How Credit Scoring Works
Credit Articles
Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates risk associated with paying your debt on time. Scores range from 350 (high risk) to 950 (low risk).
There are a few types of credit scores; the most widely used are FICO® scores, developed by Fair Isaac & Company, Inc. Each of the major credit reporting agencies use the FICO score.

Credit scores only consider the information contained in your credit report. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

Different portions of your credit report are given different weights. They are:

• 35% - Previous credit performance (specific to your payment history)
• 30% - Current level of indebtedness (current balance on each credit card compared to available credit limit)
• 15% - Time credit has been in use (opening date)
• 15% - Types of credit available (installment loans, revolving and debit accounts)
• 5% - Pursuit of new credit (number of inquiries)

Paying your bills on time is the most important factor for a good credit score. It is crucial that you make payments on time, even if the debt you owe is a small amount. In addition, you may want to: keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.

When shopping for a car or mortgage, the credit agencies have eliminated some of the negative effects of rate shopping. These consumer-originated inquiries are counted as one inquiry if within the last 30 calendar days. Multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.

Your credit report must contain at least one account which has been open for six months or greater and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.


Credit Reporting Agencies
Credit Articles
Credit reporting agencies collect information about you and your credit history from public records, creditors and other reliable sources. These agencies make your credit history available to your current and prospective creditors and employers as allowed by law. Credit agencies do not grant or deny credit.
The credit reporting agencies are:

• Equifax
  PO Box 740241
  Atlanta, GA 30374
  800-685-1111
   
• Experian
  PO Box 2002
  Allen, TX 75013
  Consumer Credit Questions
  888-EXPERIAN (888-397-3742)
   
• TransUnion
  PO Box 2000
  Chester, PA 19022
  (800) 888-4213
  (800) 851-2674

Fixing Credit Report Errors
Credit Articles
Under the Fair Credit Reporting Act, you have the right to dispute the accuracy and comprehensiveness of information in your credit file. Unless the credit reporting agency believes a dispute to be “frivolous or irrelevant,” it must reinvestigate and record the current status of the disputed items within a “reasonable period of time.” A disputed item must be deleted if the credit reporting agency cannot verify it. The credit reporting agency also must correct any erroneous information in the report. Any incomplete item must be completed by the credit reporting agency as well.

In the instance that your file indicates that you were behind on making payments for a period of time but neglects to record that you currently are on time with payments, the current agency must confirm you are now current with these payments. The credit reporting agency also will have to delete any file shown to belong to another person. Any report recipient who has checked your file in the past 6 months must receive a notice of correction from the credit reporting agency if you request it.

You send a brief statement to the appropriate credit reporting agency when you feel there are items in your credit profile that deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills). The information will be placed in your credit profile and will be disclosed each time it is accessed.

What Your Credit Score Means
Credit Articles
Credit scoring places you in one of three general categories.
If you have a score of 680 or above, you may be considered an A+ borrower. Your loan will involve basic underwriting, probably through a computerized automated underwriting system and could be completed within minutes. If you are in this category, you have a good chance of obtaining a low interest rate and closing your loan quickly.

If you have a score below 680 but above 620, an underwriter will probably take a closer look at your file to determine potential risks. If you are in this category, you may find the process and underwriting time no different than in the past. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. You may still be able to obtain "A" pricing, but loan closing may take longer than if you had a higher score.

If you have a score below 620, you may not be eligible for the best loan rates and terms offered. Mortgage professionals may divert you to alternate funding sources other than Fannie Mae or Freddie Mac. You may find loan terms and conditions less attractive than “A” loans, and it may take some time before a suitable funding source is located.

If you do have negative information on your credit report, such as late payments, bankruptcy, or too many inquiries, your best strategy may be to pay your bills and wait. Time is often your best ally in improving credit.

The length of time to rebuild your score depends on the reason behind your low score. Most decreases in scores are due to the addition of a new element to your credit report such as a delinquency or an inquiry. These new elements will continue to affect your score until they reach a certain age. Delinquencies remain on your credit report for seven years. Most public record items remain on your credit report for seven years, although some bankruptcies may remain for 10 years and unpaid tax liens remain for 15 years. Inquiries remain on your report for two years.

