Shopping for Mortgage Quotes, Credit Score, and Other Questions

Reader Questions (my responses are in green):

1. From what I gather it is best to shop around for best offers for pre-approved mortgages. I have read your response and understand that this has little impact on your credit score, even though each lender will check your credit score. How do I go about 'shopping around'? Also, I understand that the pre-approval letter does not guarantee that you will get a loan for the amount listed - is it possible that you will not get approved at all?

You can shop around in one of several ways. You can visit the websites of various lenders and apply for a mortgage loan. I recommend getting at least three offers to figure out who has the best rates. You can also get an online mortgage quote through a website like LendingTree, which is another way to get multiple offers. Yes, it's possible you might not be approved at all. That's just the reality of things -- but it certainly doesn't hurt to find out now. If they turn you down, the lender will at least be able to tell you why. Then you know what to work on.

2. My credit score is 733, however my husbands credit is very poor. I want to become a first time homebuyer. I feel I should apply for a mortgage as an individual - using only my income and credit and not include my husband in the process at all. Is this a good idea? Also, if I did this, would my husband's poor credit still have an impact on my ability to obtain a mortgage even though he will not be included in the process? How would I go about applying for a mortgage in a way that I would not have to include my husband at all?

The lender will only review the credit score, debt and income of the person who is applying for the loan. If you apply for the mortgage by yourself, then your husband's credit will not be a factor. If you want to go this route, just leave your husband off the paperwork. If the lender asks, tell them you are applying for the loan individually -- and not jointly.

Related article: My Spouse Has Bad Credit - Can We Get a Loan?

3. My credit history is not very long - a little under 2 years. I have been researching to find out what I would need to obtain a mortgage and understand that I should have at least 3 sources of credit. All of my credit is via credit cards - Should I have another type of credit - e.g. a small loan? Also, I just opened the 3rd credit card account but I do not intend on going through the pre-approval process until it is at least 6 months old - is this long enough?

You stated that you have a credit score of 733. That's a very good score, and it's almost in the "excellent credit" range. As long as your income is sufficient to cover the payments on a mortgage loan, you stand a good chance of being approved for a loan. There's only one way to find out (see the response for question #1 above).

Should We Get Pre-Approved Now or Wait for Credit Scores to Go Up?

Reader Question: "My husband and I are looking to buy a house this year. We are first time home buyers. My fico score is 740 and my husband's is 660. We recently paid off all of our revolving debt, but most of it has not shown up on our credit report yet. Should we wait a month or two to get pre-approved, or could we get pre-approved now, in hopes that our current credit scores will be good enough to get a decent rate. we will be applying for an FHA loan. If you have any advice, we would greatly appreciate it. Thank you."

If I were you, I would talk to a lender and ask them this same question. Make it clear to them that you know where you stand, in terms of your credit scores. I would try to handle this over the phone, without letting them pull your credit. In other words, try to get some insight before you sit down at the table for a pre-approval review.

With an FHA loan, you'll probably get a better rate than you would get on a non-FHA loan, with your current score. If you both boosted your scores above 750, you would probably get the best rates the lender has to offer. The question is, how long would that take? It's a choice between waiting for a higher credit score or getting into a home sooner (perhaps to take advantage of rock-bottom pricing).

Reducing your debt (especially your credit card debt) is definitely a great way to elevate your scores. Your credit utilization ratio accounts for about 30% of your FICO score. So when you use less of your available credit limit, your score goes up. This should happen fairly quickly, often with a month to 45 days. So if you're not hard pressed to buy right away, it might behoove you to wait a month or so to see if your score improves. Here's an article I did recently to show how much of a difference this can make in a monthly payment.

Hopefully you have at least 3.5% to put down on your FHA loan. That's the requirement these days. This is where many first-time home buyers are getting stuck right now. Without FHA backing, the down payment is even higher -- up to 20% of the loan amount. But with an FHA home loan, you'll probably need to pay 3.5% out of pocket. Just wanted to touch on that, in case you didn't already know.

Lastly, you should keep an eye on which way your local housing market is going. If your market has already hit bottom and is on its way up, then it would make sense to buy sooner rather than later. If your market is on a stable "flat line" at the moment, then you'll have more time to boost your credit scores. Remember, if you save a little money with a better rate but end up paying more for the home (because of pricing increases) ... then you come about the same as you would if you had bought earlier. It's a trade-off.

In closing, I would advise you to speak with a lender about your situation. Tell them the following things: (A) you are pursuing an FHA loan, (B) you already know what your FICO scores are, (C) you recently made some changes that will likely improve your FICO scores, and (D) you want to know if you should get pre-approved now or wait a little while to see what your scores do. A pre-approval is not set in stone, and most of them are only valid for 30 to 60 days. So they may recommend that you come in now to get pre-approved, and then revisit your qualifications later on.

