Month: June 2020

Once you feel ready to buy a house, the process usually happens fast. Whether it’s a buyers’ or a sellers’ market, you will quickly get excited about a house you see and want to jump on the chance to put an offer in. Before you begin this process, it’s vital to take a few financial steps so you’re prepared for what buying a house will look like. Not only will you feel more comfortable with the home-buying process once you have a grasp on your finances and learn about your options, this will allow you some time to save up more money or work on bettering your credit score. 

Have a grasp on your finances 

If you don’t already, start paying careful attention to all areas of your finances and be more proactive about your situation. Avoiding checking your account balance and only paying the minimum on credit cards isn’t being proactive enough when you’re preparing to buy a house. Start looking at your bank account more regularly; this will help you see just how many things you can cut costs on and how much money you can put in your savings instead of towards frivolous spending, after all, buying a house is a big financial investment.

This is also the time you want to check on the status of all of your loans, credit cards, and any other things you’re financing. At the least, make sure these accounts are in good standing, that you’ve been paying them on time for at least a year and none of your credit cards are over their limit. If possible, pay off any bills you can in total. This might not be possible for larger bills or if you’re aggressively trying to save for your future house, but if you have the extra cash this is a smart way to use it right now.

Paying off debts you have lowers your debt-to-income ratio, which is great when you’re looking to buy a house. Lenders look into your ratio to ensure that your income exceeds your current debt, this gives them a glance into your spending habits. If you have a lower debt-to-income ratio, you are less of a risk for the lender because you’re more likely to make your mortgage payment and less likely to default on the loan.

Finally, know your credit score! It’s a myth that checking your credit score can harm it, when you check your score on a website, this is considered a “soft inquiry” and does no harm to it! A “hard inquiry” is when someone like a mortgage lender checks your score, and this is when it can be affected. Therefore, you only want a lender to do this one time throughout your home-buying journey. It’s good to be informed on where you stand with all of your debts, so don’t be afraid to check that score. 

Research different loan options 

Before buying a home, you need to learn about different loan options to figure out which one is best for you. Luckily, there are many types out there to make it more accessible. Here’s a little information on different loan types so you can consider which one is best for your current financial situation:

• Conventional loan – This loan is not backed by a government agency, like some others we will review shortly, it’s best to put at least 20% of the purchase price as a down payment so you don’t have to pay for mortgage insurance. Additionally, you usually need at least a credit score of 620. All in all, this loan is best for people who are in fantastic financial standing and who are less likely to default on the mortgage loan.

• FHA loan – FHA loans have unique requirements because they are government-backed, this means that if you default on the loan, the lender is protected. Therefore, the financial requirements are a little looser. You can be approved for an FHA loan with only 3.5% down and a credit score of 580. This is a great option for people who haven’t been saving to buy a home or don’t have a great credit score right now.

• USDA loan – This loan is also government-backed by the U.S. Department of Agriculture, which helps people buy homes in rural regions to encourage economic development in these areas. This will specifically help those that have average-to-low incomes for their area. If you feel like this describes you, then look into USDA loan qualifications.

• VA loan – VA loans are another government-backed loan option but are for Veterans, Servicemembers, and their surviving spouses only. With this loan, there are competitive interest rates and no down payment or private mortgage insurance needed. If you’re a Veteran or another qualifying member, this is a great option for home buying!

• First-time buying grants – Although this isn’t a loan and you will need one to buy, considering different grant options in your area is definitely worth it. Grants are gifts that don’t need to be repaid that can cover the cost of closing, the down payment, or even cover part of the total purchase price. You will likely have to do the heavy lifting on this because most mortgage lenders usually don’t offer the grants but it will be well worth it to try!

Shop around for lenders and rates 

To ensure you get the best interest rate on your loan, be sure to shop around for lenders. It might feel easy in this already long process to go to a friend that is a banker or go to the bank you already use. However, it’s financially smarter to shop around for quotes from different lenders to ensure you’re getting the best deal.

Interest rates can differ depending on the type of loan you decide on, based on what was discussed above you can decide which loan type is best for you. In general, people with more money down and a better credit score will benefit from a lower interest rate, because they are less risky to the lender. However, this is why it’s important to shop around for lenders because you may find an amazing one who’s willing to work with you.

Educating yourself to make the best decision possible is extremely important in this step of the home-buying journey. Be prepared by calculating what your interest rate could be before you even go to see a lender. The last thing you want is to be taken advantage of by a bank.

Regardless of if you’re a first-time homebuyer or seasoned in this area, there’s always room for improvement when it comes to your finances. Getting your financials in the best shape possible is vital before you can move forward in this journey, and you’re the only one that can do this. Next, begin to search for a realtor, lender, and lawyer that will help the rest of this process go as smoothly as possible!

While credit is one important part of a total buyer profile when financing a home, there are ways, in addition to traditional credit, that you can prove to a lender that you have a positive payment history.

This is called alternative credit or nontraditional credit, and there a number of ways you can show payment history. One way you can do this (for example, if you rent) is to show cashed checks written on or before the day that the payment is due.

Other bills that you pay each month can be used in the same way. If you pay gas, electric, or monthly car insurance bills, you’ll also have a written record of your payment history. Cell phone bills work the same way.

If you are younger and just starting to build your credit history or don’t currently have any of the above items, you still have options.

There are several ways to actively build credit, especially if you are in a longer-term time frame to be purchasing a home.

One way is to start with a few smaller-type credit cards, such as from a gas station or a department store. What you can do is to use them regularly, even for small purchases, then pay them off each month.

In the eyes of the credit bureaus, the companies to whom the creditors report your payment history each month, you have consistent on-time payment history, and this is a good thing.

Another option is to look into what are called secured credit cards. This is where you give the credit card issuer the entire limit of the card when you sign up, say $500. You then basically borrow against yourself when you use the card. As you make payments, the card issuer reports your payment history to the bureaus as if it were an actual credit card.

If you have questions about any of this, please reach out. I would be happy to go over the options and help you determine what is right for you and your circumstances.

There are a number of factors that go into making up your credit score, which is a part of your overall credit profile. Lenders pull your credit scores from the three credit bureaus, Experian, Equifax, and TransUnion, which calculate your credit score by using a credit scoring model.

One significant part of your credit score is, of course, payment history. How well do you manage the debt that you have now? Are you making your payments on time? Do you have any collection accounts or judgments?

Another key part of your credit score is how much debt you are carrying and, specifically, how much of it you are carrying in relation to what you have available to you.

Do you have a maxed-out credit card? Do you have several of them? The ratio of balance to limit is a factor in your credit scores. A $200 balance on a card with a $1,000 limit looks much better than one with a $950 balance.

Too many installment accounts, such as car loans, or other types of fixed payment loans with high balances tend to drive down credit scores, as it gives the impression that you might be overextended.

The last factor that we’ll look into is the age of your debt. Maintaining a good payment history over a long period of time is a good thing.

The last thing you want is to apply for all kinds of credit cards just before you apply for a mortgage. This may make you look desperate in the eyes of the lenders.

Please let me know if I can answer any questions you have about how all of this works. I’m here to help, and I’m just a call or email away.