Do I have a chance with this mortgage?
January 12, 2009 6:00 PM   Subscribe

I applied for a mortgage. What have I done? (And what should I do?)

I'm fresh (well, since May) out of college, and have been looking for a place to live. Against my better judgment, I let my mom coax me into using my bank's "instant pre-approval" mortgage application to see if I could get an FHA loan to buy a condo, which would be cheaper than an apartment. "Instant pre-approval" turns out to mean, "We'll send you a letter in a week asking questions," and I, in turn, have a lot of questions for the hive mind.

With what I'm making, I figure I can afford about $2,000 a month for rent after all my other expenses, though I'm hoping for something closer to $1,250 a month, which puts me around $200,000 (ballpark) for a condo. I've found several places in the $150,000 range that still manage to be nice enough.

The past couple years I was working part-time in college, and made between $6,000 and $9,000 a year. I've since graduated and now have about $20,000 in student loans; this is a $200/month payment, and I intend to get ahead on payments once I get settled. (For now, I'm socking away as much as I can...)

I now have a letter from my bank stating that I need to provide them with a recent pay stub, past W2s, and an explanation for the gap in employment. ("Finishing college and finding a real job.") They also sent me a letter with my credit score; I don't have it on hand, but it was somewhere around 700. I'm meticulous about paying things off, having never carried a balance on my credit card and so forth, but I do have the $20,000 student loan, and am pretty new to having a credit card or anything of the sort, so I have a short credit history.

My parents have excellent credit and have said they'd be willing to cosign, but what I've read is that this really wouldn't help me that much if my parents weren't going to live there with me.

I'm spooked by something, though: the credit score mentioned that the number of recent inquiries/applications was hurting my credit score. I applied for an auto loan and was denied a couple years ago. So I'm worried that having applied for this loan is going to hurt me further. Thus my question is twofold:

- Are my chances of being approved for mortgage, "Slim but worth trying" or "Don't even waste your time" slim? Besides the fact that my credit report and history are quite unfavorable, banks aren't at their most eager to hand out money right now...

- Can I back out of this inquiry with a "Nevermind, I don't want your loan" before it's done and keep it from showing up on my credit rating? I was under the impression that it would be a quick thumbs-up or thumbs-down when I did it online, but it's actually a grueling mortgage application. If I don't/can't back out, and I'm presumably denied, how badly is this going to hurt my credit?

Sorry if this is something that's plainly obvious to most people, but I'm new to this whole thing and worried about doing more damage.
posted by fogster to Work & Money (14 answers total) 3 users marked this as a favorite
Best answer: There are two types of credit inquiries - "hard" and "soft." Both are recorded on your credit report, but only the former counts against your credit score. The former is generally used when opening a credit account or taking out a loan and the latter is generally used for information verification (like your name and address). Too many hard inquiries does decrease your credit score, but not very substantially. Further, the inquiries drop off after two years if you're really concerned.

The reasons why your credit score is as it is are generally just a listing of the top factors against you. It doesn't necessarily mean that they're very strong factors against you. Unfortunately, credit score companies don't report how much their factors hurt/help you, just that they do. I wouldn't worry too much unless you have many hard inquiries (or ones you can't explain!). The online consensus seems to be each inquiry is good for 2-3 points off your score.

As for your questions, from what you say, it sounds like you could definitely get a loan. "Around 700" isn't going to get you optimal rates, but it will get you a loan. Further, I'm betting on loan rates increasing in five to ten years anyway. Now, whether you want to spend that much money right out of college is a different question - I'd recommend against it, but you didn't answer that question. Yes, you can drop out of the loan process - people do it all the time! In the grand scheme of things, one inquiry isn't going to be above the noise in your credit score. I wouldn't do it every week, but you sound much more responsible than a lot of people your age.
posted by saeculorum at 6:24 PM on January 12, 2009 [1 favorite]

Best answer: I'm spooked by something, though: the credit score mentioned that the number of recent inquiries/applications was hurting my credit score.

Have you applied for any other credit recently? If you haven't, you might want to pull one of your free credit report to see what these inquiries are.
posted by dilettante at 6:29 PM on January 12, 2009 [1 favorite]

Best answer: Oh - and by the way, the hard inquiry has already hit your credit report. You can't pull someone's credit score without generating a hard inquiry. So, if you want the mortgage, go for it. If you don't want the mortgage, just don't respond to the bank's letter.

I'd worry more about paying off your loans than a hard inquiry here and there, personally.
posted by saeculorum at 6:30 PM on January 12, 2009

Best answer: I just purchased a house where my parents were co-borrowers. This helps you out tremendously. There is a difference between co-signing and co-borrowing.

My parents don't live in the house with me, but having them in on it helped get me a better interest rate as well as helped me get pre-approval from the bank for a larger mortgage.

Having an inquiry for a mortgage is not a bad thing and will not negatively affect your credit. you can apply for as many mortgages as you want in a 30 period and as far as your credit goes, it counts only as one since credit agencies understand that when looking for a car or house you may need to get multiple quotes to get the best deal and they do not penalize you for that.

Also, your credit score is really really good. Above average. even if this inquiry did negatively affect your score, your score can afford to take a hit.

To get approved for an FHA loan you need minimum of 600. You are far above that.

It really isn't as grueling as you think. The bank just needs some info to make a good decision. They do not base solely off of credit score like credit cards and car loans do.

