In the last installment of HBFB, I'd finally reached the mountain. Or at least close enough to touch it. I had crossed the biggest hurdle there is to home ownership--getting my credit in line. The hard part was over.
Oh, young, naive Tracey from seven months ago. How little you understood. If I knew then how easy "the hard part" was compared to what would come next, I would've rethought the whole homeownership thing. I might've chosen instead to give my savings to charity and walk the earth like Caine in Kung-Fu. It certainly would've been a less intimidating and frustrating life goal.
The truth is that there is no hard part to home buying. And no easy part either. It's one long, winding road that begins with completely rethinking your relationship with money, then continuously maintaining it throughout the home buying process, which can last months or YEARS depending on where you are when you start. You have to really want it. If you don't, you shouldn't waste your time.
Once I was in range of my ideal credit score, I got to check one item off my trusty list: Reign in all current spending and stay in good standing with all debts and bills? DONE. Very satisfying.
Here's the new list I focused on:
- Keep credit score right where is it (or further improve it).
- Save for down payment.
- Work with a lender to secure mortgage "pre-approval."
- Find a Realtor.
- Find a house in my budget that meets my needs.
- Secure full mortgage approval.
- Buy the house.
- Pat myself on the back.
Saving money and keeping my credit clean was an ongoing process, so by fall of 2013, I was ready to find a lender. Thankfully, Ali was already in the middle of the home buying process (you can see the house she chose here) and had some sage advice on what I needed to do. Until I talked to her, I didn't even know what "pre-approval" was.
Mortgage pre-approval is the early process you go through when you first start working with a lender. Basically, you find a lender you want to work with, they go over your shit and tell you whether or not they can help you. If they can, they give you a letter saying how much money they'll loan you for a house. The letter usually doesn't state the MOST they're willing to give you, but the amount you want to spend based on what you want your mortgage payment to be. You then take that letter to your Realtor and they help you find a property that's within your loan amount.
If the lender can't give you pre-approval, they SHOULD tell you why they won't so you can fix it. Wanna guess how I know this bit? ...foreshadowing...
My first stop for pre-approval was to call a private mortgage lender that was recommended by a co-worker. They took all my information, and had both bad and good news for me. Before I get into that, though, I should tell you what you'll need to provide the mortgage guys with. Another list. Yay!
- Your two most recent years of tax returns including W-2s and 1099s.
- A copy of your driver's license or ID.
- Your Social Security Number (you may be asked for a copy of your actual card).
- Your most recent two pay stubs.
If you haven't had a steady job for the last two years, you'll have to provide information about the previous jobs you've had. This was tough for me, as I worked freelance for a number of different media companies. I had to write a letter explaining when I worked for who during this time, what I made and the contact information for those temporary employers. This was a legit pain in the ass, but I got it done. It didn't hurt that I keep impeccable records of my freelance invoices, and had the 1099s to back me up. Getting the taxes together was a pain in the ass too, mostly because I wasn't organized. But within a few days, I had it together enough to give them what they needed.
Once I gave them what they needed, they in turn used a service called Mortgage PreFlight to analyze my credit. This is a private company that takes your info, puts it through a credit report analyzer thing and tells you what you need to pay off/fix/dispute or otherwise knock off your credit report to raise your score enough to qualify for a mortgage. I guess you could call it a pre-pre-approval. This is the only lender I worked with (and they were several as you'll come to find out) that used this service, though I understand that it's growing in popularity among companies that lend to lower income clients.
So getting to the bad news/good news thing. The guy ended up telling me that my PreFlight report was not too bad and that he WOULD pre-approve me... with conditions. The first was that I had to take care of a few things on my credit report. I had been paying some items off slowly as to not totally put myself in the poor house, as you may remember. This guy wanted me to pay them all off at once. The second was that what I spent on a house would have to fall within the minimum amount he needed to make it "worth it" on their end. The minimum he's talking about? Literally DOUBLE the amount I could reasonably afford. DOUBLE!?
Oh hell no. I walked away from that deal without a second thought. After sulking for a few weeks, I did some additional research and realized I was going about things the wrong way. Trying to secure a traditional mortgage with my credit history and limited price range to work with was going to be difficult. Probably TOO difficult. But there was an option.
The Federal Housing Administration, or FHA as it's commonly called, offers loans they back to lower-income, less qualified applicants*. The best news? FHA-backed loans require a significantly lower credit score than traditional mortgages. The even better best news? FHA loans only require a 3.5% down payment. This is a big deal for those of us that simply don't have the 20% down payment that traditional mortgages require. I decided that FHA was the way to go.
This time when I was searching for a lender, I looked in my own backyard first, and decided to see if my own bank--one of the biggest banks in the world--would help me out with an FHA-backed loan. The short answer they gave me? Yes. I'd been unofficially pre-qualified** for a mortgage! Pour the champagne.
Unfortunately, my excitement was short-lived. The process took several weeks. The day before my pre-approval letter was to arrive, I received an email that simply said that I was denied after all due to "income discrepancies and an unsatisfactory credit profile." What the hell? What happened?
I scrambled to contact the lending officer I'd been working with, but it was Thanksgiving week, and he was out of the office. I tried several times to contact him, but I never heard from him again. I pulled my credit report one more time... then I saw it. Dropped onto my reports just two days before I was supposed to get my pre-approval. A collections account that I was apparently into for more than $3,000.00.
I had no idea what the charge was for or why is just popped up now. As far as I was concerned, I didn't owe anyone that much money. Why? Why was this happening?
I slumped into the December without a pre-approval more desperate than ever. Sometime in early January I realized that it wasn't going to happen right then. My landlady had given me 60 days notice to get the hell out. My credit score dropped from 630 down to 580. This the worst possible outcome I could think of and here it was, staring me in the face. I'd have to move into another rental while I figured this mess out. It was a moment so low only Toby would understand.
So the worst happened. I ended up in a shitty rental flat with most of my stuff in storage. The story could've ended there. I could've been written off as just another cautionary tale; a victim of my own of bad financial decisions. Thankfully, things turned around for the better (and then get worse, then better again). In the next chapter of Home Buying for Brokeasses, I'll tell you how.
*Via FHA mortgage insurance. Don't take my word for it. DO YOUR RESEARCH.
**There's a slight difference from being pre-approved and being pre-qualified. This link explains the difference better than I can.
Obligatory disclaimer: Always keep in mind that I am no way, shape or form a financial expert. All my advice and suggestions should be taken with many grains of salt. Everything I write is based solely on what worked for me. Consider seeking professional credit counseling before making any big financial moves.