While many lenders use these scores to help them make lending decisions, each lender has its own strategy, including the level of risk it will accept for a certain loan product. There is no single “cutoff score" used by all lenders and there are many other factors used to determine your eligibility and interest rate.


Build Good Credit
Credit Articles
Building good credit can be simple. You can achieve good credit by following these tips:

• THERE’S NO TIME LIKE THE PRESENT:
  Pay your bills on time. An indication of how you will pay your bills in the future is taken from how you have paid your bills in the past. Your credit scores emphasize your most recent payment record. If you've been late in the past, start paying on time now!
• GIVE THEM WHAT THEY WANT:
  Pay at least the minimum amount required. You can always pay more, but you should never pay less.
• HOW LOW CAN YOU GO:
  Keep credit card balances low. Don't "max out" your credit cards.
• SAVE YOURSELF:
  Don't apply for too many loans or new accounts. Lenders will be concerned that you won't manage your debt well if you are requesting a lot of credit in a short time span.
• GET ESTABLISHED:
  Establish credit if you have none. Apply for one or two credit cards. Use the cards carefully and pay off the entire balance each month
• PLAN AHEAD:
  Get your credit report a few months before you plan to buy a house so you have time to correct any errors before applying for a mortgage. You can establish a plan to build your credit with help from your lender.
• KNOW WHERE YOU ARE:
  Find out your credit score and review the information that comes with it.
• THINK BACK:
  The last two years count most. Your credit score looks most closely at the last two years.
• THINK FURTHER BACK:
  But the last seven count too! Your credit tracks your payment history over the last seven years.
• TIME IS OF THE ESSENCE:
  Shop for a mortgage within a two or three- week period. When you apply for a mortgage, the lender requests your credit report and an inquiry of that request shows up on the report. All inquiries during a two-week period only show as one inquiry. A couple of inquiries on your credit report are okay, but more can lower your credit score.
• BE RESERVED:
  Don't apply for new credit or make major purchases, such as a new car, large appliances or electronics, right before you apply for a mortgage.
• ASK FOR HELP:
  Call your lender for advice if you believe you have credit problems.
• YOU DON’T HAVE TO BE PERFECT:
  Don't be discouraged if you have credit problems. You don't need perfect credit to qualify for a mortgage; however, people with perfect credit tend to get better interest rates than people with less-than-perfect credit. Beware of predatory lending practices that take advantage of credit problems and charge excessive fees.

How to Improve Your Credit
Credit Articles
Be prepared to discuss any credit problems honestly with a mortgage professional. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness, or other financial difficulties.
There are four ways to control excess debt:

• You can reduce your other expenses if your credit is not in terrible shape, even if it means making hard choices or changing your lifestyle to fit your income. A few of your options are selling a second car, taking equity out of your home, applying for a non-secured signature loan, obtaining a loan from a relative, selling your home and paying off your debts with the proceeds and then renting, cashing out your 401K/retirement benefits or selling family heirlooms, jewelry, etc.
• If you call Consumer Credit Counseling Services (CCCS), be sure you understand the process and are working with a reputable company. The mortgage lender would consider your application and use of CCCS to pay off your debts as if you were in a Chapter 13 bankruptcy.
• You may want to consider bankruptcy. Claiming Chapter 13 bankruptcy takes longer than Chapter 7, but your credit will end up in a little better standing. Chapter 13 bankruptcy gives you up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
• If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable from a credit standpoint, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
• If you want to improve your bad credit history and your debts are under control now, the most important factor is to make your monthly payments on time. Use pre-addressed envelopes enclosed with your statements to mail your payments and call the company if you don't receive your usual statement. If you carry a balance, send your payment as early as possible because most companies calculate interest on a daily basis. You’ll pay less interest the sooner they receive your payment.
• Avoid procrastinating. It's not the postmark date but the day your payment is received that is key. Be sure to give the post office sufficient time (five business days is a good time frame) to deliver your mail. Late fees, higher interest, and/or a negative mark on your credit report are all potential results of late payments.
• Never send cash. If you don’t have a checking account, open one. When you move, don’t forget to tell your creditors your new address.
• To be better organized with payments you are worried about, make a list of your debts and their due dates. If you think you will have trouble meeting the monthly payments, contact your lenders immediately to arrange a payment schedule without reporting the payments as late.
• Try to get advice from an expert before you take any major financial actions such as taking money from your retirement account or tapping the cash value of your life insurance policy to pay bills or living expenses. Decisions like these may have serious implications you haven't considered.
• While credit cards can be invaluable in a crisis by allowing you to charge items and pay them off over time, they can also be dangerous if you aren't careful and charge more than you can afford. If you do use credit cards, choose those with the lowest interest rates and pay them back as soon as you can to cut your costs.

