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Ask Susan Responses
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Loans: Mortgage Loans |
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More Ask Susan |
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A mortgage loan representative has asked me to prepare a "credit explanation letter." While I understand the concept of this letter, I'm not quite sure what the content should be. And, because this letter will carry such weight with the underwriters, I am looking for suggestions for making this letter "good" in their eyes. Can you provide any tips? Thank you in advance for your consideration.
-Hope |
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Dear Hope,
A mortgage is the largest loan most people will ever have. Obviously, the lender wants to know that you can pay it back. Your lender requested the credit explanation letter to determine if past credit problems were due to negligence on your part or due to circumstance beyond your control.
When giving your comment, be concise and honest. If the circumstances that caused your blemish were beyond your control, give a brief explanation as to what happened and the steps you took to rectify the situation. If the derogatory notation was due to your negligence, tell them that you understand the importance of maintaining an excellent credit rating and have since striven to pay your bills on time.
Good luck!
The Advice Team
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I am 25 years old, make $36,000 (gross) between two jobs and have good credit. I want to buy a condo in one year and want my credit profile to be as strong as possible. I've heard that having too much credit can be a negative. I have $54,000 available between six major credit cards which I have had in good standing all for between three and seven years. I have no balance on any of them. I paid them all off last month. My question is, should I close some of these out and if so how many? I appreciate your advice. - Mel |
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Dear Mel,
I would talk to a mortgage lender before making any decisions.
It is true that when making lending decisions, creditors sometimes consider your “propensity to owe.” This means the amount of debt that you are able to incur if you were so inclined. For example, the mortgage company might look at your $54,000 available line of credit as $54,000 against your debt to income ratio calculating it as if you did have $54,000 in debt.
With that being said, closing accounts could shorten your credit history.
If you do choose to close some of your accounts, be sure to make the request in writing and ask them to send you a letter of confirmation. Don’t leave it until the last minute; you’ll want to allow time for your credit report to reflect the changes.
Good Luck,
The Advice Team
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I am trying to buy a house. I had several credit card accounts that have been charged off. Do I have to pay these charges before a morgage company will give me a loan to buy a house? -Charlotte. |
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Dear Charlotte,
Derogatory information, such as a charge off, stays on your credit report for up to seven years. As long as the charged off accounts appear on your credit bureau file, a mortgage company will probably require you to make arrangements to pay off these accounts before they will approve you for a mortgage loan.
However, if the accounts do not appear on your credit bureau file, you should not have to repay the account before you will be considered for a mortgage loan.
The Advice Team
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I have 20 years left on a 30 year mortgage ($60,000) at 8 percent interest. I recently inherited enough money to pay off the mortgage and still have a little money left over. Should I pay off the mortgage? -Natalie |
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Dear Natalie,
What a great problem to have!
There isn’t one “right” answer to your question. You have a lot of options available. Whether or not you should pay off your mortgage depends on your overall financial picture. Do you have other debts with higher interest rates to pay? Do you have an emergency savings fund? Is your retirement savings adequate? Is your home located in an area where real estate is a good investment?
You may want to consider meeting with a financial planner to help you make a sound decision.
Good luck,
The Advice Team |
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I was divorced eight years ago. My ex-wife received the marital home in the property settlement along with responsibility for the payments. She runs consistently late on the mortgages. I am on the original note and the banks won't take me off. Now my new wife and I cannot get a loan to buy a home of our own. I want to take legal action but I don't know what can be done. I have otherwise perfect credit. If my ex hangs on to the house for 15 more years, then that's how long it will take before I can buy a home of my own. Pretty fair, huh? -Ray |
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Dear Ray,
Even though a judge “awarded” your wife the home and its payments, the lender still views you as responsible. When you and your ex-wife purchased the home, you both signed mortgage documents stating you both would guarantee that the payments on the house would be made according to the terms of the note. There was nothing in the contract relieving either one of you of this obligation in the event you got a divorce.
You will need to visit with an attorney to determine if there is legal recourse you can take to resolve this situation.