I hope that gives you some things to think about. Good luck.

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Lien Certificate Fee on Good Faith Estimate - What's That?

Reader question: "What is the lien cert / judgment / courier fee (for $225) that I have on my good faith estimate? What's this fee for?"

The good faith estimate tells you what you can expect to pay on closing day, when you close / settle on the house. As you have no doubt realized, it's basically a laundry list of fees that the lender charges to originate, process and finalize your mortgage loan. And there's a lot of obscure charges on the list! Basically, anytime a person performs a task, or touches a piece of paper in any way, you get charged for it.

The fee you have mentioned above relates to lien certificates and judgment searches, along with the courier service that delivered these documents. It sounds like they are lumping several things together as one line-item on your good faith estimate list.

Basically, the lender is researching the property to make sure there are no liens against it, or judgments (court cases and disputes) against the property. For example, if a builder or contractor places a lien against the house -- because they weren't paid for their work or whatever -- it can interfere with the title transfer. So the lender gets a certificate of liens relating to the property. The courier fee means they paid a courier service to expedite the delivery of these documents.

You should ask the lender about this line-item, if you still have questions. They are obligated to explain each item on the good faith estimate.

You should also bear in mind that your actual closing costs will probably be higher than the amount shown in the good faith estimate. Lenders are required by law to provide you with a good faith estimate, so you'll have a rough idea of what your closing costs will be. This is mandated under the Real Estate Settlement Procedures Act (or RESPA). But it's common knowledge that lenders often "low ball" the up-front estimate in order to lure in borrowers. That's just the way this industry works, love it or leave it.

I hope that helps. Good luck.

15 Money Saving Tips for Future Home Buyers

Summary: This article offers money-saving tips and ideas for future home buyers. It's important to save money before you enter the housing market, and this lesson explains why.

Saving money is an important first step to the home buying process. But many buyers don't even think about this critical step until it's too late. One day, they decide to buy a house. So they start talking to mortgage lenders, and they find out they need a down payment on the house. They also need money for closing costs. If only they had thought about this sooner, and planned accordingly.

That's where today's lesson comes in. This article is for those of you out there who plan to buy a home within the next few years -- not right away, but down the road a bit. If you fall into that category, let me offer you this piece of advice. Start saving your money now! The more money you can save between now and the day you apply for a mortgage loan, the better.

I'll get to the money-saving ideas and tips in just a moment. But first, let's talk about what kind of funds you will need when buying your first house.

The Various Home Buying Expenses

Here are some of the things you should be saving money for, within the context of home buying:

1. Down Payment -- This will be the largest expense when buying a house. The down payment varies based on the size of the loan, the lender, and the type of loan program you are in. For an FHA home loan, you can pay as little as 3.5% down. For a conventional mortgage, you'll probably have to pay closer to 20% down. On a $200,000 loan, these percentages would come out to $7,000 and $40,000 respectively.

2. Closing Costs -- These are the various fees and expenses you'll have to pay when you close on the house, the last step in the home buying process. Average closing costs in the U.S. run around $2,700. In a buyer's market, the seller will sometimes offer to pay part of this out of the proceeds they make from the sale (but don't count on it). Make it part of your money-saving strategy from day one.

3. Moving Expenses -- Will you be relocating from one city to another? Are you hiring movers? Renting a truck? Do you need to purchase furniture for your new home, or make any repairs or adjustments to the property? In addition to these things, there are many unforeseen expenses that pop up along the way. That's why my top money-saving tip for home buyers is to "save early, and save plenty."

Money Saving Ideas for First-Time Buyers

Now you can see the importance of saving money early on, if you plan to buy a home in the next few years. Most people can only afford to put a little bit aside each month, so you need to start well in advance of buying a house. The more time you give yourself the better.

Here are some tips and ideas to help you save money for your future home:

1. First and foremost, define your money-saving goals. By putting a plan on paper, you'll have a target to shoot for. How much money do you want to save, and over what period of time? How much do you think you'll need to put toward a house someday? Define these numbers, and you'll know how much you need to save each month.
   
2. Set up a "housing fund" for yourself. This can be a separate savings account at the bank where you currently have an account. This is where you'll put a little extra money each month, to prepare for the home-buying expenses we talked about earlier.
3. You might even want to set up an auto-transfer with the bank, so a pre-determined amount goes into your housing fund each payday. Most banks offer a service like this, and some employers will allow you to split your paycheck into two accounts. So you can do this in several ways.
   
