First Mortgage Buyer

For many people, owning a home can be a great investment that has many benefits. Most people do not have enough money to purchase the home up front, so they get a special type of loan called a mortgage.

A mortgage uses the actual home or the land as collateral for the value of the loan. Purchasing a home is a big decision and before jumping in and getting a mortgage, there are several things the borrower should do.

Minimize Current Debt

Before applying for a mortgage, one of the most important things to do is try to minimize your level of debt. This is because one of the things a lender looks at is how much debt you have and your payment history. If you already have a great deal of debt or have a poor payment history, they might not be willing to offer you a loan or you may not be able to receive the best rates.

If at all possible you should begin by paying down your credit card balances as much as possible. If you have any problems on your credit report, such as an unpaid bill, you should also pay these off before applying for a mortgage. This will increase your chance of qualifying for the loan and receiving the lowest interest rate possible.

Begin Saving Money

It can also be a good idea to save some money aside from the money you are saving for a down payment, this can be used in the event that there is some sort of emergency. Usually most financial advisors recommend that you have enough money to live for 4 to 6 months, paying your utilities, groceries, and mortgage, without working.

Figure Out What You Can Afford

Once you have taken care to lower your risk factors, such as outstanding payments or credit card debt, it is a good idea to get an idea of how much you can afford for a monthly payment, because this will help you determine what type of home you will be able to afford.

It is not uncommon for both lenders and real estate agents to try to push as much debt as possible onto the borrower, because this is in their best interest, but it is not typically in the best interest of the borrower. So, ensure that you have an idea of what you can afford before you begin shopping for a mortgage.

Commonly, it is recommended that your monthly mortgage payment does not exceed 28% of your gross income, including that of your spouse. There are a number of other costs associated with owning a home, such as repair and maintenance, and the 28% figure typically allows for these expenses, as well as those of daily living.

The Ups and Downs of Real Estate Property Values

Since the more you borrow, the more the lender makes, they might try to convince you that you can afford more than this. Leading up to the current financial meltdown, many lenders were telling people that 30% or even 40% was acceptable, arguing that the home would always increase in value, so this was no problem.

Now, however with the current slump in homes values, this is no longer the case, so remember to have an idea of what you can afford and look at any effort on the part of the lender or real estate agent to increase this with skepticism.

Once you have your current credit load as minimized as possible and have an idea of what you can afford in terms of a monthly payment, you can begin shopping around for loans and try to find the best possible deal.

Even though the Federal Government is not directly in the business of financing home mortgages, they do offer a number of programs designed to help make it easier for Americans purchase a home. The main government agency responsible for administering these programs is the Federal Housing Administration (FHA.)

The FHA was created in 1934 and is primarily targeted at those who are unable to get a traditional mortgage due to a poor credit rating or low income. It was created to provide mortgage insurance on home loans made by government approved lenders in the United States. The FHA not only insured mortgages on single family homes, but also multi-family homes, hospitals, and manufactured homes.

The Federal Housing Administration is not the only government agency that provides mortgage assistance. About 10 years after the creation of the Federal Housing Administration, the Veterans Administration (VA) began offering a mortgage assistance program for enlisted personal and veterans of the Armed Services. The Rural Housing Service(RHS) also provides assistance for mortgages on homes in rural areas.

Together, the FHA, VA, and RHS work together to help people who might not otherwise be able to get a home loan by offering a guarantee to the lender. These agencies guarantee that if the borrower defaults, they will pay the remainder of the mortgage.

The Federal Housing Administration is currently the largest mortgage insurance company in the World. It was created while the Great Depression was still fresh in lawmakers minds and many citizens were unable to receive a loan.

A Deeper Look at the FHA

The FHA, and programs like it, help reduce the risk of a default, specifically for borrowers who have less than 20% available for a down payment. Typically, the FHA requires only a 3% down payment, which can be a gift of contribution.

While the FHA will cover a number of different types of homes, they do not offer insurance on multi-million dollar dwellings.

