This Simple Trick Can Keep Mortgage Paperwork From Becoming a Huge Hassle

Securing a mortgage requires a laundry list of paperwork. But there’s a way to simplify it.

Every year for your tax returns, you gather together paperwork such as receipts, explanations, paystubs and W-2s. Seventy percent of this information contains the same things you’ll need for getting a mortgage loan. If you do your taxes on time in April and save your documents in a secure, easily accessible location, you can use it to to support your application for a home loan later in the year.

In an encrypted thumb drive, round up all your “mortgage documentation.” (Just remember the password for the thumb drive and, of course, where you ultimately choose to store it.) Within the drive, make subfolders that have the following titles:

  • Tax returns: You can include all pages and schedules of personal returns and corporate returns. Mortgage tip: Make a PDF of this information for future use and store safely.
  • W-2s: same concept, but you’ll need the most recent two years.
  • Pay stubs: every time you get paid, download the pay-stub in PDF format onto the thumb drive and drag and drop it into the folder. It shouldn’t take too long and can save you a ton of time in the future.
  • Bank statements: every month when you pay bills simply download your bank statements in PDF format and similarly add them into the appropriately titled folder.

Be sure to delete any sensitive information that is not properly protected on your computer to minimize your risk should you accidentally download malware onto your computer or otherwise get hacked.

Doing the above things does create a bit more work on an ongoing basis, but it insures you are prepared. These documents can also help your applications for other types of credit in the future, including:

  • car loans
  • student loans
  • personal loans
  • home equity lines of credit
  • credit cards
  • any credit offers

Documentation planning will make the process of obtaining credit less of a scramble, keeping supporting documentation literally at your thumb tips. Save yourself from the need to go “digging.” If applicable, also have this information handy:

  • Your divorce decree: have the divorce decree including all pages, all schedules and the schedule of creditors in a saved folder.
  • Prior foreclosure documents: have the trustee’s sale date deed.
  • Short sale documents: have the final settlement statement from that transaction.
  • Alimony or child support paperwork: have the agreement paperwork.
  • Information on tax debt: have state and/or federal payment plan on file.

Requests for the documentation referenced in this article are consistent with today’s mortgage lending world. Be smart, be prepared and make sure you have the documentation ready before the lender asks for it to minimize hitting any snags.

Remember, too, your credit score will also play into your ability to qualify for an affordable mortgage. You can keep track of how your credit by viewing your free credit report summary, along with two free credit scores, updated every 14 days, on Credit.com.

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10 States Plagued By Foreclosure

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Have Mortgage Rules Made It Tougher to Buy a House?

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The “Know Before You Owe” mortgage rules that went into effect last October have slowed the homebuying process a bit, but overall it hasn’t made it more difficult — for buyers and sellers, anyway — according to mortgage adviser Casey Fleming.

“I have seen homeowners frustrated because the process took longer than they thought,” Fleming, author of loanguide.com, said. But buyers and sellers have extended their contracts “in every single deal that I’ve ever been involved in.”

Those delays stem from the new rules, which require additional paperwork and disclosures for lenders. The new, standardized forms spell out exactly how much a borrower must pay for closing costs and how much each monthly payment will be as the loan ages and potentially adjusts, right up until its term ends.

They’re great changes for buyers because they make the total cost of the mortgage very clear before they finalize the purchase. Lenders, however, have been “in a tizzy” over the changes, Fleming said.

“The problem is that there are very severe penalties (for lenders) for not getting it right,” Fleming said, offering an example of a lender who, because of a math error in determining the lifetime costs of an adjustable-rate mortgage — part of the new paperwork and disclosure rules — had to eat about $15,000 because of the error, even though it would have had no financial impact on the borrower.

In a nutshell, borrowers must now get the new standardized forms at least three days before closing on their loan. Before, changes could be made right up to and even during the closing.

Before the change, homebuyers received the “HUD-1 Settlement Statement” — short for the U.S. Department of Housing and Urban Development — at closing, when they were already busy signing dozens of forms. (Note: It was always possible to ask for a preliminary HUD-1 several days before closing and some mortgage lenders did provide advance copies.) The HUD-1 looks a bit like an accountant’s ledger or an IRS tax form. Borrowers were also presented with a separate Truth in Lending Act (TILA) disclosure.

Both the HUD-1 and the TILA disclosure have now been replaced by a single “Closing Disclosure” form. This form is still several pages long, but designed to be easier to read. The cover page includes clear representations of monthly payments, total payments, closing costs, prepayment penalties, balloon payments and potential interest rate changes during the life of the loan. Everything on page one of the document is a direct response to complaints about many practices that tripped up consumers during the housing bubble.

The rest of the document bears similarity to the old HUD-1, with borrowers’ details on one side and sellers’ details on the other. Late fees and other terms follow. There’s an easy-to-use interactive guide to the paperwork on the Consumer Financial Protection Bureau website.

While lenders are still adjusting to the changes, Fleming said the processes should be smoothed out over the next several months. Overall, Fleming thinks the clarity of the new rules combined with the easing of mortgage underwriting through lower down-payment requirements and mortgages becoming available for people with lower credit scores make it a very good time for buying a new home. (You can check your own credit scores for free on Credit.com to see where you stand.)

“I see homebuying becoming far easier and far more possible than it was before,” Fleming said. “And from a consumer perspective, these new rules — they’re not perfect, but I see them giving the consumers more confidence in terms of their decision-making process because they’re going to see what they’re really spending and not just looking into some murky pond.”