4. Create a budget for yourself. You need to find out how much money you are spending each month, and where that money is going. There are two reasons for this. You need to know how much you can put aside each month, and you also want to spot any wasteful spending habits.
5. Subtract all of your monthly expenses from your net monthly income (after taxes). The amount you have left over is what you can put toward your house fund each month. If it's a very small amount, then you need to find a way to cut down on your monthly expenses -- as a way of channeling more money into your house fund.
6. How often do you eat out? This is one of the first things you should address when saving money for anything. Dining out can be expensive, especially when you do it several times a week. If you can cut back in this area by eating in more often, you'll have a lot more money to put toward your house fund each month.
7. Stop buying stuff you don't need! This seems like a simple money-saving tip, but you'd be surprised at just how powerful it is. Whenever you're about to make a purchase, ask yourself this question: "Do I really need this?" More often than not, the answer will be no. And the more you refrain from making unnecessary purchases, the more money you can put toward your future house.
8. Check out Clark Howard's website (www.ClarkHoward.com) or buy one of his books. He is often referred to as "America's money saving expert," and for good reason. I've seen a lot of so-called experts on TV, but Clark is the real deal. He has a weekend TV show on CNN, a radio show that streams through his website, and several books. You can plenty of money-saving tips and ideas from Clark.
9. Can you save money by combining your cable, Internet and phone service? Many companies offer deals on "bundles" that can lower your overall monthly payments. Take a look and see if this is a viable option for you.
10. In addition to money-saving tip #8, you might also want to shop for a different phone/internet provider. It's a very competitive industry in which companies frequently try to under-cut their competitor's pricing. So keep an eye out for TV and mail offers from other phone-and-Internet bundle providers.
11. Car insurance is another highly competitive industry. Shop around for a better rate on your policy, and you'll probably find one. This can help you save money each months, and you can put those extra funds into the home-buying account you set up at your bank.
    
12. Shop for a better rate on your credit card. If you are paying a ridiculous interest rate on your card, like so many Americans these days, you could save a lot of money by transferring the balance to a lower-interest card. Just be sure to read the fine print with the new card issuer, before you transfer the balance. Look before you leap.
13. Examine your cell phone plan and your phone usage habits. Are you paying for more than you need? Do you only use a fraction of the minutes you are allotted each month? If so, you may be able to drop down to a less-expensive plan. This is another money-saving idea that may be an eye-opener for you.
14. By making small changes to your energy usage at home, you can easily save $100 or more in utility costs each month. Turn off lights in unoccupied rooms. Use ceiling fans or floor fans in the summer, to cut down on your A/C usage (especially at night when you don't need to cool the entire house or apartment).
15. You can lower your grocery bill by purchasing store brands, instead of national brands. You can also shop more frequently to cut down on food spoilage and waste. Americans throw away a disturbing amount of food every year -- such a waste of money and resources.

I hope these money saving tips and ideas put you in a better position to buy a house some day. Remember, save early and save plenty. Just by making smart choices in your daily life, you can put extra money aside without sacrificing your quality of life.

Lacking funds for down payment and closing costs is one of the biggest obstacles first-time home buyers encounter. You can overcome this obstacle by following the advice offered in this lesson. Good luck.

Real Estate Comps for My Area - How to Find Them

Reader Question: "I have been told I need to look at real estate comps in the area where I want to buy. How do I find comps and how do I use them to evaluate prices?"

Both buyers and sellers use real estate comps, but in slightly different ways. Sellers should use them to set their asking price, and buyers should use them to make a well-informed offer on homes. I'll assume you're on the buying side of things, since that is the nature of this blog. With that in mind, let's talk about how you would find real estate comps for your area, and how you should use them when shaping your offer.

But first, let's start with a definition for the benefit of other readers:

Comparable Sale -- Also known as a "comp" for short, this is a recent home sale within the area of your interest. Specifically, it's the sale of a home that is similar / comparable to the one you are looking at.

In order to be useful, a real estate comp should have three characteristics:

• Comparable -- The home(s) for comparison need to be similar to the one you are planning to buy. If I'm about to make an offer on a two-story colonial with 2,000 square feet, I should be looking at recent sales for two-story colonials of similar size in the same area.
• Recent -- Market factors change all the time, and home values rise and value in relation to this. The sale price of a home two years ago is irrelevant in today's market. So you need to look at recent sales data when analyzing the market. Ideally, your real estate comps will have occurred within the last 90 days.
• Local -- Home prices vary by location. So you need to look at comps in the area where you want to buy. The closer the better.
  

When you put theses three things together, you have all the ingredients of an accurate real estate comp you can use to shape your offer. You have sales data for homes that are (A) similar in size and style, (B) fairly recent, and (C) in the area where you're buying. This is the only kind of comp worth using.

How to Find Comps in Your Area

Now that we know what they are, let's talk about how to find real estate comps for your area. If you have a real estate agent helping you through the process, he or she will gather comparable sales data for you. This is one of the key aspects of an agent's job, and a veteran agent will be expert at evaluating comps in the area.