Down Payment Loans and Gifts
Down Payment Articles
Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment.

Another popular tactic which can be used in a wider range of programs is to borrow from your 401K program. If you have a 401K program with your employer, you may be able to withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and, your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option.

Qualifying for Low Down Payment
Down Payment Articles
To be considered for a low down payment loan, you generally need to have:

• Sufficient income to support the monthly mortgage payment
• Enough cash to cover the down payment
• Sufficient cash to cover normal closing costs and related expenses (explained below)
• A good credit background that indicates your payment history or "willingness to pay"
• Sufficient appraisal value, which shows the house is at least equal to the purchase price
• In some instances, a cash reserve equivalent to two monthly mortgage payments

Closing costs, or settlement costs, are paid when the home buyer and the seller meet to exchange the necessary papers for the house to be legally transferred. On the average, closing costs run approximately 2% to 3% of the house price. This percentage may vary, depending on where you live.

Examples of closing costs are the loan origination fee (if not already paid), points, prepaid homeowner's insurance, appraisal fee, lawyer's fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20% down) and other expenses. Your mortgage professional will give you a more exact estimate of your closing costs.

Points are finance charges that are calculated at closing. Each point equals 1% of the loan amount. For example, 2 points on a $100,000 loan equals $2,000. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points.

So How Much of a Mortgage Can You Afford?

There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

It is important to remember that the following ratios may vary and each application is handled on an individual basis, so the guidelines are just that -- guidelines. There are many affordability programs, both government and conventional, that have more lenient requirements for low- and moderate-income families.

Many of these programs involve financial counseling for low- and moderate-income people interested in buying a home and in return, offer more lenient requirements.

Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26% to 28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance, often abbreviated PITI. For example, if your annual income is $30,000, your gross monthly income is $2,500, times 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.

Any expenses that extend 11 months or more into the future are termed long-term debt, such as a car loan. Total monthly costs, including PITI and all other long-term debt, should equal no greater than 33% to 36% of your gross monthly income for conventional loans. Using the same example, $2,500 x 36% = $900. So the total of your monthly housing expenses plus any long-term debts each month cannot exceed $900. For FHA the ratio is 41%.

Maximum allowable monthly housing expense
26% - 28% of gross monthly income - Conventional
29% of gross monthly income - FHA

Maximum allowable monthly housing expense and long-term debt
33% - 36% of gross monthly income - Conventional
41% of gross monthly income - FHA

When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for homeownership.

Homeowner's insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount which may be insufficient to rebuild a badly damaged house.

Down Payment Gifts
FHA Loan Articles
The down payment can be 100% gift funds. This is one of the key benefits to the FHA program.  Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower's bank or savings account, or in an escrow account, prior to underwriting approval. Proof of deposit is required.

Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your local branch for complete information

Single Family Mortgage Insurance
FHA Loan Articles
FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the mortgage company against loan default on mortgages for properties that meet certain minimum requirements--including manufactured homes, single-family and multifamily properties, and some health-related facilities.

