Some people get very nervous when they hear the term credit improvement or credit repair. They envision vast lifestyle changes at the very least. But there are many things you can do for your credit that won’t take a lot of time and energy and that won’t mean any huge changes to your style of living. Here are the top four.

1. Get your free annual credit report every year and check for mistakes.

By law, you are entitled to one free credit report a year from each credit bureau: TransUnion, Equifax, and Experian. Make a note on your calendar to order this free report once a year. When it arrives, look it over. If it contains incorrect information, such as a debt you do not believe you are responsible for, write to the credit bureau immediately. Catching mistakes on your credit report early is a good way to ensure that they do not snowball into huge credit problems.

2. Use your credit wisely.

Some people become so anxious about debt and bad credit scores that they stop using their credit at all. Although this behavior seems financially wise, it can actually hurt your credit score, which is based on how responsibly you handle your finances. If you don’t have any debt to handle, your score drops. Instead of cutting up your credit cards, you can achieve credit improvement by making one or two purchases on credit each month. Pay them off promptly when the bill comes in. Within a few months, you’ll go from a credit enigma to someone with a solid history of paying bills on time, and your FICO score will rise accordingly.

3. Make payments to creditors on time.

Many people miss payment dates by days or even weeks. Often, these people are not in financial difficulty, they’re simply overwhelmed and forgetful. Unfortunately, their FICO takes a hit regardless. Try to set aside one day a week when you pay any bills that arrive at your house. If you don’t have time for that, consider having the money withdrawn directly from your bank account to cover the credit card statements. When your reliability increases, so does your credit score.

4. Pay Down Some of Your Balances

If you have used your credit cards or other credit sources a little too much and have developed a high debt-to-income ratio, getting new credit may prove difficult for a time. Take some time to pay down the higher balances on your credit cards – sometimes adding just a few dollars a month to the minimum monthly payment is enough to improve your credit rating.
Raising your FICO score does not need to be a life-consuming process. A few simple alterations in your spending habits are often enough to earn you the credit score you need for larger purchases like cars and mortgages.

Myth #1: A Refinanced Mortgage is Always Less Expensive Than an Original Mortgage

The rule of thumb in real estate is not to refinance unless the new loan will end up costing less than the old one did. Most people who refinance do exactly the right thing – wait for interest rates to drop and get the best deal they can. There are some mistakes, however, that can make refinancing more expensive.

Borrowers need to be very aware of the closing costs during a refinancing. If the closing costs are high, and they roll them into the loan, they may very well end up paying more over the life of the loan than if they hadn’t refinanced.

Another risky move is called a cash-out refinancing. In a cash-out mortgage refinancing, the homeowner borrows the money he or she needs to pay off the original loan as well as extra money (equity in the home) to use for things like financing a child’s education, making necessary home repairs, or paying off credit cards. Since cash-out mortgages may be worth more than the original loan, they are frequently more expensive to pay off.

Myth #2: If You Qualified for an Original Mortgage, You Will Qualify for a Refinance

This used to be a given, but since the housing bubble burst, lenders have tightened their lending criteria. A FICO score that would once have made you a perfect customer may now make you persona non gratis. Before you apply to refinance your mortgage, it’s always a good idea to get a copy of your credit report to check for negative items like late payments, missed payments, write-offs, bankruptcies, etc.

If these items are on your credit report incorrectly, you can challenge them and have them removed. If the items are correct, however, there is little you can do but resolve to improve your credit score except to make better decisions in the future. If your credit score is low, you may need to work on credit repair for a year or two before you qualify for a refinance.

Myth #3: Always Refinance to a Fixed-Rate Mortgage

It is usually good advice to try to refinance to a fixed-rate mortgage. Over time, interest rates tend to increase, and monthly payments on adjustable-rate mortgages, or ARMs, may quickly become unmanageable. However, if you catch interest rates on a downward trend and plan to be in the house for only a few more years, you might save some money by refinancing with an ARM. This tactic is a gamble, however, and there is certainly no guarantee that it will pay off.
If you are considering refinancing your mortgage, speak to a financial advisor and look at all your options. You may be able to save yourself a considerable amount of money.

A rate lock is a short-term agreement for a lender to “hold” an interest rate on a home while the buyer negotiates the actual sale.

Rate Lock Requirements

Requirements for rate locks vary from state to state. Within states, individual lenders often set their own individual policies and practices. For instance, a broker may require a signed contract before he or she agrees to lock in a rate.

