5 Credit Card Mistakes that May Hurt Your Chances of Qualifying for a Mortgage

When preparing to apply for your first mortgage, gathering information is crucial in understanding the process and maximizing your chances of success. Between interest rates, points, and homeowners association fees, there are many new terms to learn and various outside factors to consider.

Many first-time homebuyers do not realize that credit card history can be the determining factor in whether or not you will leave your lender’s office with a pre-approval. Bad spending habits can greatly hinder your chances of not only qualifying for a mortgage, but making sure your credit scores stay as high as possible.

Fortunately, these credit card habits can be broken or even better, prevented. Here are some tips on how to avoid common mistakes and increase the likelihood of not only having desirable credit scores, but also receiving a mortgage loan approval.

1.  Don’t pay late. If you are consistently paying your credit card bill late, your credit score will suffer. Lenders pull a tri-merge credit report and use the actual middle score to determine the worthiness of your credit; a percentage of that score is determined by your on-time payment history. To correct this problem, set up automatic payments online. This way, you can ensure that your credit score is not affected in a negative way.

2.  Don’t overuse your credit. Your score is also determined by how much money is owed on all of your credit cards. This is determined by your credit utilization ratio, a calculation of the amount of credit you have used in relation to your credit limit. Using more than 50 percent of the available credit on any of your cards will likely cause your credit score to drop. Know your limits, literally, and carefully monitor your credit card accounts.

3.  Don’t apply for too many credit cards at once. Applying for multiple credit cards at the same time is viewed, by the credit bureaus, as if you are having financial problems and may cause your lender to reconsider underwriting a big loan. It’s better to wait to apply for new credit cards until after you’re settled into your new home. Applying for several different types of credit (auto, store credit, major credit), can also deteriorate your scores.

4.  Don’t avoid credit cards completely. Responsible credit card use is important in establishing credit. Lenders like to see a reliable credit history before handing over large sums of money. For this reason, if you do not have any credit history as a young adult, you should apply for a credit card today. Using a credit card on a consistent basis, and paying promptly, will help to make you an ideal candidate for a home loan. If you are unable to open up a major credit card, start with something small, like a store credit card, or even a secured credit card will help in getting your credit history started.

5.  Don’t rack up debt. Having a substantial amount of debt could easily prevent you from being eligible for a mortgage. Paying off your credit card debt in a timely manner and paying more than the minimum payment can make you a more desirable candidate for a loan. We suggest keeping your balance at 50% or below of the allowable limit; this allows for the credit bureaus to see you are using your credit, but not too much of it.

For more information about applying for a mortgage and how your credit card history many impact you, contact Stuart Epstein at 410.491.0200 or sepstein@baybankmd.com, your Mortgage Consultant for Life.

Through Guidance and Support, Stuart Epstein Assists a Former Client Again

"When I bought my first house, I worked with Stuart Epstein and his team and they did a great job holding my hand as a first-time buyer. So 5 years later, when I decided to move, of course I turned to Stuart again! What started as a fairly simple transaction became more complex with the terms of the sale of my house, and Stuart offered guidance and support all along the way. Without Stuart and his team, I fear my new purchase would not have been possible, but because of their attention to detail, quick response, and extensive knowledge of all of my options, my settlement was flawless.  

I would recommend Stuart Epstein and his team to new homebuyers and second-time homebuyers alike and I look forward to working with them in the future as well. Thank you so much, Stuart!"

-Julie

Can You Afford That Home? Perception vs. Reality

Stuart Epstein, the Maryland mortgage consultant, discusses the perceptions – and the reality – associated with home ownership and obtaining a mortgage.

Anyone who has paid attention to the economy over the past several years – in other words, all of us – might have the notion that the lending restrictions resulting from the economic meltdown have made it difficult or impossible to get a mortgage loan approved.

Indeed, a recent study by a major lender suggests that potential homeowners are overestimating the challenges involved in securing a mortgage loan, and the study reveals a few disconnects. While nearly 70 percent agree that now is a good time to buy a home, almost one-third feel that only people with high incomes can get a loan approved, and 64 percent believe that someone must have a “very good” credit score to be successful in obtaining a mortgage.

The issue is not that people are living beyond their means. Findings revealed that 82 percent of those surveyed said that they generally do not spend more than they earn, and more than 60 percent have money put away in a “rainy day fund.”