Section 203(b) is the centerpiece of FHA's single-family insurance programs. It is the successor of the program that helped save homeowners from default in the 1930s, that helped open the suburbs for returning veterans in the 1940s and 1950s, and that helped shape the modern mortgage finance system. Today, FHA One- to Four-Family Mortgage Insurance is still an important tool through which the Federal Government expands homeownership opportunities for first-time homebuyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms, as well as for those who live in underserved areas where mortgages may be harder to get. In FY 1997, FHA insured more than 790,000 homes, valued at almost $60 billion, under this program. FHA currently insures a total of about 7 million loans valued at nearly $400 billion. These obligations are protected by FHA's Mutual Mortgage Insurance Fund, which is sustained entirely by borrower premiums.

Section 203(b) has several important features:

Downpayment requirements can be low. In contrast to conventional mortgage products, which frequently require downpayments of 10 percent or more of the purchase price of the home, single-family mortgages insured by FHA under Section 203(b) make it possible to reduce downpayments to as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage, in some cases.

Many closing costs can be financed. With most conventional loans, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to finance many of these charges, thus reducing the up-front cost of buying a home. FHA mortgage insurance is not free: borrowers pay an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.

Some fees are limited. FHA rules impose limits on some of the fees that mortgage companies may charge in making a loan. For example, the loan origination fee charged by the mortgage company for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.

HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage loan.


Home Owners Insurance
Home Owners Insurance Articles
When you insure your home, you should insure your home for the total amount it would cost to rebuild your home if it were destroyed. If you don't have sufficient insurance, your insurance company may only pay a portion of the cost of replacing or repairing damaged items.
There are three ways to insure the structure of your home:

• Replacement Cost:
  Insurance that pays the policyholder the cost of replacing the damaged property without deduction for depreciation, but limited to a maximum dollar amount.
• Guaranteed Replacement Cost:
  Insurance that pays the full cost of replacing damaged property, without a deduction for depreciation and without a dollar limit. This coverage is not available in all states and some companies limit the coverage to 120 percent of the cost of rebuilding your home. This gives you protection against such things as a sudden increase in construction costs due to a shortage of building materials.
• Actual Cash Value:
  Insurance under which the policyholder receives an amount equal to the replacement value of damaged property minus an allowance for depreciation. Unless a homeowners policy specifies that property is covered for its replacement value, the coverage is for actual cash value.

For a quick estimate of the amount to rebuild your home, multiply the local building costs per square foot by the total square footage of your house.

To find out the building rates in your area, consult your local builders association or real estate appraiser.

Factors that will determine the cost to rebuild your home:

• local construction costs
• the square footage of the structure
• the type of exterior wall construction -- frame, masonry (brick or stone) or veneer
• the style of the house (ranch, colonial)
• the number of bathrooms and other rooms
• the type of roof
• attached garages, fireplaces, exterior trim and other special features like arched windows.

Be sure to check the value of your insurance policy against rising local building costs each year. Ask your insurance agent or company representative about adding an "INFLATION GUARD CLAUSE" to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area. Also, be sure to increase the limit of your policy if you make improvements or additions to your house.

Title Insurance Policies
Home Owners Insurance Articles
An owner's title insurance policy protects the owner against title defects in the property. A mortgage title policy protects the holder of the mortgage on the property. Separate policies are required to protect both interests.

After the buyer’s deed is delivered and recorded, the owner’s policy of title insurance is issued. Typically, a purchaser’s policy is issued after both parties have executed the contract and the title agent has recorded the deeds.

The coverage of your policy applies only to matters that appeared of record up to the date of issuance of your policy. Some documents may have been recorded since that time; some of these may affect the title to your land. There may be accrued and unpaid taxes and assessments along with possible court actions affecting your title. The purchaser is entitled to have full information and protection as to the condition of the title right up to the date of his/her purchase. In addition, there may be matters of record which would prevent either the seller or buyer from selling, buying, or mortgaging land until such matters have been cleared. These items include such things as federal tax liens, judgments, divorce actions and other conditions, which the title search may disclose.

Mortgage Escrow Accounts
Your Ability to Qualify
Mortgage escrow accounts ensure that homeowners' property taxes, fire and hazard insurance premiums, mortgage insurance premiums and other escrow items are paid in a timely fashion. So that the homeowner avoids the risk of expired insurance coverage or delinquent taxes, mortgage escrow accounts guarantee that there is always enough money to pay the bills when they are due. For over 50 years, mortgage escrow accounts have been serving their original purpose, which is to protect the interests of homeowners.

