Money Does Matter

It really will help if you choose the optimum time to apply for your mortgage, and not just when you have decided you want to buy a home. This is generally true, but you can improve your chances of obtaining a mortgage by timing some important steps.

Let’s look at the reasons this is so. To understand the issue, you have to understand a little about credit ratings. You may not be at a point to be concerned about your credit rating, but once you start looking for a home loan, you will. Taking any steps to better your credit score will make a major difference in getting a home loan.

If you have reached a point in your life where you have decided to buy a first home, or have outgrown a home and need to shop for a new one, putting off some decisions and changes may make a big difference in your credit rating.

We have to realize what influences the credit score. The credit score is the judgment, expressed in a number, by a credit rating agency about how good a risk a borrower is. Some items have a lot of influence in the calculation of this rating.

A potential borrower can attempt to improve some or all of these in order to improve his chances of obtaining a mortgage. What are those factors?

Your bill paying history is really important, and you can start improving that immediately. This is not to say that your old history will not have an impact, but if a lender sees that your recent transactions reflect a history of on time payments, this will have a good influence.

Do not open any additional credit accounts when you are getting ready to apply for a mortgage. Even lines of credit that have no balances are frowned upon by bankers because of their potential for abuse. Even though you are offered great deals such as 0% financing or store discounts with the opening of a new account account, avoid this temptation because it may harm your credit score.

Too many outstanding credit card balances will also have a bad influence your credit worthiness, so now is the time to cut back and stop purchasing and start paying off credit card debt.

If you have any control over the decision, avoid changing jobs at this time. Length of time in a position is a major component of your credit rating, since a lender thinks you have a better chance of continuing income. In a new job, you may be the low man on the totem pole and the first one to be let go in a downturn, making it difficult to pay bills.

You may have some decision over when you retire, and this can help in your loan application.

Lenders prefer to see a steady paycheck to make the mortgage payment. Apply for your mortgage while you are still working, and then begin the retirement process.

Some of these steps may be simple for you to do, but others may not be at all possible, but any improvements you can make will help your credit score and mortgage application.

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In addition to all of the other decisions you have to make when you are choosing a home loan, such as whether to go fixed or floating rate, how much down payment to make and how many points to pay, lenders have further complicated everything by offering a wide range of choice of indexes for ARMs (adjustable rate mortgages).

The index is the underlying instrument that is used as a basis for the adjustment of the mortgage rate. Various indices are employed, including government treasury instruments, the Fed Fund rate or LIBOR.

The basic concept of an ARM is that the interest on the loan is adjusted up or down, on a periodic basis, based on a chosen underlying interest rate that is indicative of interest rates in general. If your ARM is tied to the CD rate, and the bank’s CD rate increases, your interest rate will likewise go up. ARMs have rate adjustment caps, so that the rate on your home loan will only go up at certain intervals (every three or six months, for example), so that when the CD rate goes up, you may not have an increased rate for a few months, if your rate just adjusted recently. But be aw are, however, that if you just readjusted at a higher rate, and your index rate goes down, you are stuck with the higher rate until the next adjustment period.

ARMs can be tied to any number underlying instruments, for example the 90 day U.S. Treasury Bill. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. LIBOR, the London Interbank Offered Rate, is another popular index, and is the rate used by international companies to borrow.

Which is the right choice depends on your own circumstances and your view of where interest rates are heading. Adjustable rate mortgages that use CDs as the reference rate tend to change more quickly. Adjustable rate mortgages that use T Bills will change more slowly. LIBOR is the index that moves the most frequently and the most rapidly, so if you want to take frequent advantage of the downward level of lowering rates, this is the one for you.

As we said, new products are introduced each day, and one of the newest it the option ARM, which allows the borrower to choose how much he wants to pay on his home loan each month. The options that are offered are interest-only payments, and a lowest possible payment that can’t be less than the interest-only payment. There is a real danger in option mortgages that the loan will end up with negative amortization, which means the mortgage balance goes up instead of decreasing as it normally would.

This is a lot of information for the borrower to digest, and the best solution is to talk to a professional mortgage broker who can explain it all and recommend the best solution for you.

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