Instead, they will insure mortgages for about $360,000 in areas deemed as high cost and about $200,000 for lower cost areas. In Alaska, Hawaii, the Virgin Islands, and Guam, the FHA will insure homes up to almost $550,000.

While an FHA Loan can be a great choice for someone with poor credit or who has previously filed bankruptcy, they do charge a premium for the insurance. The FHA requires 1.5% of the value of the loan at the time of closing and 0.5% annual charge over the course of the loan.

VA Loans

The Veterans Administration offers mortgage insurance for veterans and insure mortgages for up to $417,000.

As is the case with an FHA loan, a VA loan can be used by veterans who have limited credit or even those who have previously filed for bankruptcy, as long as it has been at least 2 years.

RHS Loans

Rural Housing Service Loans (RHS) became available in 1994, with the passage of the Department of Agriculture Reorganization Act.

RHS Loans are intended to help stimulate rural areas that have been in a recession over the last twenty years. These types of loans are also called Section 502 Guaranteed Rural Housing Loans and do not require a down payment.

RHS loans can be used to help rebuild a rural home or prepare a site for a home, including installing water and septic facilities.

While an RHS loan can be an excellent way to purchase a rural home, the interest rate is based off of the income of the borrower and can go up if the individuals income increases. There are also may be a charge for selling the home early.

When considering purchasing a home, it is a good idea to get approved for a loan prior to beginning to look at too many homes. The reasoning is two fold in that you want to be certain that you can indeed get a loan and also that you have an idea of how much money the homeowner is willing to finance. Today, there are a number of options available to individuals wishing to purchase a home, but prior to the eighties, there were fewer choices.

Typically, prior to the 1980s, mortgages were primarily offered by commercial banks, thrifts, and some of the larger credit unions. Today, however, it is also possible to receive mortgages from mortgage brokers and mortgage bankers.

Mortgage Bankers are institutions that are classified as banks and sometimes package their own loans to sell to investors as mortgage securities. Other times, they will go through Freddie Mac, Fannie Mae, and Ginnie Mae, who in turn package and resell the mortgages.

Mortgage Brokers, on the other hand, has a number of relation ships with lenders. Their relationship is considered to be wholesale and they act as an intermediary between the borrower and the lender. It is their job to find the borrower the best deal, which often varies day by day or even hour by hour. Once the mortgage is approved and the home purchased, the mortgage brokers work is done and the borrower will deal directly with the lender.

For those with very good credit, a mortgage broker can often find the best deal available, because they are in contact with a number of different lenders. Many times, the mortgage broker will be able to get the borrower a better deal than they could possible expect from a bank or other institution.

However, for those with less than perfect credit or even no credit, going through your bank might be a better choice. The bank might not be able to offer as great of a deal or as low of an interest rate as you might get from a mortgage broker, but they might be willing to be a little more flexible if you have a good relationship with them.

If you have less than perfect credit, then you have likely received numerous offers from credit counselors or businesses that specialize in credit repair.

In truth using these types of companies is not usually going to be in your best interest. This is because all of the things they can do, such as negotiating with creditors, is something that can be done by the individual.

Credit Repair Agencies

Credit Repair Agencies are basically simply another lender and if you have ever watched any late night infomercials, you are sure to have seen their advertisements. They might say they will “Get rid of your Bad Credit!” or “Quickly Raise your Credit Score,” but in the end, they are out to make a profit.

Most credit repair agencies will offer free credit counseling to get people interested in their service, then they will set up a plan, where you pay them and they pay your creditors. It is basically just like taking out another loan, but with a much higher interest rate than if you had just spoke directly with your creditors.

In fact, credit repair agencies are so often the root of a business complaint that the Federal Trade Commission, published several warning signs that you might be dealing with a dishonest credit repair service.

