If you're like most Americans, owning
your own home is a major part of the American dream. Allie Mae wants
to help you understand the steps necessary to reach that dream. Home ownership is a big responsibility, one that you will need to accept for many
years to come. It’s worth the effort, and the Allie Mae can help.
You may not be familiar with us. Allie
Mae is an objective, independent source of information for the mortgage consumer. We know that the whole process of getting a mortgage can
be confusing, so an important service we provide is information such
as this guide. Whether you are buying a home, refinancing, taking
a home equity loan, building a home or in need of a mortgage for any
purpose, Allie Mae is here to help.
Are you ready to get started?
When you decide you want to buy a home,
you will be faced with many decisions. The first is whether you are
actually ready to buy. Finding the right home is not always easy,
and getting a mortgage loan can be time-consuming and complicated.
To help you decide if you’re ready to buy, we’ll take you
through the steps a mortgage lending institution uses to decide if
you qualify for a mortgage loan.
When you take out a loan, you sign documents
that say you promise to pay back the loan. When a mortgage lending
institution makes your loan, it has determined that there is a good
likelihood that you can keep that promise. The mortgage lender knows
that it does not help you or the lending institution if you are given
a loan, and are unable to make the payments each month. To decide
if you will be able to repay the loan, the lender will look at many
different pieces of information about you. This process is called
“underwriting.” These pieces
of information show how well you have repaid your debts in the past,
whether you are likely to repay your debts in the future, and your
ability to repay the mortgage and your current debts.
There are some general guidelines that
help a lender in looking at these pieces of information about you.
But you should also remember that there is some flexibility in these
guidelines, because everyone’s financial situation is different.
If you are very strong in one area, it may help balance out another
area in which you aren’t quite as strong.
Let's go thru
some questions. If you aren’t ready to buy a new home now, you’ll
find we’ve included information that may help you qualify in
the future. When you get to the end, you will have a better idea of
whether this is the right time for you to buy a home, or whether you
need to work on improving your credit history, paying off existing
debts, or saving more money. Either way, Allie Mae will be able to
give you some helpful information.
How is your job history?
This is extremely important. Having
a steady job helps you to keep your promise to pay back a mortgage
loan. If you have been working continuously for two years or more,
you are considered to have steady employment. If you have recently
changed jobs but are in the same line of work, you are also considered
to have steady employment. A lender will need to know your job history,
and it will be a major factor in whether you qualify for a loan. If
you have been working continuously for less than two years, the mortgage
lender will look for an explanation. There may be a good reason:
You may have been discharged recently from the military or just finished
school.
Your
work may be seasonal, and you might have work gaps between seasons.
There may be other acceptable reasons
why you have not been employed continuously for two years. For example,
you may have been laid off because of a business closing or an illness.
Or you may be in a line of work in which frequent job turnover can
be customary, but you have been consistently employed and have maintained
a regular, consistent level of income. If you have been fired for
cause such as excessive absences, have long gaps in your employment
record, or have dips in your income level that are difficult to explain,
you should probably delay buying a home until you can demonstrate
that you have a stable work history.
However, if you are still want to buy
a home now. You should apply thru Allie
Mae directly or contact us for personalized advice.
Based on the information above, give
yourself a “+” if you think you have a stable work history
or a “–” if you do not.
Do you pay your bills on time each
month?
How you paid your bills in the past
gives a lender some indication of how you can be expected to pay them
in the future. When you apply for a mortgage, a lender will order
a credit report. They will look at all all
your debts, the amount of your monthly payments, and the number of
months or years left to pay on the debts. The lender will also check
on how well you have kept your promises to repay your debts. Credit
reports are provided by credit reporting companies that make inquiries
through a wide range of available sources of information: banks that
may have given you a car loan, credit card companies, even gasoline
companies and department stores that offer credit cards.
It’s important to disclose all
debts and any difficulty you may have had in the past in repaying
these loans. It’s also important not to leave out any information
about money you owe. Credit reporting companies have access to a great
deal of financial information about you, and they make it available
to lenders who will be reviewing your loan application. If you have
previously owned a home, and your mortgage has been foreclosed upon
within the last seven years, the foreclosure will be revealed on your
credit report. Having a foreclosure on your records doesn't’t mean
you can never buy another home. Your lender will want to know the
reason for the foreclosure, and most prefer that two years go by before
you apply for a new mortgage. If you have declared bankruptcy within
the past ten years, that also will be revealed on your credit report,
and it will be helpful for you to explain the circumstances surrounding
it. Lenders usually prefer that you wait two years after discharge
of the bankruptcy before assuming a new large debt like a mortgage
loan (this is not always the case). This gives you time to reestablish
credit and show that you are again able to manage your financial
affairs. Sometimes credit reports are inaccurate, or they give a misleading
picture of past credit problems that have since been resolved. To
check the accuracy of yours, make sure to get a copy of your credit
report before you start the application process. If you find any errors,
you can take steps to have the report corrected.