You can also find recent sales data online these days. In fact, there are quite a few websites designed for this purpose. These websites include Zillow.com, Domania.com and Trulia.com. The big drawback to using these websites is the lack of information. You might see the price a particular home sold for in your area, but you won't get many details about the size and style of the property (one of the key ingredients of a real estate comp, mentioned earlier).

You can also check the county tax records for recent property transfers in your area, though this requires a trip to the county courthouse in most cases.

So that's how you would find real estate comps in your area, and what to do once you have them. I hope you have found this article helpful, and I wish you well in your home buying process. If you have any other questions about this or similar topics, click on the "Ask Us" link at the top of this blog. Good luck.

Home Buyer Tax Credit as Down Payment - A Bad Idea

It never ceases to amaze me just how short our collective memory is in this country. Just how short is it? Well, we are currently trying to stimulate our economy with the same kinds of practices that wrecked it in the first place.

See if this sounds familiar:

In the 1990's there was a huge push to increase home ownership in the United States. The federal government challenged banks to find new ways to get people into mortgages -- even if those people normally would not qualify. "Home ownership for everyone" was the word of the day.

As you might imagine, this push for easier lending attracted a lot of people that really couldn't afford to buy houses. Eventually, millions of these people went into foreclosure. And the rest is history -- housing collapse, mortgage collapse, and a full-scale economic recession.

And here we go again:

The first-time home buyer tax credit can be used as a down payments on certain types of loans. So we are once more using government stimulus and incentives to get people into mortgage loans -- people who cannot afford to put any money toward their down payments. According to a recent article in Business Week, people with government-subsidized down payments are twice as likely to end up in foreclosure. The reasons why are fairly obvious.

At the height of the subprime mortgage meltdown, politicians were shaking their fists about the "easy credit" mentality that got us into that mess. Too much government stimulus in the housing market was blamed as well. So what are we doing right now? We are using government within the housing market ... again. We are trying to stimulate our economy with the exact same strategies that tanked it to begin with.

Sadly, I even predict a comeback of subprime lending in the near future. Of course, it won't be called "subprime lending," because that phrase has a stigma tied to it now. Just like AIG is now called AIU -- same company, different name. So when we start making loans to people with bad credit again (and thereby planting the seeds for the next housing crisis), we will probably give it a much friendlier name. I vote for "universal lending."

The tax credit should not be used as a down payment on mortgage loans. Lenders should not use "creative financing" to qualify unqualified borrowers. We should stop pretending that home ownership is available to all, because it's not. People who want to buy a home should save their money and earn a good credit score by being financially responsible. The further we get from this notion, the closer we get to the next recession.

Documents Needed for the Mortgage Pre-approval Process

Reader Question: "I plan to apply for a mortgage loan to buy a house later this year. I was told I should get pre-approved first. What kind of financial documents are needed for the pre-approval process?"

I'll get to the documents part of your question in just a moment. But first, I want to touch on the reason for pre-approval. Through this process, a mortgage lender will review your financial situation and tell you how much they are willing to lend you. It's not set in stone, and it doesn't obligate the lender into giving you that amount -- but it's still a useful step worth taking before you start looking at houses.

Getting a mortgage pre-approval helps you in two ways. For one thing, it helps you narrow your home search by giving you a price range. Granted, you should establish your own budget before you even start talking to lenders, but a pre-approval is still helpful in this regard. The second way it helps you is by making sellers take you seriously. This is especially important in a seller's market. If a seller receives three competing offers, but only one of the buyers has been pre-approved, they'll probably take the pre-approved offer more seriously -- and for obvious reasons.

The Documents Needed for This Process

When you arrange for a mortgage pre-approval, the lender should tell you which financial documents you need to bring. If they don't give you a list of required documents, you should ask for one. Today, in the wake of our economic recession, lenders are asking for even more documents than they've required in the past. Here's a list of the most common items needed during the mortgage pre-approval process:

• W2 statements (or 1099 income statements) for the last two years
• Federal tax returns for the last two years
  
• Bank statements for the last few months
  
• Recent pay stubs and proof of other income (if applicable)
  
• Proof of investment income you are currently receiving (if applicable)
  

Again, this is just a standard list of documents needed for pre-approval. Your lender may not require as many of these items, or they might ask for additional items not listed above. So be sure to ask for a complete list before you go to your appointment.

Why are all of these documents needed to get pre-approved? Basically, the lender is trying to figure out (A) how much money you earn and (B) how much cash reserves / savings you have on hand. Specifically, they want to make sure that you make enough money to cover your mortgage payments. This is how they determine the amount they are willing to lend you. It's all based on the documents you provide and your current credit score -- everything else is secondary to this.

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