Check Your Credit Before Checking Out a New House

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Perry, Countrywide’s senior vice president of the consumer markets division in Calabasas, California, adds that when lenders look at your credit history, " The past year is very important." You want to have a clean record for at least the last 12 months. While they do look farther back, he says the previous 13 to 24 months are less important, aside from any major black marks, such as a foreclosure or bankruptcy in the last five years.

" A lot of borrowers," Perry adds, " have the misconception that being in arrears with small bills does not matter as much as with large ones. They think you can be late on a smaller debt as long as you pay the big ones on time. That’s not true. You have to pay them all on time--big and small." Having black marks on your credit report doesn’t mean you won’t get a loan. But it will play a major part in determining the sort of loan you get in terms of interest rate, points, and so forth.

" There are different loan programs for people with various credit challenges," Stavenger explains. " There are alternatives for people with problems--those who have had delinquencies with their credit cards, or loans, or mortgage payments, or even bankruptcies."

To get a copy of your credit report contact: Equifax (800) 685-1111, online at www.equifax.com ; Experian (888) 397-3742, online at http://experian.com ; or Trans Union (800) 888-4213, online at http://www.transunion.com. Since you don`t know which reporting agency a lender will use, you should get a copy from all three of them. You can buy all three reports from one agency.

The next major point the lender looks at is your ability to pay. A key element here is the debt-to-income ratio. The main questions are how much do you make and how much do you owe? Even people with perfect credit can be turned down for a loan if the lender thinks they don’t make enough money to pay it back and continue to pay their other debts. These could include outstanding loans, car payments, credit cards, and the regular monthly bills almost all of us have. Stavenger and Perry agree that lenders also want to look at your reserves. How much do you have in the bank, or in stocks and bonds? If something goes wrong and you are out of work for a month, or even more, will you be able to continue making payments?

The size of the down payment is taken into consideration, too. However, the amount of the down payment is not as influential as the percentage of the sale price. A person who can afford to put 20 percent down is better off than someone who can only put 10 percent down, or 3 percent. And someone looking for a zero-down-payment loan could face more obstacles. Perry says a person wanting a zero-down loan will probably need six months of reserves, while someone putting 20 percent down might need only two months of reserves. As Stavenger puts it, " The more equity you have, the more options you have."

Why? If the lender has to foreclose, he or she will sell the house to recover losses. Let’s say a lender has to foreclose on a house valued at $100,000 and the outstanding debt is $99,000. It would be virtually impossible for the lender to recover all of his or her money since selling a house often costs 10 percent of its value. The real estate commissions in most home sales are 6 percent of the selling price. The rest goes toward closing costs, making necessary repairs, and having to pay taxes and other fees even though the house is unoccupied. Now let’s look at a $100,000 house with an outstanding debt of $80,000. In this case the lender will almost certainly get his or her money back in a foreclosure.

The final major factor lenders evaluate is your employment record. How long have you had your current job? Perry says, " We want to see someone in the same line of work for about two years. However, this doesn’t apply to students just entering the work force." He adds that it is okay to change jobs within the two years prior to applying for a loan, as long as you do so within either the same industry or the same company.

If you repair widgets and get promoted to a better position within the company, that would be acceptable. So would taking a similar job for a competing company. If you’re a commission salesperson and you’ve been selling widgets for years and switch companies that would be all right because you are an established commission salesperson. If, however, you were to go from repairing widgets with one company to selling them for another, the lender might refuse the loan because you have not established yourself in your new sales career. Regardless of the sort of work, Perry says, " Any gaps of employment need to be explained."

Both Perry and Stavenger recommend you start thinking about the sort of impression you will make on the lender even before you start thinking about the home you want to buy. The better prepared you are for the lender, the easier it will be to get the best mortgage.