Month: March 2013

There are few things more important to the process of financing a home than credit.
Better credit means more financing options and often better rates, which will save you money.
When you hear the term credit score, it actually means the middle of the three scores that lenders pull from three different credit bureaus.

The three credit bureaus are TransUnion, Experian and Equifax, and they are repositories of information sent to them by creditors, such as credit card and automobile financing companies.

A credit report is a representation of how much credit you have available to you and how well you manage it. Lenders want to know how you manage what you have now before they agree to lend you even more.

There are various components that make up your credit score. Two of the most important are:

Recent late payments

Lenders will look closely at this, thinking that if you are having challenges meeting your current payments, you perhaps should not be taking on any additional debt.

Balance-to-limit ratios

Even when you pay all your bills on time, if your credit cards are maxed out, lenders will see it as a sign that you need lots of credit to get through your daily life. Keep balances low – preferably below 25% of your credit limit.

Note that this doesn’t mean you should cut up all your credit cards. You need to have some open trade lines.

Many people believe that having no access to credit keeps them out of financial trouble. This is correct to a point, but you also need to be able to demonstrate to a lender your ability to manage credit, thus proving you are worthy of a mortgage.

Contact your mortgage professional, who can advise you on credit issues and your ability to get a mortgage.

When you shop for a mortgage, whether it’s for a new home or a refinance, you’ll soon hear about adjustable-rate mortgages (ARMs).

While ARMs definitely have their advantages, make sure you understand them before getting into one.

How ARMs work

All ARMs start out as fixed-rate mortgages. An ARM will appear like this, where the first number in the terms “3/1,” “5/1” or “7/1” denotes the number of years that the rate will be fixed. Usually the lower the number, the lower the initial rate.

The second number shows how many years before the rates can be adjusted once that fixed period has expired.

After this fixed period, the rate can fluctuate. The rate itself is made up of both fixed- and variable-rate components.

The variable component will be based on some index such as Treasury bonds. This is added to the fixed-rate component set by the lender when you determine your starting rate.

Your decision to obtain an ARM should be based on how long you plan to live in this home.

If you believe that you could be living there for a long time, you may want to consider opting for a fixed-rate mortgage.

The reason? If you have an ARM and have to refinance at some time in the future when rates are higher, you might find yourself in a fixed-rate mortgage with a much higher rate.

Talk to your advisor about whether an adjustable-rate mortgage is right for you.