Where do You Start? Start with Your Credit!
Information for Buyers
When you look for a mortgage, lenders will review your credit report. Your credit report is a history of how you have managed your finances and repaid debt. It provides information on money you have borrowed and a history of your payments.
Your credit history is pulled together into a credit report by three private companies: Equifax, Experian and Trans Union. These companies sell your credit report to banks and other creditors so they can review mortgage and loan applications.
Your credit report includes:
- A list of debts, such as credit cards and car loans, and a history of how you have paid them.
- Any bills that have been referred to a collection agency. This can include items like phone and medical bills.
- Public record information, such as tax liens or bankruptcies, even if these have happened several years ago.
- Inquiries made about your creditworthiness. An inquiry is made when you request credit. Many times your report will also show if you were given credit based on the inquiry.
Most of the information in your credit report is deleted after 7 years (a bankruptcy is deleted after 10 years) and is continuously updated to reflect the latest information.
It’s important that you look at your credit reports from each of the three companies to make sure they are correct. Your credit report may vary from one company to the other.
Your Credit Score
When you apply for a mortgage, the lender may request a credit score as well as a credit report. A credit score is a computer-generated number that indicates your ability and willingness to repay a debt based on your credit record.
Your credit score is part of the mortgage information that will decide if your application is approved. Your credit score may also be used to determine the mortgage interest rate.
Start Building Your Credit
Building good credit doesn’t have to be difficult. Follow these tips and you’re on your way:
- Pay Your Bills on Time. How you’ve paid your bills in the past can indicate how you’ll pay in the future. Credit scores emphasize your most recent payment record so if you’ve been late, start paying on time!
- Pay at Least the Minimum Amount Required. You can always pay more, but you should never pay less.
- Keep Credit Card Balances Low. Don’t “max out” your credit cards.
- Don’t Apply for Too Many Loans or New Accounts. Requesting a lot of credit in a short time span may concern lenders that you won’t manage your debt well.
- Establish Credit if You Have None.
- Apply for one or two credit cards. Use the cards carefully and pay them off each month.
Make a Budget and Live Within It!
A budget will help you meet your monthly bills, and therefore help your credit. It also can help increase your savings for things like a down payment on a house.
Demonstrating your ability to save and having funds on hand will help you in the mortgage approval process. Your personal savings should be sufficient to last several months should you lose your job or source of income.
Can You Afford to Buy a House?
Information for Buyers
While everyone would like to live the American Dream of buying and owning a Home, it is important to understand all the costs involved in buying and owning a home.
Many potential buyers sometimes forget to factor in the down payment, homeowners insurance and the possibility of depreciation, as well as the costs associated with closing the transaction, moving, purchasing major appliances, and home, landscape, and pool maintenance, not to mention furnishings and design accessories once you move in.
For a general idea of your buying power, multiply your gross annual income by 2.5. For example, if you had a household income of $50,000, you might be able to qualify for a $125,000 home. The actual number may be more or less, depending on your individual situation, debts and credit history.
Housing Expense Ratio
As a general guide, your monthly mortgage payment should be less than or equal to a percentage of your income, usually about a quarter of your gross monthly income. The percentage can change depending on the type of mortgage you choose. However, there are mortgage products available that focus solely on the debt-to-income ratio. Your lender can provide more information on these types of mortgage products.
Your buying power can be affected by factors such as your income, debt and credit history. Your debt, such as credit card bills and car loans, and other expenses such as housing expenses, alimony and child support, should not be more than about 30-40% of your gross income.
How Much Money Do I Need to Buy a Home?
You’ll need money for:
1.) A down payment
2.) Closing costs
3.) Other housing-related costs – mortgage payments, maintenance and repair costs
Your Down Payment
The down payment is a percentage of the value of the property. What percentage that is will be determined by the type of mortgage you select. Down payments usually, range from 3 to 20% of the property value.
You may be required to have Private Mortgage Insurance (PMI or MI) if your down payment is less than 20%.
Closing costs include points, taxes, title insurance, financing costs and items that must be prepaid or escrowed and other settlement costs. These costs generally range between 2-7% of the property value. You will receive an estimate of these costs from your lender after you apply for a mortgage.
While it may seem that it can take a lot to actually buy your home, you may be closer than you think.
Why Should You Own a Home?
Information for Buyers
Some people like the flexibility that comes with renting. When you rent, you can live in a neighborhood for as little or as long as you want. You’re also free of most maintenance responsibilities – your landlord usually handles repairs.
Of course, there are many other reasons owning a home can be beneficial. These are just a few….
In the early years of most mortgages, the majority of your monthly mortgage payments go towards interest on your loan. Over time, an increasing amount of the monthly payment goes toward reducing mortgage balance, or “principal”.
As you make payments, you reduce the principal and increase your share, or equity, in your home’s value. If your home increases in value through appreciation, your equity will build even faster.
Building equity or savings in your home is necessary. For many people, it lets them plan for retirement and other future goals.
Gain Tax Advantages
You are allowed to deduct mortgage interest and property taxes from your federal income tax and some states’ income tax. These deductions can mean significant tax savings, especially in the early years of the mortgage when interest makes up most of the monthly payment.
After calculating your taxes, you may find that it’s cheaper for you to buy than to rent.
Rely on Payment Stability
If you select a fixed-rate mortgage, you will pay the same monthly principal and interest payment for the term of your loan. Unlike renting, this type of payment will remain the same month after month, even when inflation leads to higher prices. However, your total monthly housing expense could vary if tax and/or insurance expenses change.
When Buying a Home Determine Your Needs…
Information for Buyers
Before you begin house hunting, create a realistic “shopping list” to narrow your search. Looking for a home can take time, especially if you have not focused on what is most important.
Create a “wish list” and a “must have” list. Many people focus more on “wants” than “needs.” As a result, they sometimes reject homes that perfectly meet their needs in search of homes that meet their wants, which in many cases can be out of your budget and unaffordable.
That’s not to say that you shouldn’t try to get what you want – you should just be able to tell the difference between what you really need and what you would like to have.