How Using Your Latest Paycheck for a Down Payment Could Stall Your Mortgage

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Are you saving up a down payment to buy a home? Here’s something you need to know: Your paycheck can work against your down payment-savings plan if you aren’t careful.

Buying a home requires precision planning, good income, good credit, manageable liabilities and a healthy down payment. Having as much as 3.5% of the purchase price can be a big factor for many families looking to get their piece of the American Dream. In some areas, it can be best to put down 20% of the sales price of the home.

Not all the money you save is created equal, however, and here’s why. When you save money from your paycheck (a good idea for personal financial planning in general), that money is not automatically eligible to be put toward purchasing a house. It’s called income from assets, and income from assets in the world of mortgage lending is frowned upon.

For example, let’s say you receive your paycheck and your net earnings is $5,000. That $5,000 must be in your bank account for a period of 60 days in order for that money to be considered what’s known as seasoned. The bank wants to see you had the ability to save the money on your own volition rather than depositing your income for cash to close. If you are currently in contract to buy a home, these funds, if needed, could delay your closing date. If you are not in contract, plan on keeping these funds in your account for 60 days if you intend to use them.

Using income for a down payment may might not seem like a big deal in the grand scheme of things with all the other aspects that go into buying a home. However, it will be looked at closely by the bank’s underwriter. Your cash to close can very easily set off a bank’s radar if you’re using every last hour you can to get your foot in the door.

If cash is your obstacle to buying a home, you have options. It may mean waiting to put an offer on that house until you have enough money in your bank account or writing a longer contract. Remember, every seller has different motivations and timelines for selling. You will need to plan with your lender to have the funds ready to go, then write the contract to make your home-buying plan a reality.

Also keep in mind that mortgage lenders like to see good credit among applicants, so it pays to know where you stand before you apply. Good credit can also open the door to better rates and more affordable monthly payments. You can view two of your free credit scores, updated every 14 days, on Credit.com.

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Will Applying for a Mortgage Tank My Credit Score?

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If you are hesitant to apply for a mortgage because you think your credit score will drop dramatically each time you fill out an application, think again. Here’s what really happens when you apply for a mortgage and your credit is pulled.

When you apply for a mortgage, you must have your credit checked. It is the only way a mortgage company can really determine whether you can qualify for financing and what your rates and fees will look like.

If you are applying for multiple forms of credit at the same time, such as a credit card, a mortgage and an auto loan, such actions will negatively impact your credit score. Each of these applications will generate a hard inquiry on your credit report, which could send a signal to lenders that you are having difficulty managing credit.

But you can avoid extra damage to your credit score if you apply for one form of credit at a time, and limit the time between each credit inquiry. That’s because most credit scoring models group credit inquiries for the same type of financing (mortgage, auto or student loans) that are made within a specific timeframe to allow people to comparison-shop for competitive rates. It can vary from model to model, but, in most cases, all inquiries of one of those types will be counted as one, provided they take place within a 14- to 45-day period

A single inquiry is likely to drop your score by less than five points.

When Credit Shopping

Remember, there are lots of different credit scores out there. Different lenders use different models and there can be variations from score to score. For example, the credit score your auto lender looks at might be 740 while the score your mortgage company looks at could be 720.

And each creditor you do business with reports to the bureaus at different times of the month. So it’s normal for your credit score to be different from one month to another, too, simply because of when your creditors sent their report.

Small variances, caused by inquiries or otherwise, may not be a be big deal, given the way mortgage rates are determined.

If your credit score is higher than 700 to 740 and drops two or three points because of a credit disparity, there may be nothing to worry about. Similarly, if your credit score is anything from 660 to 699, it’s not going to cause much change in your mortgage rate and pricing on conventional and Federal Housing Administration mortgages.

Still, your credit score does set the benchmark for what type of mortgage loan program you can qualify for, especially if you’re looking for a jumbo mortgage, which across the board requires a score of at least 680. If your credit score is between 620 and 640, you are still going to be looking in the FHA mortgage loan category, as conventional loans in this category automatically hit high-cost thresholds.

So, getting rate quotes from a mortgage company without getting an idea of where your credit stands is setting yourself up for disappointment — especially if your actual scores are different than your guesstimates. (You can get an idea of what shape your credit is in by viewing your two free scores, updated each month, on Credit.com.)

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