Washington Mutual Wants to Help You Buy A Home

Before you apply for an actual mortgage:

1. Check your credit.  

You can go online or call the three credit bureaus directly. Most states will give you a free credit report, however, you want one from each of the three major credit bureaus, along with the score, because your credit score can vary from bureau to bureau. A creditor may only be reporting to one of the three credit bureaus.  

The three credit bureaus are:

Your credit should be clean of any judgments, collection accounts, charge-offs and latenesses. Yes, you can get a mortgage with any of these on your credit report, but you will probably pay a higher interest rate, which can equate to thousands of dollars over the years. If you have credit issues, settle or pay them off first, and be sure to keep all receipts and correspondences. Do not assume that just because you paid the bill, that the creditor told the bureaus. An outstanding judgment or collection account can cost you on average 40-points on your credit score. Follow up with the credit bureaus to make sure all is updated on your report. And you may need to re-establish good credit. Remember, you are not trying to carry debt, just establish good credit. You may want to charge simple things like gas for your car or small items that you can pay off immediately just to prove that you can handle credit.  

Here are some simple suggestions to improve your credit:

1. If you have difficulty remembering to pay bills on time, sign up for on-line bill pay and set up your accounts with recurring bill pay, even if it's just minimum payment. This will ensure that your payments are made on time. A single late payment can equal up to a 40-point credit score deduction.
2. Try to avoid maxing out your cards or applying for new credit cards right before you apply for a mortgage since that can also lead to credit score deductions. Also, avoid allowing too many people to check your credit unnecessarily; you can be hit with inquiry deductions.  
3. Avoid going to a Debt Consolidation service - it can be viewed as derogatory credit, even if you make all of your payments on time.
4. You don't necessarily have to close all your credit lines to make the bank more comfortable lending you money. Again this is something to discuss during pre-qualification since the strategy is different from person to person. Check out www.myfico.com for more helpful hints.
5. Hold off making large purchases like a car, new furniture or long vacations if you know you want to purchase a home in the near future. A new car payment can definitely diminish your purchasing power.  

2. Get pre-qualified. Take the mystery out of the home-buying process.

3. Create a realistic budget and stick to it.    

Once you think you are ready to start looking for home,

1. Get pre-approved.  

You are going to need a Pre-Approved Letter of Commitment so you know exactly how much you can afford to spend on a house.   Most realtors won't show you homes if they think you are going to waste their time.   In some cases, realtors, sellers and attorneys won't allow you to enter into contract negotiations unless you have been pre-approved.  

2. Start creating your team.    

You are going to need a good real estate lawyer that specializes in your particular type of transaction and you don't want to wait until the last minute to start looking for one. (It isn't required in every state that you have one but it's always in your best interest.) Ask around and check out their references. If they don't respond in a timely manner or seem like they don't have time for you when you call, keep looking. Anything can happen during a real estate transaction and you want to be prepared.

Look for a good certified housing inspector that is registered with ASHI, American Society of Home Inspectors, especially if you are looking to buy an existing property. They are highly trained and will see things that are not obvious to the untrained eye.  

There are three basic phases for getting a mortgage:

Phase 1:   Pre-Qualification: If you have any desire or interest in getting a mortgage anytime in the future, whether it is weeks away or years away, get pre-qualified so you know where you stand. You'll find out how much you can afford, if you have to save more money or correct any credit issues. Usually the process is for a nominal charge or free.   

A good loan consultant will sit, listen and ask many questions so they can assess where you are financially and what it is going to take to get to homeownership.  

Phase 2: Pre-Approval: Once it is established that you are ready to look for a home, you will usually need to have a pre-approval in order to receive a formal Letter of Commitment from a bank so you can start shopping. Most realtors require it so they will know what houses they can show you. Some lawyers will require it before you are allowed to go into contract negotiations.

The loan consultant will create a hypothetical situation to determine how much you can afford. It is important to know at this stage what type of property you are interested in and where you hope to buy.   Property taxes vary from neighborhood to neighborhood and maintenance fees can vary greatly between condos and co-ops.     

To complete this process, you will need at least the basic documents.  

• 30 days of your most current pay stubs
• 60 days of bank statements showing all the necessary funds for the transaction (closing costs are different from state to state and property type)
• Last two years of W-2s.  

Banks will pull up their own credit report. Other documents may be required depending on the situation. Once they have all of the necessary documents, they package the loan and send it off to underwriting for approval. Depending on the situation, some banks may be able to give you pre-approval by the end of the interview.

Phase 3: Live Loan: Exactly the same as a pre-approval but this time, there is an actual subject property and an actual contract of sale. They will also figure out which loan program is best for the borrower and their specific situation. A single person who knows they will be moving out of their studio co-op in the next 3 to 5 years may be offered a very different loan product as oppose to a growing family that stated that they want to stay in that particular house for the next 20 years and raise their children.

All information is verified and confirmed. A new Letter of Commitment will be issued; this time it will have the address of the subject property. The Letter of Commitment may have conditions that have to be satisfied prior to completion of the transaction, also known as a Closing. A good consultant will guide you step by step.