Some brokers will make a verbal agreement to lock in a rate but will not put that agreement in writing. Mortgage experts suggest that buyers decline offers of oral lock-in contracts. If something goes wrong and the buyer needs to sue the lender, it can be very difficult to prove that an oral contract existed.

Rate Lock Terms

A rate can only be locked in for a certain number of days. The most common period is 30 to 60 days, although rates can be locked in for as long as 120 days. If there is a problem with the sale and the locked-in rate expires before the sale is negotiated, the buyer will usually have to accept the loan at the prevailing interest rates or look elsewhere for a better deal.

Unpredictable Interest Rate

When a buyer attempts to lock in an interest rate on a mortgage, he or she is most concerned about interest rates climbing. Sometimes, however, the opposite happens and rates actually go down. In this case, the buyer may be locked in at a rate far higher than the prevailing rates. Even among mortgage experts, locking in rates has the reputation for being a guessing game and a gamble.

A cautious buyer may want to pay extra money for what is known as a “float down” locked rate. In this case, the buyer can lock in the rate at the time he or she signs the contract, however, if the rates go down, the buyer’s lock-in rate similarly decreases. If the rates go up, the lender abides by the original lock-in rate.

Used carefully, rate locks can be an important tool for keeping the interest rates on a loan as low as possible.

The FHA mortgage is a home loan insured by the Federal Housing Administration. FHA loans do not provide money directly to borrowers; rather they insure the mortgage against a default.

For this reason, Federal Housing Administration borrowers find these loans particularly attractive to lenders. Basically, lenders know that if the borrower fails to pay, they can file a claim with the Administration for the money they lent.

FHA History

The Federal Housing Administration was conceived in 1934. In 1965, it joined with the Department of Housing and Urban Development (HUD). During its lifetime, the Federal Housing Administration has insured more than 30 million mortgages. About 800,000 people who currently hold mortgages have a loan through the Federal Housing Administration. The Federal Housing Administration operates from the proceeds of PMI purchased by home buyers whose down payment was less than 20% of the principal of the home.

Can I Qualify for an FHA Loan?

When most people think of a Federal Housing Administration loan, they think of a first time home buyer. The Administration does help first time home owners, but an Administration loan still could be your best bet, even if your buying your second home.

The following requirements for a Federal Housing Administration Loan include:
* Good Credit Score
* Down Payment (3.5% down if your credit score is 560 or better)
* Housing costs that equal no more than 30% of your gross annual income. ( For first time home buyers, this rule ensures that you do not purchase more house than you can afford.)

Popular Federal Home Loans

One of the most popular FHA loans are the (203B) fixed rate loans. This loan allows for a low down payment (3.5%), and also allows borrowers to use moneys for closing costs to come from gifts.

Other popular loans include the Rehab Loan (203K) which helps borrowers who purchase property that requires repairs before anyone can live in it. The Adjustable Rate (251) is also a popular loan plan.

Remember, home owners who pay a down payment of less than 20% of the principal of their home are expected to buy private mortgage insurance (PMI).

If you think your ready to be approved for an FHA loan or would like to get more information of the best loan type, you can contact our home loan specialists below.

If you’re a first time home buyer, listening to your lender or your mortgage broker can be a little like trying at times. This article lists some common mortgage terms that you might hear as you negotiate your first home loan.

These quick explanations are just to get you better informed. If your looking for more specific information, feel free to contact our home loan advisors or use an mortgage glossary for terms that you might need more details on.

Here is a quick breakdown:

Adjustable Rate Mortgage (ARM)

The interest rate of an adjustable rate mortgage changes over time depending on changes in the APR. This means that monthly payments may go up or down over time.

Amortization

According to the mortgage glossary, amortization is simply your monthly payment less the interest. To put it another way, it is the amount you are paying to build equity in your home.

Bridge Loan

A bridge loan is a short term loan to help someone who is forced to buy a new house before selling their old one. The money is borrowed against a certain percentage of equity in the first home and is used to help pay down payments and closing costs on the second home.

Closing

Closing is the official transfer of ownership of the property from the seller to the buyer. At closing, the buyer is usually responsible for paying closing costs or settlement costs such as loan origination fees, points, and the first year of private mortgage insurance.

Credit Score

During the loan approval process, lenders will express a great deal of interest in your credit, or FICO, score. This score is based on different events in your credit history such as making payments on time, taking a bankruptcy, or having a high debt to income ratio. The lower your credit score, the more trouble you will have finding a favorable deal on a mortgage.

