Credit reports are available to consumers at any time for a fee. However, once a year, you are entitled to get a free credit report from each agency. Free reports can be obtained here.

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How do lenders evaluate if a potential borrower qualifies for a loan?

The key factor that determines your approval status and the terms of your loan is your credit rating, commonly expressed in a FICO score (created by and named after the Fair Isaac Corporation). The FICO score is a numerical expression of your credit that ranges from 300 to 850. This rating is based on your past credit history – namely, the punctuality of payments (35% of the score), the ratio of debt to available credit (30%), your length of credit history (15% of the score), the types of credit used (10% of the score), and amount of debt recently obtained or sought (10% of the score).

Most creditors (landlords, mortgage, bankers and lenders) will look at your credit report and credit score to evaluate you as a potential borrower or tenant/buyer. The creditors will look at all three credit reports and credit scores from the three credit bureaus. The medium (not the average) of these scores will be taken as your actual credit score.

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What is considered good credit?

Each lending institution sets its own multi-tier rating of mortgage interest rates determined by your credit score. Generally, a score of 720 is considered a prime rate and will result in the smallest interest for the borrower. As a rule, a lower score would result in a larger down payment and a higher interest rate.

Scores from 650 to 680, although sub-prime, are considered fair credit scores. Scores between 620 and 650 are less favorable, but they still will qualify the borrower for a mortgage at most institutions. If the score is below 620, most lenders will be reluctant to issue a mortgage.

Since the credit score has a direct influence on the interest rate and the minimum down payment required, it is highly advisable for home buyers to make sure that they are applying for a mortgage at the height of their credit rating. It is worth to check your rating and invest some time to improve it before you apply for a mortgage. A better credit score will result in a lower interest rate and will save you thousands of dollars on a mortgage.

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How can I improve my credit rating?

If your credit rating is not perfect, there are ways to improve it by becoming more fiscally responsible. When you make your payments on time and reduce the amount of debt owed your score will improve over time (for example, you debt should not exceed 40-50% of your credit limit on each credit card.) In addition, if you view carefully and compare information reported by each of the three credit bureaus, you might find some discrepancies or even errors. Disputing such discrepancies can result in a significant increase in your credit rating in a matter of 3-6 months. You can do this either by yourself, or with a help of reputable professionals that specialize in credit repair.

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Is there a difference between financing a condo or a coop apartment?

Unlike with a condo or a house, buying a coop means that you are buying shares of the corporation that owns the building. Since a cooperative is not formally considered a real property, the type of financing provided is a loan and not a mortgage. There is no difference in the approval process – it is still based on your credit rating. However, some of the benefits of buying a coop are associated with the absence of a mortgage. The absence of mortgage recording fees, mortgage taxes or mortgage insurance mean lower closing costs and a different tax structure for the buyer.

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How much is a regular down payment?

The borrower’s credit rating will influence how much money the bank requires as a down payment – usually 10-30% of the purchase price. In New York, many coop and condo buildings have a requirement for a minimum down payment, which is generally 10-20%.

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What type of mortgage is best for me?

The US market offers many financing options for real estate investors. When advising on the type of loan, mortgage specialists take many factors into account, including:

- Your financial capabilities – income, credit rating, how much you can pay upfront as a down payment, your savings and other equity, etc.;

- Current interest rates and forecasted market trends;

- Your plans regarding long-term possession of a property (over 5-7 years).

An amortized mortgage is a standard mortgage configuration. In an amortized mortgage, your interest payments plus your principle (the amount of the loan) are amortized over the life of the loan. The amount owed plus principal is divided into equal monthly installments that become your monthly payment. Each time you make a payment, a part of it covers the interest and the other part goes towards the principle. At the beginning of your “amortization schedule”, your monthly payment is mostly applied to the interest owed. As you are paying off your mortgage, a larger portion of your payments will be applied towards the principle.

The two most common types of mortgages are a fixed-rate and an adjustable-rate mortgage.

A Fixed-rate mortgage is the most popular home financing product. As the name implies, the interest on this mortgage is not affected by the market ups and downs.

An Adjustable-rate mortgage (ARM) is linked to financial market indicators, such as Treasury bill rates. Interest rates for this mortgage do not go below a prime rate (fixed as of the time of the mortgage contract) and have the maximum 'cap' rate which they cannot exceed. Sometimes this mortgage starts with a low interest rate that stays fixed for a certain period of time (usually between 5-10 years), and then becomes adjusted.

An Interest-only mortgage requires the borrower to pay only interest during a specific period of time (usually 5 to 10 years). During that time, the principal is reduced only if the borrower pays more than the minimum amount. This is ideal for investors who are planning to flip the property in the short-term.

A Negative amortization mortgage (also called “Option ARMS”) is like an interest-only mortgage, except for that it allows the borrower to pay only a portion of the monthly interest. The balance of the interest owed is added on to the principle, increasing the amount of the outstanding balance. This type of mortgage is a sensible option for short-term investors in an appreciating market.

A Zero-down mortgage allows the buyer to get 100% financing for a home. Some lenders even waive part of the closing costs for qualified buyers. However, as a general rule, a lower down payment means significantly higher interest rates, which makes the loan more expensive in the long run.

A Balloon mortgage starts with low monthly payments that are fixed for the 5 to 7 year term. The final “balloon” payment for the entire remaining balance is due at the end of this term. This type of mortgage is best for buyers who either plan to sell their property before the end of the fixed-rate term, or who can afford a large final payment.

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Evans Real Estate will be happy to refer you to mortgage specialists who will guide you through the technicalities of applying for a mortgage and advise you on the financing best suited to your needs.