During each of the three phases, the lender is pretty much looking for the same 4 requirements, which we will call the 4 C's:    

• Credit - One of the best ways a lender can tell if you will repay your mortgage is to look at how you handle your other debts. Lenders are paying particular attention to your credit history for the last 12 months prior to applying for a mortgage. Alternative credit is sometimes acceptable if the borrower doesn't have established credit like credit cards, for instance, receipts for rent, utility bills, cell phone, home phone, etc.  
• Capacity - Lenders need to see you earn enough income to repay the loan. They are looking for three things. They first look at your current gross income. From that, they will calculate what percentage, also known as a ratio, you can afford to pay and still live comfortably. The ratio will vary with the loan program and property type. Next, they are looking for stable work history for the last two years and probability of future employment. Other income can count as well, such as child support, social security, rental income from the proposed property, but requirements are different based on each situation so please bring this up during pre-qualification. Another important factor that the lender is looking for, is how much debt you have and the minimum payments. The lender will go through your credit report to determine your total recurring monthly debt to see how much of a mortgage payment you can afford. Some borrowers may be asked to pay off some accounts, some may be asked to open more credit accounts to re-establish good credit. Every situation is different and this is why pre-qualification is so important. It will allow you the time, if needed, to correct any situation.
• Capital - The amount of cash available for the transaction is your capital.   Lenders will ask you to prove how much cash you have and where it came from.   You will need to show that you have at least enough capital to pay for the following:

1. Down payment
2. Loan fees
3. Closing Costs (varies from state to state and transaction type)
4. Escrow Impounds (Advance payments for property taxes and insurance)
5. Reserves (At least two months of mortgage payments)

There are different programs available for low-to-moderate income borrowers that are purchasing for the first time that can assist with down payment and closing costs through grants and gifts. It varies from state to state so be sure to check with your local non-profit and community lender to see what is available.

• Collateral - Lenders will determine the value of the property by performing an appraisal. Some lenders do not accept appraisals performed by individuals that they have not certified personally so be careful. Also, lenders will lend against the appraised value of the home or the sales price, whichever is lower.   Be sure to discuss with your attorney all the possible scenarios that can occur.  

Here are other suggestions:

1. Here's a test to see if you can really afford a higher housing payment: Open up a separate checking account and deposit whatever is the predetermined complete mortgage payment (Also know as the PITI payment = Principal, Interest, Taxes & Insurance) into the account sometime between the 1st and the 15th of the month and the only money you can withdraw is the rent payment and if applicable, renter's insurance. Nothing else. If you are comfortable making the payments after several months, then you will know can move on to the next phase. The money you saved in that account can be used for a down payment. If you're not comfortable, then you might want to consider other property types or less house.
2. One of the big decisions a borrower must decide on is if what the lender is offering is TOO MUCH based on the borrower's life style. The lender can't always determine the borrower's life style based on the documents presented at the application or through the credit report. It is very important the borrower create a budget that includes everything, like their children's private school, the babysitter, after school program, expensive gym memberships, expensive hair & nail maintenance, gas for your SUV, expensive car insurance, Friday-nights-out-with-the-boys, etc. Create a realistic budget and do your best to stick to it.   Definitely allow for "play" money because if your budget is too strict, you might get frustrated and you might find yourself sabotaging your own goals. To help determine your budget, get a little notebook and write down every single expense you may have, and be sure to include all of the small stuff like coffee, gum, a newspaper or a movie. You may find there are a lot of little expenses that you can't forgo while you are saving for the down payment, and you may need to decide on less house or a different neighborhood.
3. It's not if something happens, it's when ... it is sometimes more important to have savings (at least 2 months reserves) than to have little or no debt, so be sure to ask during your pre-qualification which applies to you. I have had many borrowers say they pay far more than the minimum payment on their credit cards but then have no savings. That might turn into a situation of concern because if the borrower goes into hardship or has any unforeseen expenses, (like a sprained ankle, death in the family, a leaky roof, broken window, etc.) they may not survive if they don't have any savings.  

It is also highly advisable that the prospective borrower take a 1st Time Homebuyer's class at either one of the non-profits or a community lender so they have a good understanding of what the banks are looking for. If you are planning on purchasing property that will allow you the opportunity to become a landlord, it is highly advisable are you take Landlord Counseling, whether the bank requires it or not. Laws are different state to state so be sure to take the class in the state you are buying the property in. In NY, HPD has wonderful FREE classes on all sorts of real estate related topics, just dial 311 or check out www.nyc.gov/hpd. There are also great classes on simple home improvement and maintenance that are given at the local home improvement centers, as well as non-profits that can save you time and money.

~Miriam E. Perez, VP
Home Loan Center Manager - Brooklyn 2
Washington Mutual Home Loan Center
900 Fulton Street, between Waverly& Washington Avenues
Brooklyn, NY 11238
(718) 398-5307 Phone
(718) 398-5320 Fax
E-Mail Address: Miriam.Perez@wamu.net
Website: www.wamuloans.com/miriam.perez