Credit Requirements For a Home Loan

So, the market has dropped and now home prices are getting to the point where you can afford to buy. Congratulations, that's fantastic! What do you need to buy a house? Well, here's the basics.

Before you start shopping, make sure you are going to be able to get financed. That means pre-qualifying. Because of the condition of the market, many sellers are now requiring pre-approval from a direct lender. Usually, they will have a specific company and a specific rep that you need to qualify with.

Personally, as a real estate agent, I think it is utter crap to force my clients to cross qualify with the seller's agent. Why? Because, it isn't just to make sure your client is going to be able to close the deal, NOOOOOO! It's hard sell, offer the world and steal the client that you've been busting your butt to find the right property for. And, you either are a loan officer as well or you work with specific lenders you have built a relationship with, to get your clients pre-qualified. Basically, they are trying to capture the loan and steal your commission.

Another reason why I don't like the stipulated cross qualifying, is because if your client is getting FHA financing, they don't give pre-approvals!! They have to have an accepted offer and some other legal stuff to give the pre-approvals. Not all clients are going to qualify for that direct lender the seller is insisting on.

However, you still have to be pre-qualified so that your agent will show you houses you can afford. So again, what are you going to need? Here you go:

• 2 years tax returns - the whole shabang; all schedules; W-2's and/or 1099's
  
• Most recent month of pay stubs
• Last 3 months bank statements, all asset statements (IRA, stocks, investments, etc.)
• Copies of all business licenses
• Home address with landlord information for past 2 yrs
• Employers name, address (last 2 yrs)
  
• Loan info and lease agreements for all real estate owned.
• Clear copy of government issued photo id and SS card
• A tri-merge credit report

Now, these are things the lender is going to need to issue the approval and loan docs. However, what condition does your credit need to be in?

You need a minimum of 580 FICO score for FHA financing. Most lenders want to see upwards of 680 FICO scores and most banks won't lend you squat if your FICO is under 720. This means that you have to have fairly decent credit.

You need at least 3 trade lines - lines of credit. One should be an installment loan, such as a car note. For FHA, you CANNOT have any collections (medical excepted). NO judgements, NO liens, NO unpaid student loans that are not in deferment. You may not have had a BK for 2 yrs from date of discharge (or filing for dismissed bk). Any derogatory will need a letter of explanation. You may NOT have had a foreclosure in the last 3 years.

Now if you qualify for FHA, you will also qualify for down payment assistance (DPA). However, you still need closing costs, unless the seller agrees to assist there as well. But, when buying an REO, they will want you to cover their closing costs and yours, and will only credit 3% for closing costs.

You will need extra money because FHA has a mortgage insurance premium that is paid up front and an extra .5 percent interest on your loan. But, you can get in with 3% down, and that can be gifted. I usually figure with down payment and closing costs for an FHA insured loan, my buyer needs about 8% total. So, that's what I figure when I request DPA.

Don't forget the good faith deposit. Usually it's about 1% of the offered purchase price from the buyer. That can be applied toward your down payment or your closing costs.

So, get your credit cleaned up, score raised and start shopping. Oh, I need to warn you. When you find that perfect house at a great price, you do not have unique tastes. Every other real estate agent showing properties in that area has a client that thinks that house is perfect. Your offer is going to be one of several to oh, maybe, 35-40 offers, all offering wayyy over the listed price.

The offer with the best loan terms, best credit has the best chance. It is not always the highest price. Strong credit, decent down payment, fair offer will get you the invitation of best and final or bank addendums! Hurray! You're going to be a homeowner!