Fixed Rate Mortgage

A fixed rate mortgage is a mortgage in which the mortgage rate, or interest rate, does not change throughout the life of the loan. This means that the monthly payments remain the same over time.

Mortgage Insurance (PMI)

If your down payment is less than 20% of the value of the home, you will be required to purchase private mortgage insurance. This protects the lender if you default from the loan.

Qualification

Qualification is simply an educated guess on the part of the lender as to how much you probably qualify to borrow. It should not be confused with pre-approval. During the pre-approval process, the lender looks at your financial documents and runs a credit check. The lender then gives you a letter, usually good for thirty days, stating how much money you have been pre-approved to borrow.

Even with a mortgage glossary on hand, mortgage terms can be somewhat confusing to the first time buyer. Pay close attention to what your lender is telling you, and don’t be shy about asking questions about terms you don’t understand.

Many first time homebuyers start looking for a house with no real idea of how much home they can actually afford. If you’re looking for your first home loan, take a few minutes to consider the factors involved in determining the size of your mortgage loan.

Housing Payment to Income Ratio

Most lenders do not want your housing payment to take up more than 28% of your gross monthly income. A few lenders will push the amount up to 31%, but most will not go any higher than that. You can reduce the monthly mortgage payment by putting up a larger down payment and paying more points at the time of closing to get your interest rate down.

Debt to Income Ratio

Most lenders insist that a borrower’s total debt to income ratio be no higher than 36%. In the past, a few lenders would allow borrowers to carry a debt to income ratio of 40% or more, but in light of the recent foreclosure crisis, banks are tightening their standard on the mortgage loan. You can improve your debt to income ratio by paying off as many debts as you can. The more outstanding debt you can pay off–credit cards, student loans, medical bills, car loans–the more you’ll be able to borrow when it comes time to finance the purchase of your home.

Rule of Thumb

If you are not sinking in debt and if your credit score is decent, you will probably be able to borrow 2.5 to 3 times the amount of your gross annual salary. For instance, if you make $50,000 per year, it’s safe to guess that you will be able to borrow $125,000 to $150,000 for your home loan. If you have little or no other debt, and if you can make a down payment of 20% of the home’s value, you may be able to convince a lender to give you a mortgage worth up to 4 times your gross annual salary.

Use a Mortgage Calculator

Before actually approaching a lender to find out how much money you might qualify to borrow, use a home mortgage calculator, easily found online, and plug in the numbers. The result will give you an idea of the maximum amount you can borrow.

Let Common Sense Prevail

The lender’s guidelines and the mortgage calculator provide an educated guess as to the maximum amount of home you can afford, but if the numbers seem large and intimidating, you’re under no obligation to take the largest home loan available. It’s better to be in a smaller home where you’re comfortably in control of the payments than it is to be in a mansion where you spend each month agonizing about how the mortgage will be paid.

Fundamentals of Understanding Your Mortgage Rate

A mortgage rate is the interest rate you pay on your home loan. Understanding your mortgage rate is important, because your rate, along with your loan type and your loan amount, determines your monthly mortgage payment. Mortgage rates vary from day to day and from one lender to another. When looking for a new mortgage, it’s always a good idea to shop around to see which lender offers the best rates. It’s also important to give some consideration to which mortgage plan is the most appropriate for your circumstances. Depending on the plan you choose, your mortgage payment may remain the same throughout the life of the loan, or it may vary over time.

Fixed-Rate Mortgages

A fixed-rate mortgage means that your mortgage rates will remain the same throughout the life of your loan. The fixed-rate is determined by the interest rate on the date your mortgage originates. This type of mortgage works to your benefit if the interest rate rises after your mortgage is approved.

ARM Mortgages

ARM stands for adjustable-rate mortgage. When you have an ARM, your interest rate fluctuates from month to month. This means the amount of your mortgage payment changes, too. An adjustable-rate mortgage works to your benefit if the mortgage rate drops after the origination of your loan. If the mortgage rate rises, however, you will end up with higher monthly payments.

Adjustable-rate mortgages are considered higher risk for the borrower, so lenders may be willing to offer you incentives to sign up for this type of mortgage.

Hybrid Mortgages

A hybrid mortgage locks in an interest rate for the first several years of the loan. When that initial period expires, the loan becomes an adjustable-rate mortgage.

