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Get to Know "Loan Worthy": A Study of Your Finances and Credit

Unless you have buckets (big, big buckets) of cash, you'll need a loan to buy a home in San Francisco. But what does it mean to get approved for one? What do you really have to show/prove to qualify for a mortgage?

Preapproval
This process involves a mortgage lender doing an in-depth analysis of your financial situation and credit rating that results in a preapproval letter stating the amount of your home loan.

To get to this amount, your lender will analyze all of your financial information. You must provide at least 2 years worth of bank records, proof on income, employment status and tax forms. Particularly if you have freelance income, your records must be meticulous and stable enough to merit a lender's assessment of you as a good risk. Keep and organize all your W-2s and 1099s for the last few years, bank statements, paystubs, proof of assets (stocks, bonds, mutual funds, etc.). Freelancers may need letters from regular contract employers stating their plans to use you in the future.

If you pass inspection, you'll get a letter from your lender stating your loan amount and interest rate. Keep in mind this is not a binding agreement yet. It's a good faith estimate that applies, generally, for 60-90 days. The letter doesn't mean you have a loan. Things can and do go wrong during escrow and snags with financing are common. The more complete (and honest) you are in presenting your assets and debts, the better likely your loan will proceed as planned.

FICO scores
You should know your FICO score before setting out to buy a home. You can get your credit report for free once a year, at which time you have the chance to double check all the information on your credit report is correct. However, getting the FICO score usually costs you extra. Perplexingly to some new buyers, your credit report isn't exactly the same as your FICO score; though it draws from your credit report, your FICO number in particular calculates how likely you are to stay current on your loan. For lending purposes, the higher the FICO score, the better your loan. The term FICO comes from the Fair Isaac Corporation, which refined the industry standard for measuring people's credit-worthiness. The analysis takes in how much debt you have, how many debts you have, and your record on paying them as well as your total available credit. Logically, the higher your FICO, the more a lender trusts you to make payments; so, the interest rate you're offered on your loan goes down as your FICO goes up. The highest FICO range, 760-850, wins you a much lower interest rate than a lower FICO will (check how these rates affect one another with current market data at MyFICO.com.)

Bankruptcy and home loans
You may think that if you've ever declared bankruptcy, you cannot ever own a home. Not true. After two years of filing for bankruptcy, your credit score is no longer adversely affected by the bankruptcy. Your FICO score will then only be based on your current credit ratings with creditors and your current debt. However, lenders will certainly see the record of your filing when they check your paperwork, and that may adversely affect your mortgage process—though it won't necessarily kill it. If you have been very careful post-filing with debts, not taking on too much and always making prompt payments, you may be able to get a loan. You might though have to deal with higher interest that someone who hasn't filed for bankruptcy. You can potentially offset that higher interest, or even avoid it completely if you have the right resources. Among your options: buying down the interest rate; making a higher down payment; choosing a less costly home; getting a family member with strong credit and preferably who owns a home to cosign on the loan; or waiting a few years so you build your credit back up. If you need help repairing your credit, agencies like Credit Repair San Francisco offer a list of federal and state resources plus counseling.

Though supposedly a bankruptcy disappears from your records within 10 years, you may still be asked if you've ever filed, and obviously you have to be honest. In most cases, a decade old bankruptcy won't stand in your way of a home loan if you have a decent income, low debt, good credit history those past ten years, and enough money for the down payment. Always save a copy of your bankruptcy discharge in case your lender asks to see it.

Getting Help
Buying a home is complicated and fraught with additional expenses (inspections, appraisals, closing costs). This is true regardless of your credit rating. And this whole process of checking your credit costs money too- plus, don't forget that checking your score too many times in a short period actually lowers your score. Seek professional advice from mortgage brokers, federal programs, and credit unions that work specifically with the kind of income, credit, and down payment resources you have. Be as upfront and informed as possible to save everyone time and heartache. Then you can be better certain you're getting the best deal (and correct numbers) on your loan, and can confirm that the timing is right for you to buy-- or that it's not.

· Monitor Your Credit · · · [Federal Trade Commission official site]
· Annual Credit Report [official site]
· All Curbed University coverage [CurbedSF]