Warning Signs of Dishonest Credit Repair Companies

• The Credit Repair Company requests payment before they actually do anything.
• The Credit Repair Company does not inform you of the many things you can do for free, without their help, and also doesn’t mention your legal rights.
• The Credit Repair Company advises that you do not attempt to contact the Credit Reporting Agencies, TransUnion, EquiFax, Experian, instead suggesting that they have to do it
• The Credit Repair Company tells you to create a new identity, using a employer identification number instead of your Social Security Number.

Risks of Using a Credit Repair Company

Using a credit repair service, like you might find advertising on late night television that they can
“Fix Bad Credit!”, is seldom in the best interest of a person with poor credit.

These companies may be able to lower your monthly payment, but this is likely something you could do on your own by speaking with the credit company. Instead, they make their money by offering a loan at subprime rates.

Credit Counseling

Credit Counseling is usually a better option than using a credit repair company, although there are a number of dishonest credit counseling companies as well.

The difference between a credit counseling company and a credit repair company, is that the credit counseling company will go over all of your debts and then speak with your creditors. The counselor will request that some of the debt be forgiven, such as late fees, and will request a lower interest rate, in return for the debt being repaid.

This is again something that the average consumer can do, because having the debt repaid is in the best interest of the creditor, so they are often willing to lower interest rates and forgive late fees.

Always ensure that the credit counseling company is non-profit and some are even run by the actual credit card companies.

Even though they are technically non-profit, credit counseling companies actually get paid a commission from creditors when they are able to work out a deal with a borrower. Sometimes, you pay the credit counseling company, who will in turn pay the creditor, which is referred to as a Debt Management Plan(DMP), but these should only be used as a last resort. In either case, there should not be a fee for using the credit counseling service.

While many of the things a credit counseling company does are within reach of the average borrower, they can provide a helping hand for some.

Since there is so much dishonesty in the credit and credit repair industry, it is important to always thoroughly analyze the company before using them.

Evaluating a Credit Counseling Company

Below are some tips for analyzing a credit counseling service.

• Try to find a local company. Often the Better Business Bureau will be an excellent place to check prospective companies.
• Be Wary of Companies Asking for Money. A legitimate Credit Counseling Company should send you free information and advice about how to restore your credit.
• Watch out for Credit Counseling Companies that offer a Debt Management Plan as the first option, DMP should only be used as a last resort.
• Determine how the company gets paid. This will help you understand their motivation.
• Determine how the debt will be paid off. If using a Debt Management Plan, inquire into how the plan works and how it is paying off your debt.
• Check behind the company to make sure the debts are actually being paid off.
• Always have a written copy of anything you do with the credit counseling company.

Fixing Your Credit on Your Own

In a perfect world, the best way to hand bad credit would be to avoid taking out debt in the first place.
Unfortunately, it does not always work this way, so it may be necessary to repair your credit.

If this is the case, speaking directly with the creditor should be your first step. The creditor wants you to pay them back, so will often work with you to reduce interest rates and forgive late fees.

Speaking directly with your creditors is almost always just as effective as using a credit counselor. It is also much safer and less expensive than using a credit repair company.

There are three different credit reporting agencies, which provide all of the Credit Reports. These companies collect information into a single database and then resell it to interested banks or lenders.

These three companies, Experian, Equifax, and TransUnion, all provide the same report, but it is possible that a discrepancy could show up on one, which might not be visible on the others. However, once it shows up in the database of one of the credit reporting agencies, the error will subsequently be transmitted to the other two agencies.

As a result of how easy it is for a discrepancy to propagate itself among the three credit reporting agencies, it is important to regularly check all three and fix any errors as they arise. Checking your credit report is often one of the first ways that you can tell if you have been the victim of identity theft as well,

Getting Your Credit Report for Free

Each person is eligible to receive one copy of their credit report for free from each of the three companies every 12 months. One of the easiest ways to get a free copy of your credit report is to use annualcreditreport.com. You will have to create an account at annualcreditreport.com, then select which credit agency you want to send you the report.

