WHAT YOU MUST KNOW ABOUT YOUR 
CREDIT BEFORE BUYING A HOME

Sometimes being approved for home buying can be difficult however, there are things you can do to be approved.

One of the greatest obstacles with home buying is having less than perfect credit. Credit is a huge advantage when buying a home so if you do have bad credit, before you start into the home-buying phase, take time to get copies of your credit report from the three main reporting agencies and cleanup discrepancies. Keep in mind that this effort can take years so be prepared to spend some time getting it in order.

There are things you should know before you venture out to buy your home:

· Payment history - No matter what type of loan you apply for, one of the first things any lender will look at is your payment history. If you have made payments on time and even paid off loans early, that's a bonus.

· Create a budget - This is highly recommended and will help you prepare for a home loan as well as keep you on track once you've purchased your home. If at any time you run into a problem and start to fall behind in payments, it's very important to contact your lender to let them know. In almost every case, the lender will gladly work with you to keep you from losing your home.

· Credit Counseling - Sometimes people set up budgets with the best intentions but then slip off their schedule. There are credit counseling services that can help by setting up payment plans to help you stay on budget or get you out of debt. Lenders don't want you to lose your house no more than you want to lose it. Not all lenders will work with credit counseling services, but it's always an option to ask for.

· Bankruptcies, tax liens, and foreclosures can haunt you for years. Most stay on your credit report for up to ten years and can have a negative impact on purchasing a home. However, if you stay up to date on payments for two to three years after running into one of these situations, with a strong letter of explanation and the proof that you've been working to stay on target, lenders will work with you. It may take a little more work, but it is possible.

· Debt Consolidation - This is another option for reducing your debt to buy a house. In this case, the balance of your debt remains the same but companies are willing to lower interest rates, which do two things - they help lower your outgoing monthly payment and, they lower the overall balance you will be paying. If you have a lot of debt and need to bring your debt to income ratio down in order to qualify for a house, this might be a consideration. The normal ratio is what's called "28/36",meaning lenders believe you cannot spend more than 28% of your gross income for housing expenses and that the total amount of debt payments cannot exceed 36% of your income for a normal 10% down payment loan.

· Flexible Guidelines - Lenders are becoming more and more flexible as a way of getting people approved for home loans. The way they do that is by allowing a greater percentage of monthly income to be used toward the mortgage payment.

· Pay-off Options - If you plan to pay off some of your debt prior to applying for a home loan, consider going after the ones with the highest balances first. Although it's nice to pay off credit cards, available credit puts a person in risk of recharging after the home loan goes through and may actually hurt you in the approval process.

· Near Pay-off or Minimum Payment- If you are close to having a loan paid off, often times a lender will overlook this debt when looking at the ratios. In addition, lenders don't look favorably at loans where only the minimum payments are made.

· FHA Changes - Recently the Federal Housing Administration, FHS, has created new mortgage programs for potential homebuyers. This means that single-family closing costs can be 100% financed where the borrower doesn't have to come up with so much money to close the deal.

· First-time Homebuyers - There are new programs with the Federal National Mortgage Association, Fannie Mae, to help first-time homebuyers, which allow for slightly more debt when qualifying for a loan, and raise the percentage of gross monthly income that borrowers can spend on housing payments.

· Affordable Interest Rates - This helps more people qualify when buying a new home or larger home, as well as lenders providing more attractive mortgage offers.

· Computer Programs Rate Borrowers- A computerized system called "credit scoring". This new way of assessing one's ability to qualify for a loan still relies on the same information but this new systems helps determine who will default on a loan. To do this, a numerical score is assigned to each factor and then calculated.

The bottom line is getting your credit in order and asking your lender for options.