How to Build Credit to Buy a House

May 24, 2022 by Cindy Steelman

One of the top factors that will make or break your mortgage approval is your credit score. To find out why your credit score matters, what kind of score you need, and how to build your credit to qualify for a mortgage, keep reading.

What is a credit score?

Your credit score is a three digit number between 300 and 850 that reflects how well you handle debt. There are three credit reporting agencies in the US: Equifax, TransUnion, and Experian. When you apply for a new credit account, the potential lender will contact at least one of these agencies to find out how much credit you are using and how often you are making payments, reflected in your credit score.

The calculation models that determine your credit score take into account factors like these:

The number of credit accounts you have open
The type of credit you have
Your utilization rate (the balance you carry as a percentage of your maximum, e.g. a 25% utilization rate if you carry a $250 balance on a card with a $1000 maximum)
How long you have had credit
You payment history

Why do lenders care about your credit score?

Lenders use your credit score to find out how responsible and capable you are when it comes to handling finances. All mortgages represent risk for the lender, and it is the job of a loan officer and mortgage underwriters to determine whether an applicant is a “good risk.” One of the ways to determine this is by looking at the applicant’s credit score.

A high credit score gives the lender confidence that you as the applicant are likely to manage your debt payments responsibly because you have a track record that shows you take on a reasonable amount of debt and make sure to pay what you owe on time. On the other hand, a low credit score presents the impression that you are a risky applicant, even if you are sure that isn’t the case.

What counts as good credit?

In general, we recommend applying for a mortgage if you have a credit score of 620 or above. Credit scores are divided into tiers, so it’s more significant to know which tier you fall under than the exact number of your credit score. In general, credit scores under 579 are poor, 580-669 are fair, 670-739 are good, 740-799 are very good, and 800-850 are excellent.

Aim for good, very good, or excellent credit before applying for a mortgage. Your mortgage rates and terms will be more favorable the higher your credit score.

How can you build your credit?

If your credit score is not exactly where you want it to be in order to apply for a loan, don’t worry. There are plenty of ways to raise your credit score, and you can do this in a relatively short amount of time with the right strategy. What you need is an understanding of what types of financial decisions and actions impact your credit score so you can personalize a plan that will best fit your situation.

Some of the ways you can raise your credit score include:

Lowering utilization rates on credit cards: If any of your cards are over a 50% utilization rate, focus on those first. Aim to bring your balance under a 50%, or better yet 25%, utilization rate. You may also be able to ask for a higher credit limit, which will immediately change your utilization rate.
Make on time payments: If you struggle to make payments on time, consider setting up an autopay on your debts.
Add a new type of account: Lenders want to see a variety of types of credit accounts and how you manage them. If you only have credit cards, consider opening a credit-builder loan and managing it impeccably.

To find out more about qualifying for a mortgage, talk to one of our loan officers today!

IF you enjoyed this post, these might be helpful as well:

5 Common Mortgage Mistakes to Avoid

The Most Important Steps Toward Buying Your First Home

Steps to Determining Your Mortgage Budget

5 Benefits of Buying a House with Good Credit

What’s the Difference Between Pre-Approval and Pre-Qualification?

10 Days to Know About a VA Loan

7 Signs You’re Ready to Buy a House

What is a Closing Disclosure?

May 18, 2022 by Cindy Steelman

One of the final steps in buying a home with a conventional loan is reviewing and signing the closing disclosure (sometimes also called CD). First time home buyers in particular may feel overwhelmed at the volume of documents that require approval and signature, so to help make the process less overwhelming we are breaking down everything you need to know about a closing disclosure below.

What is a Closing Disclosure?

A closing disclosure is a five-page form that is designed to outline all of the terms of your loan. It will be issued to you (usually via encrypted digital copy) a few days before closing, after the majority of the escrow process has been completed. This will take place after your home appraisal, home inspection, any agreed upon repairs, all negotiations, and underwriting has given final approval.

The details outlined in your closing disclosure will give you all the information about your loan in one place, including:

Loan amount (also called the principal)
Mortgage insurance (also called PMI or private mortgage insurance)
Property taxes
Interest rate (also called APR or annual percentage rate)
Fees, closing costs, origination charges
Purchase points, if applicable
Prepayment penalty, if applicable
Escrow account information
Monthly payment amount
Total sum of financing charge over the life of the loan (total interest paid at the end of the 15 or 30 years)

The first page of the document will give you an overview of the information you need, acting as a sort of cheat sheet if you need something to reference. The document as a whole will include every relevant item, and is required to be issued to you in advance to give you time to be sure you understand the documents you will be signing at closing.

The Three Day Rule

In 2015, the Three Day Rule was put into place to protect borrowers from tying themselves to a loan without understanding the terms. This law stipulates that a lender must issue a closing disclosure to the borrower at least three business days before closing, allowing the borrower to carefully review all the terms of the mortgage.

Before this rule was put in place, many lenders gave borrowers the closing disclosure at closing, resulting in a rushed process that was to the detriment of both lender and borrower in many cases. While you are legally allowed to waive your Three Day Rule rights, be cautious about doing so. This rule is in place to protect and benefit you, and your right should only be forfeited in emergency circumstances where you are fully confident about your understanding of the loan terms.

