Importance of Credit Scores when buying a home and what you can do to improve them

View detailsJuly was a busy month for me and I hope it will continue into August.  One thing I ran into several times last month was buyers having a hard time getting financing due to certain things on their credit.  Many felt they would not have any problem getting approved only to find that their credit scores had fallen for one reason or another.  There are many things that can cause your credit scores to fall below what a lender will allow including unpaid Medical bills or consumer loans, late payments on your mortgage, too much debt load, late  payments on credit cards, liens or judgments, bankruptcy, foreclosure or short sales……. and more.  It has always been my policy that my buyer clients have an updated pre-approval letter in hand before we begin looking for homes.  Why?  Because I don’t want you spending weeks searching for homes, find one you absolutely love and then not be able to have it.  Even if you had a pre-approval letter in the past year, they are usually only good for 90 days and need to be updated.  Your credit changes and lender guidelines change and you need to be current.

Did you know that FHA guidelines do not even have a credit score requirement?  That’s right, if you met all their other guidelines, your score does not matter, HOWEVER, most lenders will have what they call an "overlay" that adds that component and sets a minimum credit score requirement.  All lenders are different so it does pay to check a few and see what their minimum score requirements are. 

Knowing what your credit score is and what affects it in a first critical step to getting the best financing available and the lowest payment possible on your new home.  The higher your score, the lower your interest rate.  I posted an article a few years ago after a seminar our company hosted that had some great information about credit scores and I wanted to post the links to that 3 part series:

Myths and Misconceptions of Credit Scores Part 1
Myths and Misconceptions of Credit Scores Part 2
Myths and Misconceptions of Credit Scores Part 3

Once you have your credit scores high enough and you pre-approval letter in hand – you are good to go!  Almost….You do still need to have some cash available for appraisal, inspections, down payment and earnest money deposits.  If you have any questions about getting pre-approved, call me and I can help direct you to the right place – I am happy to help.

A few things to consider before purchasing a distressed property

I have been working with lots of buyers of foreclosed or distressed homes lately and wanted to give you some hints on how to make this type of purchase a little easier. 

First, let’s talk about Short Sale Properties:  A short sale is a home that is listed by a real estate firm for less than is owed to the bank because the currentj0427594_1 value of the home has decreased to the point that they cannot get an offer to cover all encumbrances on the home.  The seller will complete a financial package and submit it to the bank for review and advise that they want to sell the home and that it is expected to be a short sale.  Once an offer is received on the home, the bank will send out an independent person to do an appraisal or Broker Price Opinion on the home to determine current market price.  If they are in agreement, they may accept the short sale.  WARNING:  This process can take a LONG time.  Usually up to 4 months or more and the foreclosure process still moves forward.  It is a game of "Beat the Clock" and there are not guarantees.  Once accepted by the lender, you may still run into title issues on the property that have to be resolved (usually by the seller or buyer) before closing.  It is recommended to have a title report done in advance to uncover any hidden Liens or judgments.  You can get a great deal on these properties but you must be patient and work with the process.

Foreclosures:  These types of sales are much easier to do than a short sale and work the same way a regular sale works other than the seller is a bank and there are usually additional addendums to be signed that state the property is being sold in "as is" condition with no warranties and no liability by the bank.  You need to do your homework UPFRONT on these types of properties and know what you are buying.  In some instances, you can ask the bank to make repairs to enable you to qualify for financing and they may agree to complete them.  They may also pay for closing costs and even a home warranty.  Some banks will waive the appraisal fees and even lower the interest rates if you finance through them.  Work with your Realtor and know all your options. 

Financing considerations:  Please keep in mind that with ALL distressed properties, the banks will require a pre-approval letter from a lender or require you to be qualified with them directly (even though you may still choose a lender of your choice), or require proof of funds if you are paying cash.  They will consider an offer without this and earnest money.

There are lots of finance options out there such as USDA (100% financing), FHA (3.5% down payment), VA (100% for veterans plus possible lower interest rates), 203K (roll renovations into the loan and finance the whole package) as well as conventional loans.  Talk to your lender about the best option for your situation.  If you are considering a Manufactured Home, be sure to let your lender know upfront as some programs are for "Stick Built" home only.  There may also be limitations on loan amounts.  Many lenders  may not finance anything below $35,000.

So, before you begin your search, get prepared, do your homework, ask your Realtor lots of questions and make a smart buy.  Avoid any un-necessary stress by being an informed buyer.

I am here anytime you have questions – just ask!

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