If you want to get an idea of how much home you can buy, you can check out this home affordability calculator.

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4 Credit Tips for Buying a Home

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This may come as a surprise, but you don’t need a perfect credit score to buy a home or get a mortgage.

In some cases, your credit just needs to be sufficient. Good, bad, ugly or indifferent, as long as your credit score matches the criteria of the mortgage size and property type you are looking for, you may be able to get financing.

Here’s a quick cheat sheet of the top three most commons mortgages and their basic credit score requirements.

  • Conventional loans. You generally need a credit score of 620. However, anyone with a 620-679 credit score should expect to pay higher interest rates and fees.
  • FHA loans. You’ll generally need a credit score of at least 600. There are lenders that do FHA Loans with credit scores as low as 580, but it’s going to come at a cost. Expect the lender to go through your file with a much finer-toothed comb if your score is at 620 or below. Conversely, if your credit score is 620 or higher, not only will you get better rates and fees, but you’ll also have an easier loan process.
  • Jumbo Loans. You’ll generally need a credit score of at least 680. You will also generally need at least 30% equity when buying or refinancing a home. A 700 or better score yields better rates and terms and requires less down (possibly as little as 20%).

Of course, a good credit score generally helps you net better terms and conditions. You can check two of your credit scores for free each month on Credit.com to see where you stand. If you have some credit challenges preventing you from getting a mortgage with competitive rates and fees, here are some strategies straight from a mortgage pro that could improve your situation.

1. Pay Down Debt/Rapid Re-Scoring

Some mortgage lenders have a credit doctor service, known as rapid re-scoring, available through their credit reporting company. This service allows them to run statistical credit modeling: the lender plugs in a certain credit score needed, an algorithm analyzes your complete credit portfolio and outlines what can be done to get you to that aforementioned threshold.

Oftentimes, high credit utilization (the amount of debt you are carrying versus your total available credit) is the culprit for a low score. In those instances, paying down certain credit accounts could make you more creditworthy — and mortgage eligible — within short period of time.

2. Time

If buying a house is a longer-term goal, time can be your friend. Credit history is a large component of a healthy credit score. Make your payments on time, keep the amount of debt you are carrying low and avoid late payments of any kind. These smart spending habits show that you are responsible with your obligations and will bolster your credit score eventually.

3. Quit or Resolve Disputes

In order to get a mortgage, you generally cannot have any accounts in dispute on your credit reports. At the same time, simply removing a dispute from your credit report can make your credit score drop. The reason? Credit scoring models generally ignore information being disputed, like an account with a late payment, which would otherwise hurt your credit score.

In order to circumvent these problems, work to resolve any disputes. (You can find more about getting errors off of your credit reports here.) You can also consider handling any issue you may have with a lender directly in lieu of filing a formal dispute with the credit bureaus. Here are some tips for negotiating with creditors.

4. Put More Money Down

Putting more money down to buy a home could put you in an entirely different mortgage category and help you bypass certain credit scoring problems.

Remember, if you have been told “no” by a bank or lender, you owe it to yourself to get a second or third opinion. What’s more, your credit score could improve from month to month, depending on what’s holding you back, so keep an eye on it in the meantime.

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Do You Understand Your Mortgage’s Fine Print?

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When shopping for a mortgage, it’s critical to have a general understanding of how points affect your mortgage rate and payments, and ultimately connect to your bottom line. Below are some guides to help you identify your net tangible benefit on a home loan.

Points

When you pay points, you are paying a premium to buy the interest-rate down, thus lowering your monthly mortgage payment. In most mortgage scenarios, you have the choice to pay this point based on the interest rate, and other times you might not due to factors like loan-to-value, loan size, loan program, loan purpose, property occupancy or credit score.

A point is essentially1% of the loan amount. Also referred to as mortgage pricing, points can change daily until you lock in your loan rate. Some lenders allow you to lock your rate up front while others require your loan to be underwritten or have the home appraisal ordered prior.

No Points

This is the most common scenario for buyers, but your financial goals should dictate your decision. If lower interest rates over the life of the loan are better for your situation, paying points might be worth considering.

Basis Point Credits

When a particular interest rate generates an overage, a premium is paid back to you and applied toward closing costs. Here’s how it works:

Let’s say you’re looking at that 30 year fixed rate at 3.75%, but you want no points. The next day mortgage pricing deteriorates by 25 basis points making the rate 3.75%  at .25% charge. If the 3.75% rate improves by .25% then that would be a credit as a function of your loan amount to pay the closing costs .

Mortgage Tip: Anytime you’re seeing a mortgage rate with any form of credit, it is based on the rate chosen for specific day in real time. Always review APR as the benchmark cost measure.

Determine Rates and Fees Consistent With Your Financial Goals

Ask yourself:

  • How long will you keep the loan or property for?
  • Do you plan to buy another property?
  • Is retirement around the corner?
  • Do you intend to pay the mortgage off in full?
  • Do you want to pay dollars today to line up the future?
  • Are the figures available based on your financial pictures consistent with any other goals you may have?

If you are uncertain about your short- and long-term financials goals, taking a conservative, low-cost, low-payment loan is usually a sound bet. An experienced mortgage professional can help you weigh costs versus benefits to determine which rate and pricing scenario best suits you.

Looking to get a sound mortgage loan? Get a free rate and cost offer online now!

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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