The best solution might be to convince your ex-wife to move or to refinance the home under her name. Until that time (or until the mortgage is paid in full), you might be able to buy a home by assuming an existing mortgage or seeking owner financing.
Good luck,
The Advice Team
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I will be returning back to the states in December and will be starting the process of looking for a home and I have a couple of questions for you.
What exactly are "points" and how are they accumulated?
What would the effect of "slow credit" have in being considered for a loan?
Would a mortgage lender extend our loan to include our debts if they are not of the credit card type?
Our debts are mostly that of bounced checks, CD companies, car payments, and way overdue utilities (phone, cable...) -Martelle |
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Martelle,
"Points" is another way of saying percent. In real estate terms, they might say you have to pay one point. That means you have to pay one percent of the amount you want to finance.
"Slow credit" could prevent you from getting a mortgage loan approved.
No, you probably cannot include your other debts in with a mortgage loan. It is unlikely that you will find a mortgage company to make you a loan for the full value of the house. Therefore, in addition to paying off your debts, you should start saving money for a down payment.
The Advice Team |
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My boyfreind and I plan to buy a house in the next nine months. I will relocate to the state he lives in. He is about $40,000 in credit card debt. I will sell my home and expect to make $20,000 from it. What is the best way to: 1) Handle his credit card debt and 2) Apply for the new mortgage? -Crystal
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Dear Crystal,
Before you blend your finances with your boyfriends, ask yourself if you are sure that the relationship is ready for this step. Please do not be offended, I am not suggesting that you don't love each other. I only ask because so many people write to me each month because they got into a situation with a boyfriend/girlfriend that ended in financial disaster.
An alternative might be for you to purchase a home in your name, using your money as a down payment. Your boyfriend can "rent" from you until you are married. At that time, if it makes financial sense, you can refinance the mortgage together.
This would also give your boyfriend time to repay his debt and improve his credit rating.
Regardless of what decision you make, I sincerely with you both the best of luck.
The Advice Team |
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Over the last year, I have been working my way out of $20,000 of credit card debt. I still have about $12,000 left to pay, but through diligence and frugality, have managed to pay off a hefty chunk already. I fully expect that within a
year I should be debt-free.
I want to look into purchasing property and am curious how my debt will look to mortgage companies. Is it ridiculous to approach the mortgage process while there is still $12,000 of debt to pay off?
-Lizzie |
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Lizzie,
When applying for a mortgage loan, the mortgage company will look at your overall "debt-to-income" ratio. For a typical government backed loan from the Federal Housing Administration (FHA) or the Veterans Administration (VA), the lender likes to have about 33% of your gross income available for a mortgage payment, which includes principal, interest, insurance, taxes and assessments. For example: gross monthly income of $2,000 multiplied by 33% equals $660.
Your mortgage payment, plus your ongoing debt (credit card payments, car payments, student loans, child support and so forth,) should be no more than about 38% of your gross income, or you are getting into expensive trouble. For example: gross monthly income of $2,000 multiplied by 38% equals $760.
However those ratios vary by lender. Some lenders may have higher or lower ratios. Your best course of action is to check directly with a mortgage lender or mortgage broker.
By the way, great job on paying down that debt!
The Advice Team |
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Two years ago we were notified of a tax lien for state taxes from a previous business that went bankrupt. We make monthly payments on this in the amount of $200 per month. The amount never seems to decrease and the lien is on our credit report. Is there any possible way to get a mortgage even though we have the lien? Signed, Mark |
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Mark,
You probably will have difficulty getting a mortgage loan as long as you still have this tax lien outstanding. Most mortgage companies insist all derogatory reports on your credit bureau file be resolved before they consider you for a loan.
What you could do is contact a Realtor and explain your situation to the Realtor. Realtors stay on top of mortgage company requirements to qualify for a loan. The Realtor just might know of a mortgage company that might consider you for a loan despite of your tax lien. It's worth a try. Good luck.
The Advice Team
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