless of their backgrounds, I consistently ask the same pivotal question: What’s your credit like? Experienced clients, those who have previously bought or refinanced a home, are typically well aware of their credit standing and understand that loan officers are eager to work with clients boasting a 720+ credit score. For others, this question often leads me to deliver a brief but crucial lesson on credit. I take pride in educating my clients, striving to be the loan officer who takes the time to explain the intricacies of credit. With this commitment in mind, I have crafted an article to share essential credit insights for first-time homebuyers or those refinancing for the first time. In my view, there are three key steps consumers can take before applying for a loan to ensure their finances are in optimal shape. Given that credit report updates can take up to six months, it’s wise to start these steps early.
Check Your Credit Report Under the Fair and Accurate Credit Transactions Act, consumers are entitled to a free credit report every 12 months from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. You can request your free report at annualcreditreport.com, the only site authorized by the major bureaus for this purpose. While this report won’t include your credit score, it will provide a comprehensive view of your credit history. Take time to review each entry, ensuring there are no errors, late payments, or signs of identity theft. Address or dispute any negative items, even minor issues like a past-due utility account, which can negatively impact your credit.
Pay Down Your Credit Card Balances Reducing credit card debt is crucial. Loan underwriters assess your ability to repay total debt, considering not only your income but also your current revolving account balances and monthly payments. They may calculate payments at 3% of the balance rather than your minimum payment, affecting your debt-to-income ratio. High earners should not assume their salary alone guarantees favorable loan terms. For example, a client earning over $70,000 annually was required to enter a less favorable loan program due to high credit card balances. Start making significant efforts to pay down your credit cards now.
Save for Closing Costs Closing costs, which can range from $3,000 to $7,000, include title fees, loan fees, inspection fees, and appraisals. If refinancing, you may be able to finance these costs into the loan amount. For home purchases, however, you’ll need to cover these fees at closing. While some loan programs allow financing of closing costs, this often comes with a premium. If you rely on the seller to cover these costs, remember that what the seller pays is effectively a rebate on the home’s price. If the home doesn’t appraise within range, the seller may not be able to cover the costs. For instance, if a $200,000 home includes $5,000 in seller-paid closing costs but appraises at $195,000, you’ll need to cover the $5,000 difference. Therefore, it’s prudent to save for closing costs ahead of time.
These steps, while not exhaustive, will help you qualify for the best mortgage possible. The months leading up to your first home purchase are a crucial time to be frugal and maintain a positive credit profile.
About the Author: Cassandra Forbess is a loan officer specializing in mortgage planning at Mt. Financial Services in Portland, Oregon. She can be reached for further questions at [email protected].