Interest-Only Mortgages

If you sign up for an interest-only mortgage, your monthly payment for the first several years of the loan–typically the first five to ten years, will consist only of the amount of interest due. This is a tempting plan for many new buyers, because it means their initial monthly payments will be lower.

Interest-only payments, however, do not reduce the balance of the loan. When the specified period for interest only payments expires, homeowners face a sharp increase in monthly payments as the balance of the loan begins to come due.

Understanding your interest rate is vital to making sure you get the best deal possible on your mortgage. Take some time to figure out which plan makes the most sense for your circumstances.

One of the first steps of the home purchasing process is to get pre-approved. This step should even come before you take a car ride to find your dream home. It’s important to know exactly how much home you can afford and at what interest rate you can lock in your dream home.

The following checklist will help ensure you get the best mortgage loan for your new home.

1. Work history. Nothing is more appealing to a mortgage lender than a steady source of income. That means you can pay your monthly mortgage payment.

Ideally your lender will want to see “two years of work history in a related field.” As you can see there are two criteria here: first, two years of consistent income and second, all the work is in a related field. This tells the lender that you have a skill or trade that is in demand.

You will, of course, have to prove this two year work history so be prepared to show W-2s, tax returns, and pay stubs verifying your income.
Exceptions: As with any guidelines, there are exceptions. There are some circumstances that create “acceptable” gaps in employment, such as: maternity leave, job skills re-training, pursuing higher education.

2. Good credit. This really is the centerpiece of today’s mortgage approval process. It’s simple the higher your credit score the better your chances of getting approved for a mortgage loan. In addition, a higher credit score will give you the added bonus of a lower mortgage rate.

If you don’t know what your current credit score, get a copy today. Here are a couple simple places to get all three of your credit scores and the associated credit reports online (instantly):

1. TrueCredit
2. myFICO
3. CreditReport.com

Not only will it prepare you for your mortgage application process, but a very high percentage of credit reports have mistakes. It’s better to correct these errors now.

3. Savings history. Your mortgage lender’s primary concern is: “Will they be able to make the monthly mortgage payment?”

Your savings account is a good indication of that discipline. Not only will show that you have sufficient financial reserves to fund a down payment, closing costs, homeowners insurance, and property taxes–It will show you have sufficient income to pay your current bills and support a mortgage payment.

Important Note: Your lender will be looking for “seasoning” in your savings. That means that they expect to see documentation that your savings are consistent and over time. One large, recent deposit to pump up your savings account will only lead to suspicion that a “family loan” is the source of your savings. Don’t do this.

4. Funds for closing costs. Somewhat related number 3, your lender will need to verify that you have enough money to pay for fees and costs associated with closing your mortgage loan. All of these expenses will be itemized on your Good Faith Estimate (GFE), early in the mortgage application process. Make sure that you have the savings to pay any closing expenses.

Closing Cost Tip: Often many of these closing costs can be “rolled into” you mortgage, saving upfront depletion of your savings and financial reserves.

5. Strong debt to income ratio. This is another critical component of the mortgage approval process. Remember, your mortgage lender wants you t o pay your monthly mortgage payment–and so should you. The rule of thumb here is that your mortgage payment is no more than 33%-35% of your monthly income. Do the math and adjust your home/mortgage loan expectation accordingly.
Having a house but being poor is not fun. And in the current housing market, chances are you can get a lot of home for a very affordable price–so don’t unnecessarily push this limit.

6. Down payment of 20%. There are a variety of ways to skirt this ideal down payment, but more than likely it will increase your mortgage rate and monthly mortgage payment. Typically, you will pay a higher interest rate and need to pay for mortgage insurance (insurance to pay your lender–not you–if you can’t pay your mortgage).

You can generally get away with only putting down 10% if you pay mortgage insurance; however, if you get a government-backed mortgage (like an FHA
loan) you can’t get this even lower–3.5% or nearly 0% with a 203k fixer-upper FHA loan.

7. More than one borrower/income. One of the easiest ways to beef up many of these qualifying factors is to add income to the approval process. For most, this is simple because you are buying with a spouse or partner–nearly doubling qualifying income.

Note: This is another important reason to know your credit scores. If one borrower has a very low credit score a mortgage lender will often use the lowest credit score as the qualifying credit score. Therefore, you might have better chances of qualifying for the mortgage without that borrower, even if it means less qualifying income.

8. Reserves (emergency funds). Cash is also King in the mortgage approval process. You’re lender will love to see how you are going to pay that monthly mortgage payment (and still have enough to eat).