However, it is not a good idea to get all three reports at once. Instead you would want to receive one copy and review it, spreading out all three over the course of a year. They are supposed to share their information, so fixing an error at one agency should fix it at the other two.

Always remember to keep track of who you have already asked for a credit report, so you can get all three free credit reports every year.

Fixing Errors on Your Credit Report

Errors can occur because of several reasons, but it is most often because a creditor did not record a payment. In this event, even though you paid the debt, it is reported as a late or missed payment, which will hurt your credit score. If you find an error like this, it is important to act on it as soon as possible.

First, collect all the documentation you can to show that you paid the bill or debt. This includes check stubs, bank statements, and any letters from the creditor. Once you have the documentation, you will need to send a letter explaining the problem to both the credit reporting agency, as well as the creditor. Along with the letter, you will have to send your personal information, such as name, address, birth date, and social security number. It is a good idea to speak with the creditor as well, because they can often fix the error on their end quickly.

It is important to be careful when fixing errors though, because creditors take into account how often the credit report has been accessed. So, it is possible to raise alarms if too many people run your credit while you are fixing the error. If at all possible try to fix the problem as soon as possible, so the people that are accessing your credit report to fix it are not get stretched out over an extended period of time.

Once the error has been fixed, it is very important to ensure that it has been removed from your credit report.

Importance of Reducing Your Debt Prior to Applying for a Loan

When applying for a loan or mortgage, many lenders will charge the borrower for the credit report. If they charge more than $20, then they are very likely being dishonest, because this is the standard rate. Since checking the borrowers credit report is often the first thing a creditor does, it is important to know whats on your credit report and fix as much as you can before applying for the loan.

In regards to current debt and outstanding payments, it is a good idea to pay these down as much as possible before speaking with a lender. It is also possible that there may be a mistake on the credit report, which even if you have documentation for, you bank would not overlook.

One of the most important things a prospective homeowner can do to improve their chances of receiving a mortgage is to reduce the amount of debt on their credit report. This can be a great first step to new home ownership.

Credit reports are often used by creditors to determine how much of a risk a person would be to lend to. These reports contain information about a persons financial dealings, with some other limited personal information.

Who Can View My Credit Report?

There are a number of people who could potentially view your credit report, including the government, banks and other creditors, and insurance companies. It is also possible for employers, both present and prospective, to view your credit report. This is common in professions where they are worried about company theft or embezzlement.

In fact almost anyone can see your credit report providing that they are able to offer an actual financial reason why they should be able to see your credit report. Each person is also eligible to receive three free copies of their credit report every year, one from each of the different credit reporting agencies.

Since there are so many potentially important people who could looking at your credit report, it is important to identify any problems and try to fix them as soon as possible. This can not only make it easier to receive a loan or mortgage, but can also effect many other parts of your life.

What Type of Information is on a Credit Report?

At first glance, a credit report can seem very confusing, but all of the information in a credit report can basically be divided into four sections.

Personal Information: Credit Reports are prohibited from containing information about race, religion, or sexual orientation, but they do contain a great deal of other identifying information.

This includes the persons name, aliases, current addresses, previous addresses, Social Security Number, Date of Birth, current employer, past employer, and information about husbands or wives.

Credit Information: As the name implies, credit reports contain a great deal of information about your credit history. This includes mortgages, credit card debt, unpaid debt, debt that has been sent to a collections agency, and some utility information. Also, in the case of loans it has information such as the type of loan, length, cosigners, and a two year payment history.

While the credit information is usually very inclusive, it can not include bankruptcies that are more than 10 years old or other debt that is older than 7 years.

Information from Public Records: This includes any state or country government records, including information on bankruptcies, tax liens, or other civil judgments. It can also include child support.

Recent Credit Report Requests:: This section lists the people who have requested your credit report over the last year, although it goes back 2 years for employers. Sometimes, too much activity can raise a red flag to lenders and may also be an indication of identity theft.