Give it a chance. It is really worth the experience.
posted by deebs at 6:39 PM on January 12, 2009

Two words: Condo Fees.

You'll have your mortgage, plus property taxes, plus condo fees to pay for upkeep of the building, etc. Condo fees are often approximately what you'd pay for renting a comparable apartment.

It's kind of a huge rip-off IMO.
posted by Sys Rq at 7:10 PM on January 12, 2009

Response by poster: "Two words: Condo Fees."

I completely agree about the ripoff, but I've been figuring that into my equations. (Just not in this question.) Thanks, though: it's definitely a good caveat.

And all around, great answers so far! I thought I was in much worse shape. (And it turns out I was thinking of credit ratings backwards: I thought high was bad. Whoops!)
posted by fogster at 7:23 PM on January 12, 2009

Condo fees around here are nowhere near what you'd pay for renting an equivalent apartment (about 20% on average) and often include a lot of utilities so they're not a total rip off by any means.
posted by fshgrl at 7:40 PM on January 12, 2009 [1 favorite]

I may have missed it, but you seem to have not mentioned your salary. I can understand why you wouldn't want to share that, but it's nearly impossible for anyone to evaluate your chances of getting a mortgage without that.
posted by smackfu at 7:51 PM on January 12, 2009

Actually, Sys Rq and fogster, condo fees are not a rip-off. If they were, everyone who owned a condo would have to be a huge moron.

Condo fees pay for the maintenance of the building, the heating/cooling/water/electrical systems in the building, and in my case, all my utilities and my cable television. If i didn't pay condo fees, i'd have to pay for all of those things myself, individually. Homeowners, who pay for all of this, simply end up with unexpected bills for things like a brand new roof or furnace, and have to pay for it all at once, and unplanned, rather than putting a regular amount into a monthly fund. So: Condo fees usually end up to be around the same as other housing expenses. (Also, admittedly, you often pay extra for the security of being in a building with a concierge, or having an onsite gym; but for many, those are things worth paying for.)

But yes: you must take condo fees and the expenses not included in your condo fees into account when you consider your mortgage application. Housing expenses all together are supposed to equal not more than one third of your gross income. So mortgage payment + condo fees + utilities not covered by fees + average maintenance costs = 1/3 or less of your gross income. If you have $2000 budgeted per month, that means you need to have a monthly income of $6000/month, or $72k/year. If you've overestimated, you may not get approved for the amount you applied for. Apparently the banks have suddenly got a little gun shy about the mortgages.
posted by Kololo at 8:20 PM on January 12, 2009 [2 favorites]

Oh - and by the way, the hard inquiry has already hit your credit report. You can't pull someone's credit score without generating a hard inquiry.

This actually isn't true, there are various reasons why someone might check your credit score without doing a hard check. For example, you can check your own credit score whenever you want without doing a hard check. Usually hard checks only happen when you apply for credit or a loan, and applying to be pre-approved is sort of a gray area so I'm not sure if that would be a hard check or not. If it was a hard check, the most damage it could do to your score would probably be around 5 points for six months.

I may have missed it, but you seem to have not mentioned your salary. I can understand why you wouldn't want to share that, but it's nearly impossible for anyone to evaluate your chances of getting a mortgage without that.

This is true. Your credit score and other debt seems reasonable enough, but your chances of getting approved will vary greatly depending on your monthly income. Another big factor is how much money you have in the bank, even beyond your down payment.
posted by burnmp3s at 4:20 AM on January 13, 2009

Definitely shop your loan around. My wife and I are in the application process for a mortgage and the different services offered by different banks/credit unions require some mulling over.

Plus, it gives you something to do during the inevitable "hurry up and wait" part of buying a house. You run about getting all your paperwork and finances in order, then wait like a teenager at their first school dance for your lender to ask you for a waltz.
posted by robocop is bleeding at 5:06 AM on January 13, 2009

burnmp3s: I am curious why you assert that your credit score can be obtained without a hard inquiry. I know you can check your own score (the exception - not what the OP was talking about), but I'm not familiar with any way another party can. Do you have any example of that? I'm not going to claim to be an expert on this, but from what I've read, obtaining a credit score is the definition of a hard inquiry.
posted by saeculorum at 8:44 AM on January 13, 2009

Join a credit union. They give you better interest on savings, and offer better rates on loans, and mine has the best service of any bank, ever. Work with them personally to get pre-qualified.

Keep in mind that if you own real estate, you'll have to pay property taxes, insurance, and have a budget for maintenance. With a condo, you'll have condo fees.
posted by theora55 at 1:26 PM on January 14, 2009

from what I've read, obtaining a credit score is the definition of a hard inquiry.

I had never heard this version of how it works before, so I googled to try to find someone else who said the same thing and couldn't find anything. I've never actually pulled someone else's credit score so I don't know from firsthand knowledge, but various sites explicitly say that soft pulls can get scores:

Generally a soft credit score can be done by anyone else for a number of reasons. For example, if a credit card company or mortgage company would like to send you a pre approved loan offer, the will use a soft pull. Your current bank will use a soft pull to make sure you aren't opening dozens of other credit card accounts. When a bank wants to verify your identity when opening an account, usually they will do a soft pull. You are also doing a soft pull when you check your own credit history or credit score.
posted by burnmp3s at 4:09 AM on January 15, 2009

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