Financing

Content prepared by Towne Mortgage of the Carolinas for Coldwell Banker Howard Perry and Walston

If you're in the market to buy a home, chances are you will need to take out a mortgage. While a mortgage is a big responsibility, you don't have to do it alone.

If you're having trouble getting approved for a mortgage, you might want to consider adding a co-borrower or even a cosigner. 

Many types of mortgage loans, such as an FHA or Conventional Loan, allow for an occupying or non-occupying co-borrower or cosigner.

Though income, assets, liabilities, and credit history are considered for both the cosigner and co-borrower during loan qualification and underwriting, there is a big difference between the two roles.

What is a Cosigner?

A cosigner does not share the same benefits as a co-borrower. A cosigner is legally responsible for paying back the loan, but does not have ownership of the property and is not listed on the title. 

What is a Co-Borrower?

Co-borrowers share ownership of the property, as well as the legal responsibilities of the loan. 

Using a Cosigner or Co-Borrower

Using a cosigner or a co-borrower could significantly improve your chances of approval on your mortgage—especially if you do not have an established credit history.

Chances of approval can increase if a co-borrower or cosigner is able to improve your debt-to-income ratio.

Debt-to-income, or DTI, is the sum of your monthly debt payments divided by your gross monthly income. Lenders use the DTI number to measure your ability to repay your mortgage each month.    

If you are applying for an FHA mortgage, your co-borrower must:

• Have the required minimum qualifying credit score
• Live in the United States
• Be a relative or close friend
• Approve his/her name to be listed on the mortgage and property title

If you are applying for a conventional loan, your co-borrower must:

• Have a minimum FICO score of 620 to 640
• Live in the United States
• Be a relative or close friend
• Approve his/her name to be on the mortgage, but will not be required to be on the property title

If you have poor credit, a co-borrower or cosigner won't be able to help you qualify for a mortgage. Lenders must use the borrower with the lowest credit score to qualify for a loan.

Ways to Improve Your Credit

To improve your credit, you can:

Check your credit report and credit scores. 

You are entitled to three free copies of your credit report by law. Review your credit score to make sure all information is accurate. If you uncover an error, report it immediately to begin the process of correcting it.

Pay your bills on time. 

The most important step to rebuilding your credit is to make all bill payments on time. Your payment history is the basis for the majority of your credit score, so it is critical that all bills are paid on time.

Keep your credit card balances low. 

Your credit utilization is important, and keeping your balance low shows lenders you can manage your credit responsibly without spending beyond your means. Credit experts recommend using only 30 percent of your available credit.

Protect your existing credit. 

Don't close existing credit accounts in hopes that they will disappear from your credit report or higher your score.

Content prepared by Towne Mortgage of the Carolinas for Coldwell Banker Howard Perry and Walston

Image Credit: Shutterstock.com

Content prepared by Towne Mortgage of the Carolinas for Coldwell Banker Howard Perry and Walston

While most people know what a credit score is, many do not fully understand what factors can impact their scores.

What is a credit score?

Credit scores reflect your payment patterns and credit history over time, and almost all major lenders use them to determine how likely you are to pay back a loan.

In the eyes of a lender, a high credit score indicates you are reliable, while a lower credit score means you're less likely to make payments on time, or even pay back your loan at all. Your score will also help a lender determine the types of loan available to you and the interest rate that you will pay to borrow money.

"Today's home buyers are impacted more than ever by their credit score," said Doug Anderson, Lending Manager with Towne Mortgage of the Carolinas. "A credit score can affect their down payment, their interest rate, and their mortgage insurance payment; even homeowner's insurance can be affected by a credit score."

What is a good credit score?

A perfect credit score is 850; however, any credit score above 760 is considered to be good.

How do you establish credit?

There are five important factors when establishing credit:

Payment history

Your bill paying history is the most important factor on your credit score as it shows that you manage your money well and are likely to be a responsible borrower.

Be sure to pay all your bills on time. If you think you might be late on a payment, call your lender promptly, to determine if you may work something out to avoid penalty. 

Credit utilization

Credit utilization is the amount of money you spend compared to your available credit. For example, if your credit card has a limit of $1,000 each month and you only spend $200 each month, your credit utilization is 20 percent. Do your best to keep your credit utilization ratio under 30 percent to avoid drops in your credit score. 

Length of credit history

The length of time your credit accounts have been open and how often you've used those accounts determines your credit history. An account with a longstanding history will help you to establish credit and demonstrate that you are a responsible borrower. 

New credit

Lenders pay close attention to your credit activities and may lose confidence in your financial stability if you open too many credit accounts at the same time. Such concerns can lead credit-reporting agencies to issue you a lower credit score.

Credit mix

Credit mix is the variety of debt that you have taken out such as installment credit like car loans and student loans, or revolving credit like credit cards or retail accounts. This variety may indicate that the borrower can handle all different types of credit.

What is my credit score?

Interested to find out more about your credit score? You are entitled to order a free copy of your credit report from each of the major credit reporting agencies—Equifax, Experian, and TransUnion—through AnnualCreditReport.com every 12 months. AnnualCreditReport.com is the only website that is government authorized to provide you with free copies of your score.

Pleased with your credit score? Congratulations, keep up the good financial work to continue increasing your credit score.

Surprised to find a negative report and low credit score? Unfortunately, negative information on your credit report remains for a long time. Here's the rundown:
- Late payments: 7 years from the late payment date
- Foreclosures: 7 years
- Short sales: 7 years
- Repossessions: 7 years
- Judgments: 7 years if the judgment has been paid; potentially longer if unpaid
- Tax liens: 7 years after they are paid
- Collection accounts: 7 years and 180 days from the date of delinquency on the original debt
- Bankruptcies: 10 years from the filing date; 7 years for Chapter 13 cases

How can I better my credit score?

Yes, it may take awhile, but you can fix these blemishes over time. Tips that will help you rebuild your credit include:

Check your credit report for mistakes

Under the Fair Credit Reporting Act, credit-reporting companies are obligated to fix any mistakes on your report.

To report a mistake, you must submit any inaccuracies in writing to each credit bureau. You'll need to clearly identify the issue in writing, and supply documents that support your position.

Make all payments on time

Your payment history is the basis for the majority of your credit score making it critical that you pay all bills in a timely fashion to prove your reliability to lenders. 

Keep credit card balances low

Maintaining ideal credit utilization of 20 percent or less by keeping a low balance on your credit card shows lenders that you can responsibly manage your credit without spending beyond your means.

Lenders may become concerned that you are in financial trouble if you continually spend more than 30 percent of your available credit.

Protect existing credit

Don't take scissors to your credit cards or close existing credit accounts in hopes that previous negative activities will disappear from your credit report or increase your credit score. Instead, use your established credit accounts appropriately to rebuild your credit score by managing them wisely.

Create positive credit history

Bad credit history may cause you to be denied some forms of credit, but it is possible to open a new form of credit that could help build your score.

One option to consider includes asking a family member or close friend to co-sign for a credit card or car loan. You can also apply for a secured credit card, which will require you to put up cash collateral to serve as security for your line of credit.

Content prepared by Towne Mortgage of the Carolinas for Coldwell Banker Howard Perry and Walston

Image Credit: Shutterstock.com