The Real Estate Settlement Procedures Act of 1974 (RESPA), administered by the U.S. Department of Housing and Urban Development (HUD), governs the practice of escrowing. Lenders must manage their escrow accounts in compliance with this federal law, state regulations and with the interpretations set out by HUD. In addition, according to the 1990 Housing Bill, lenders must issue itemized statements of escrow accounts to borrowers on an annual basis. This law ensures that every lender follows this practice.

Escrows accounts guarantee that bills are paid on time. The most obvious advantage of escrow accounts is that they automatically budget the borrower's tax and insurance responsibilities over the course of a year. Homeowners do not have to worry about coming up with several large, lump sum payments. If there is ever a fire in the home, or if the basement floods causing damage, the homeowner is assured that the home is protected by up-to-date insurance.

Because of escrow accounts, homeowners also do not need to be concerned about calculating unexpected increases in their taxes or insurance premiums. Your lender is responsible for allowing possible increases in these payments. Even when there are not enough funds in a mortgage escrow account to meet increased tax or insurance payments, your lender typically covers the bill without charging interest to the borrower. The lender will send you a bill for the deficiency in the escrow account. As a common practice, lenders pay increases when they are due even though all the money for these bills has not yet been collected from the homeowner.

The interests of investors in home mortgage loans are protected by escrow accounts. Escrowing has led to a healthier mortgage market by making home mortgages more attractive and secure as investments. As a result, loans with better terms and lower down payments are available to homebuyers.
Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection. Rather than working with millions of homeowners, municipalities need only collect from a few hundred lenders.

The law is very specific in setting limits on the amount that your lender may collect. Your lender may require a monthly payment of 1/12 of the total amount of estimated taxes, insurance premiums and other charges. Reasonably, the lender may collect an additional balance of not more than 1/6 of the estimated annual payments. Your lender is allowed by law to require additional money or eliminate the deficiency if your lender determines there will be or is a deficiency in the escrow accounts.

How Much House Can I Afford
Your Ability to Qualify
To figure out an approximation of your buying power, multiply your annual gross income by 2½. For example, with a household income of $50,000, you could potentially qualify for a $125,000 home. Depending upon factors such as your individual situation, debts, and credit history, the actual number may be more or less.

Whether or not you can live comfortably with the amount of your suggested monthly mortgage payment is a decision best made by you, the buyer.

Housing Expense Ratio
A general rule is that your monthly mortgage payment should be less than or equal to 25% of your gross monthly income. Depending on the type of mortgage you choose, this percentage may change. However, there are mortgage products available that focus specifically on the debt-to-income ratio, and more information on these types of mortgage products can be provided by your lender.

Debt-to-Income
Factors such as your income, debt and credit history directly affect your buying power. Your debt includes things such as your credit card bills and car loans, and other expenses such as housing expenses, alimony and child support. Combined, these debt items should not be more than about 30-40% of your gross income.

Some hints to help you determine a mortgage amount that makes it possible for you reasonably to meet your long-term goals and needs:

• CRUNCH THE NUMBERS:
  Compose a budget including your estimated mortgage payment including taxes and insurance.
• MURPHY’S LAW:
  Utility costs should be included in your housing budget with an additional amount set for costs of future home maintenance and repairs.
• LOOK AT THE BIG PICTURE:
  Be sure to take other financial goals into consideration such as paying for college tuition or saving funds for retirement. 

The Effect of Changing Jobs
Your Ability to Qualify
For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money. However, for some homebuyers, the effects of changing jobs can be a problem when attempting to qualify for a mortgage.

Salaried Employees
Switching employers should not create a problem if you are a salaried employee who does not earn additional income from commissions, bonuses, or over-time. The switch has less impact if you remain in the same line of work. You will hopefully be earning a higher salary, which will help you better qualify for a mortgage.