If your credit
report shows that you do not have a good credit history, and the
information reflected is correct, you should probably delay trying
to buy a home and take steps to improve
your credit profile.
For example, you may have too many debts,
or you may pay some debts late each month. If so, you should work
to bring your payments up to date and pay off some of your debts.
Even if your debts are current, you may not be considered a good candidate
for a loan if you have made your monthly payment after the due date
each month. After you have decreased the amount you owe and are able
to show a history of making payments on time, you may be ready to
begin looking for a home to buy.
However, if you are still want to buy
a home now. You should apply thru Allie
Mae directly or contact us for personalized advice.
Based on the information above, give
yourself a “+” if you have a good credit history or a “–”
if your credit history shows some recent, unresolved problems.
Do you have a credit history?
If you have never had any credit cards
or taken out a loan through a financial institution, the various credit
reporting firms may not be able to issue a credit report on you. In
that case, you may be able to use a “nontraditional” credit
history. For example, you may be able to document that you pay your
rent, telephone bills, or utility payments on time each month. You
can put these records together yourself by making copies of canceled
checks (usually 6+ months) or showing copies of monthly bills that
do not have any late charges. A mortgage lender may be able to help
you put this information together. If you have a good record of paying
your rent and other bills you may still qualify for a loan.
Based on the information above, give
yourself a “+.” If you do not always pay your bills on time
or have no record of your payments, give yourself a “–.”
Do you have money saved for a down
payment?
When you buy a home, you will need money
that you have saved for a down payment and “closing costs.”
The amount of the down payment may vary, but generally you must make
a down payment that equals a percentage of the purchase price. You
will also need money for closing costs. These costs can be expensive,
depending upon where you live. Sometimes the property seller is willing
to pay part of your closing costs.
The mortgage lender will want proof
that you have saved the funds that you will use for a down payment
and part or all of the closing costs. If the funds are in a savings
account, the lender will ask the financial institution to verify the
amount and the length of time that the funds have been in your account.
The lender wants to make sure that you are not borrowing all the money
you will use for the down payment and closing costs. Some communities
have programs to help first time buyers. With some of these programs,
you may be able to accept a gift from a relative or to borrow a portion
of the money you will need for the down payment and closing costs
from a local nonprofit organization or government agency. With others,
you may be able to get a grant or other funds that you will not have
to repay and can use to cover some of these costs. If you do not have
at least a portion of the money saved, this probably is not the right
time for you to try to buy a home (this is not always the case). Instead,
it would be a good idea to open a savings account and begin putting
away some funds from every paycheck. The longer you have accounts
and the longer and more consistently you have been able to save money,
the better you will look to lenders when you are ready to apply for
a mortgage in the future.
Based on the information above, give
yourself a “+” if you have money saved for your down payment
and closing costs. Give yourself a “–” if you do not
have money saved right now.
Can you afford to pay a mortgage
each month?
If you pay rent each month, you may
be prepared to make monthly mortgage payments. The amount of your
monthly payment depends upon the amount you borrow, the interest rate,
and the repayment period or “term.”
The shorter the term, the higher your monthly payment. For that reason,
most home buyers repay their mortgage over the longest term possible,
usually 30 years. Use Allie Mae's calculators
for help.
How to calculate your payment.
The amount of your mortgage payment
will depend on how much you borrow, the term (repayment period) of
the loan, and the interest rate. If you know how much you need to
borrow (the purchase price minus your down payment and closing costs),
and what the interest rate will be, you can use our calculators
to find out what your monthly payment will be on a mortgage. Note
- don't forget to add property taxes and insurance to your payment.
Let's look at an example: Let’s
suppose that you want to purchase a house that costs $100,000. If
you make a $5,000 down payment, you would need a $95,000 mortgage
with 0 closing costs. The monthly payment on a $95,000 mortgage at
6 percent interest is $570 for 30 years. The $570 monthly payment
only covers the principal, or a portion of the amount you borrowed,
and interest on the mortgage loan. There are other expenses that will
be added to your monthly payment. These include taxes and homeowner’s
insurance. If your down payment is less than 20 percent, you may need
to pay private mortgage insurance (PMI). These
costs vary depending upon where you live and the cost of your home,
but they can add a hundred dollars or more to your monthly payment.
In addition, if you are thinking about buying a unit in a condo or
cooperative building, or a house in a planned unit development, you
may also need to pay monthly homeowner’s fees to cover maintenance
expenses or special assessments related to the common areas.
Step
by step guide continued