What to Do with your Closing Disclosure

When you receive your closing disclosure, pull it up with your initial loan estimate and compare each item. Read through the entire closing disclosure to make sure everything looks right. Now is the time to contact your loan officer if you have questions about any of these terms.

Even if you aren’t sure there is anything wrong, it is always wise to check in with your loan officer if you don’t fully understand the disclosure. Don’t worry about looking like you don’t know what you’re talking about. Your loan officer is there to help, and all high quality mortgage professionals are trained to educate borrowers on the complex process of home buying. Remember, your loan officer is there to help!

Why You Should Carefully Review Your Closing Disclosure

Buying a house is one of the most influential financial decisions you will make. The details of your loan disclosure outline one of the most significant factors in your financial health for the time you own this home, so it is in your best interest to be sure you understand all of the rates, fees, and terms.

Before tying yourself legally and financially to the home through the mortgage, take your time in the comfort of your own home to familiarize yourself with the details. While you can still ask questions at closing, you risk delaying the sale of the home. Take advantage of the closing disclosure by reviewing it in detail, for your own benefit and for a more efficient process.

To find out more about the home buying process, contact us any time! I handle all types of loans and mortgages in Roseville CA and surrounding areas.

IF you enjoyed this post, these might be helpful as well:

5 Common Mortgage Mistakes to Avoid

The Most Important Steps Toward Buying Your First Home

Steps to Determining Your Mortgage Budget

5 Benefits of Buying a House with Good Credit

What’s the Difference Between Pre-Approval and Pre-Qualification?

10 Days to Know About a VA Loan

7 Signs You’re Ready to Buy a House

How to Finance a Vacation Property

What is Escrow?

April 26, 2022 by Cindy Steelman

As you prepare to buy a home, there are some new terms that will enter your vocabulary and become some of your most frequently used words. One of these is “escrow.” The more informed you are, the more confident and calm you will feel during the home buying process, so keep reading to familiarize yourself with escrow.

“Escrow” vs. “Escrow Account”

You will hear two terms that may seem interchangeable at first, but are actually two distinct things. Escrow is a legal term that means the deed, deposit, funds, or property are being held by a neutral third party while a real estate deal is completed. You will also hear this process described as being “in escrow.”

An escrow account, on the other hand, is where funds are held by your mortgage lender. This is account is used to pay property taxes and insurance premiums, and is funded as a part of your monthly mortgage payment.

Who is the neutral third party and what do they do?

The third party might be a law firm, title company, or an escrow company. Their role is to mediate the real estate deal, holding all the funds until the deal is complete. By holding onto these funds while the deal is in escrow, earnest money is protected and homeowners’ funds for home expenses are held securely. The third party will not release funds to the seller until all of the conditions have been met, protecting the interests of both seller and buyer.

What is the purpose of escrow?

To understand why escrow is important, let’s imagine the home buying process without a neutral third party to mediate. After having an offer accepted, you will put down earnest money (also called a good faith deposit), which is essentially a way of putting your money where your mouth is. Earnest money says you’re serious. Without escrow, where would this money be held? Would you be comfortable giving this money to the seller and trusting them to return it if the deal did not go as you expect? This is a level of risk most buyers are not comfortable taking.

In addition to protecting earnest money, all funds are held by the neutral third party until conditions of the sale have been met. Imagine that after reading the report from the home inspection, you discover that a major repair is needed. After negotiating with the seller, they agree to pay for the repair before closing the deal. Without a third party involved, you would be taking the sellers’ word. With a third party, you can trust that funds will not be released to the seller until the terms of the sale are met. This protects your financial interests, and subsequently your peace of mind.

When does the escrow process end?

Escrow closes when the terms of the sale have been met. This process tends to take between 30 and 60 days, depending on a variety of factors that might include:

Problems discovered during the inspection
Appraisals
Bank delays
Funding issues for the buyer (e.g. changes in credit score or other eligibility factors)
Unknown leins
Agreed upon repairs to the property

When both parties meet the condition of the sale, escrow will close and the home belongs to the buyer.

Do I have to have an escrow account with my lender?

After closing on your home, your lender will set up an escrow account. In most cases, you will pay to fund this account at closing, with between 3 and 12 months’ worth of property taxes and insurance premiums. This escrow account acts as a built in savings account, one you won’t be tempted to draw from. It also puts the responsibility of paying for these two essential components of homeownership on your lender, giving you peace of mind and one less item on your to do list. This also makes it easier to qualify for a mortgage, because if gives the lender more peace of mind when they are the ones making sure the insurance is up to date and property taxes are being paid on time.

In some cases, you may qualify for a loan without having an escrow account. If you are confident that you will be sure to pay taxes and insurance on time, and it doesn’t affect your mortgage terms or eligibility, then you are free to opt out of the escrow account.

If you’re ready to buy your first home, or want to talk with someone about when is the right time to buy your first home, contact us any time!