Hourly Employees
If your income is based on hourly wages and you work a straight 40 hours a week without over-time, changing jobs should not create any problems.

Commissioned Employees
Because of the way that mortgage lenders calculate your income, you should not change jobs before buying a home if a substantial portion of your income is derived from commissions.

Mortgage lenders average your commissions over the last two years. Changing employers creates an uncertainty about your future earnings from commissions; there is no track record from which to produce an average. Even if you are selling the same type of product with essentially the same commission structure, the underwriter cannot be certain that past earnings will accurately reflect future earnings.

In this situation, changing jobs would negatively impact your ability to buy a home.

Bonuses
If a substantial portion of your income on the new job will come from bonuses, you may want to consider delaying an employment change. Mortgage lenders rarely will consider future bonuses as income unless you have been on the same job for two years and have a track record of receiving those bonuses. In calculating your income, mortgage lenders will average your bonuses over the last two years.
Changing employers means that you do not have the two-year track record necessary to count bonuses as income.

Part-Time Employees
You should not change jobs if you earn an hourly income but rarely work forty hours a week. Because there would be no way to tell how many hours you will work each week on the new job, there would be no way to accurately calculate your income. If you remain on the old job, the lender must average your earnings from part-time income over the last two years. You must have a 2-year work history of part-time income to count as income for a mortgage.

Over-Time
Your overtime income cannot be determined if you change jobs since all employers award overtime hours differently. If you stay on your present job, your lender will give you credit for overtime income. The mortgage lender will determine your total overtime earnings over the last two years to calculate a monthly average.

Self-Employment
Delay any change to self-employment before buying a new home. Buy the home first.
Lenders like to see a two-year track record of self-employment income when approving a loan. Plus, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.

Don't Move Money Around
Your Ability to Qualify
The source of funds for your down payment and closing costs is a high level concern for lenders when they review your loan package for approval
Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.

If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them. The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. Although potentially quite tedious, you may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data.

While it might seem to be an added frustration to the process, the lender is better able to serve you with this documentation. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.

For a smoother process for your lender and for yourself, it is best not to change banks and to leave your money where it is until you talk to a loan officer.

Estimate of Closing Costs
Understanding the Mortgage
Your lender will provide a Good Faith Estimate of Closing Costs which include but are not limited to:

• Down payment
• The loan origination fee
• The mortgage loan processing fee
• The mortgage loan underwriting fee
• Appraisal fee
• Credit report fee
• Flood certification
• The homeowner's insurance premium for the first year
• Escrow account reserves for insurance and property taxes, if applicable
• Survey fee
• Attorney fees
• Title search fee
• Title insurance premium
• Title company fees
• Courier fee
• Deed recording fee
• HOA transfer fee if applicable

Fixed-rate Mortgages
Understanding the Mortgage
The fixed-rate mortgage is the most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years.

Fixed-rate fully amortizing loans have 2 distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed-rate loans are 15-year and 30-year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30-year fixed-rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Pros

• Future monthly payments are easy to project
• Provides stability if you plan to be in your home for a long time
• If interest rates rise, your payment remains the same

Cons

• If interest rates drop, your payment remains the same or you can refinance

Adjustable Rate Mortgages (ARMS)
Understanding the Mortgage
The interest rate on an Adjustable Rate Mortgage may be adjusted periodically, usually in response to changes in the Treasury Bill or the London InterBank Offering Rate (LIBOR). The interest rate is fixed for a certain period of time (the adjustment period). After the fixed period, the rate varies depending on market. Common ARMS are fixed for 1, 3, 5, 7 or 10 years.

Pros

• Lower initial payments
• Ideal if you plan to own a home short-term
• Fixed rate during adjustment period
• If interest rates fall, your rate falls too
• May allow you to qualify for a larger loan.

Cons

• Less long-term stability
• After the adjustment period, interest rates typically rise
• When rates are low, an ARM maybe the ideal choice if you know you won't be living in your home for a long time. However, a fixed rate mortgage can offer stability and long-term benefits that add up over the years. So think carefully and consider how long you plan to live in your home when deciding which rate to choose