The biggest barrier to home ownership is considered the lack of funds for a down payment, especially among younger respondents. Almost half felt there were no desirable homes in a price range that would be affordable to them.

The reality is somewhat different. For example, FHA loans require a down payment as little as 3.5 percent of the purchase price, some conventional loans require as little as 3% down and programs such as VA and USDA require no money down. (44 percent of the survey respondents thought that a minimum of 20 percent down was required). 

In addition, there are many down payment assistance programs available that provide borrowers help with down payment and closing costs. The Maryland Mortgage Program and FHLB are two very popular 1^st time homebuyer programs in Maryland.

And as to the issues of affordability and credit scores, many lenders offer a wide variety of loan products to suit both the buyer and the home. Smaller lenders may have the flexibility that larger institutions lack.

The main lesson of the survey is that lenders in general have some educating to do in order to close the gap between the perception that qualifying for a mortgage is impossible for most, and the realities of the current marketplace.

Wondering if you’re qualified, or whether that home is affordable? Contact Stuart Epstein, Your Mortgage Consultant for Life. 

Fixed-Rate vs. Adjustable-Rate Mortgage

Stuart Epstein, the Maryland mortgage consultant, explains the difference between a fixed-rate and an adjustable-rate mortgage.

Just as you research which type of car is the most practical and suitable for your lifestyle, you need to do the same with a mortgage. There are two general types of mortgages -- fixed-rate and adjustable-rate. The entire list of mortgage types is much more extensive, but they all fall under one of these two categories. Determining which type of mortgage is the better choice for you is an important task to complete in the early stages of the home buying process. So, what’s the difference…and more importantly, which is best for me? 

Fixed-Rate Mortgage

This type of mortgage has an interest rate that will remain the same for the entire existence of the loan. Fixed rate mortgages are usually offered in terms of 10, 15, 20 or 30 years. Even though the interest rate is fixed, the amount of interest that you pay during the life of the mortgage depends on which term you choose.

An advantage of a fixed-rate mortgage is that your interest rate will never change even if the index of interest rates rises. This will help with budgeting because you will always know approximately how much your monthly payments will be over the course of the loan. Those payments may change somewhat if property taxes, insurance or other escrow items go up or down, but the largest components of your payment, principal and interest, will remain the same.

A disadvantage of this type of mortgage is that since your interest rate is fixed, you may pay more interest over time if rates fall.

Adjustable-Rate Mortgage (ARM)

With this type of mortgage, the interest rate fluctuates based on a specific benchmark. Initially, the interest rate will start out low, usually lower than the market rate, and then it can rise (or fall) over time. This initial rate could remain constant for months or years. After this introductory period, your interest rates and monthly payments will most likely rise, and your rate will fluctuate with market rates over the life of the mortgage.

The lower initial payments are a central advantage of an adjustable-rate mortgage, and may allow you to qualify for a larger loan. In addition, if market rates fall later on, your interest rate will drop as well.

A disadvantage of ARMs is that they can be unpredictable. You should always be prepared for increasing interest rates, especially given the historically low rates of the past several years. This can be problematic if you are on a tight budget and can only allocate a certain amount of funds for your mortgage. Many ARMs will have limits in place on how much, and how frequently, your rate can increase. Understand the terms of your loan and be certain you can handle a worst-case scenario if interest rates rise.

Here’s an example: A 5/1 Libor ARM 2/2/5.  A 5/1 ARM means that the introductory rate is set for the first 5 years, and after that it adjusts each year on the anniversary of the loan.  The annual adjustment is based on an “Index”, in this case, the 1 Year Libor plus a “Margin”.  The Libor right now is very low, around .5% and the typical margin is 2.25%, so the adjusted rate today would be 2.75% - not bad!  The 2/2/5 means that the maximum first and annual adjustment would be 2% and the lifetime maximum adjustment is 5%.  So if your starting interest rate was 3%, the maximum it could adjust to over the 30 years would be 8%.

Lenders offer 1, 3, 5, 7, and 10 year ARMS.  So the period of the rate being set depends on the type of ARM you choose.  If you purchase a home with the plan to live in that home for less than 10 years, and ARM may be a very smart choice for you. 

For more information on the difference between a fixed-rate and an adjustable-rate mortgage or how to determine which one is the best option for you, contact Stuart Epstein at 410.491.0200 or sepstein@baybankmd.com, your Mortgage Consultant for Life.