Clean up information on your credit report

by Sally Lapides

WITH FALLING home prices, low interest rates and an incredible inventory of properties to choose from, you’d think buying a home these days would be easy - that is, until you try to get the financing.

Lenders have tightened their requirements, giving even the most credit-worthy borrowers a hard time when it comes to qualifying for a new mortgage or refinancing an existing one.

Understanding the intricacies of the mortgage market is hard enough in normal times. But when prices are declining, these difficulties are compounded.

As with all things, knowledge is power, so to better understand what the mortgage people are going to want to see, I sat down with Steve Tetzner from HomeStar Mortgage; he is my go-to guru for mortgage and finance questions.

Here are his answers to some of the financing questions that have come up recently:

Q: What is the best way to get financing when the market is tight like this?

A: Obtaining financing is not an issue for those who have good credit and can verify their income. FHA 3 percent down and RI Housing 100 percent financing is still available to those who have less than perfect credit or lower incomes.

Q: What steps can you take to improve your credit?

A: Clean up any derogatory information on your report; i.e., collection accounts and past due accounts. Make sure the creditor reports the information correctly to the bureaus. Maintain credit cards. Never close cards but always try to pay the balance in full each month. Having a lot of open credit with low balances will give the highest scores. The better the debt to available credit ratio, the higher the credit score.

Q: When is it a good time to refinance? Is now a good time?

A: Refinancing is a case-by-case answer. Whenever you can lower your rate and recoup the costs within about 18 months it may make sense. If you have an Adjustable Rate Mortgage (ARM), and you think you will be staying in the home longer than the fixed term of your loan, it may make sense to look at some longer term options now.

Q: Are people having trouble with appraisals; how has that changed?

A: Appraisal can be an issue. If you bought a home three years ago and put 20 percent down, you may not have that 20 percent equity position now. It could affect your ability to refinance.

Q: How do you negotiate getting the best mortgage?

A: Be a good consumer and shop three companies. Ask about rate and fees. Some loans may look attractive but be sure of what you may be paying in points or fees for that rate.

Q: Should people still be looking at Adjustable Rate Mortgages (ARMs)

A: Yes, some ARMs are good options. I would look at delayed ARMs, such as a 5/1, 7/1 or 10/1 ARM. The first number represents the number of years the interest rates are fixed before they adjust. Choose the ARM to your situation. Many people don’t stay in a house for 10 years, so why not take advantage of a lower rate?

Q: What about points?

A: I would almost never pay points on a loan. Points are up front interest in exchange for a savings some time in the future. Banks would always love to have your interest up front. Most people think it takes about four to five years to recoup points on a 30-year mortgage. The actual number is more than eight years and the savings are worth less in the future because the dollar is worth less. It is an example of inflation.

In this climate, sensible people could easily talk themselves out of buying. But history proves that over the long-term, home ownership is a smart way to invest your money. In any market, it is certainly wiser to own than to pay rent to a landlord. Homeowners become savers. Each time you make a mortgage payment, you’re saving money because each payment reduces your loan balance and builds equity.

Sally Lapides can be reached at slapides@residentialproperties.com.

Click here to read Sally Lapides' most recent article in the Jewish Voice and Herald.