Preparing For Home Ownership
Whether or not you can buy a house will depend on how much money you have and your credit standing. Even if you have the money, your credit will determine how much house you will be able to buy and how much it will cost you to borrow the money. Yes it costs money to borrow money! You didn’t think that the bank would give you money for free did you? Interest is the cost of borrowing money. How much interest you may, depends on your credit worthiness. How much money you owe, how many lines of credit you have, how you have paid those debts in the past, what types of debt you have are all ways that your credit worthiness is calculated. Lenders also look at employment history along with your credit history. Your credit file contains: Identifying, employment, credit and public record information and inquiries.
What is not included in your credit profile is; race, religion, health, driving record, criminal record, political preference or income. Your credit profile is about your use of money and credit extended to you, not who you voted for in the last election, or where you Mother was born.
What is important is the credit score, which ranges between 350 and 950. The higher the number, the less risk, the lower the number, the higher the risk. Well, the risk is the likelihood you will pay the loan back. A person with a high credit score is more likely to repay a loan and they have done with other loans. Someone with a low credit score has been scored low for a reason, whether it be late payments, non payments, and even judgments.
Previous credit (payment history) is 35% of your credit score. 30% of your credit score is your current level of indebtedness, the balance you hold compared to credit limit. 15% is the time the credit has been opened (the longer the better). 15% is based on the types of credit, installment loans, revolving and debit accounts; and the last 5% is the number of inquires, i.e., how much credit you are trying to get.
The most important part of your credit is paying your bills on time, no matter how little the debt. This will show mortgage brokers that you will pay your mortgage on time. Before going to a mortgage broker, order copies of you credit reports from www.freecreditreport.com. As mandated by the government, everyone is entitled to one free copy of their credit report from each of the three credit bureaus, Trans Union, Experian, Equifax. It is important to monitor your credit often, as identity theft is one of the fastest growing crimes today. Know what you are walking into before you go looking for your pre-approval.
Before you go looking for a house, know how much you can spend. And this is what you find out from your mortgage broker. A mortgage broker will take a look at your credit history and your income and determine how much house you can afford. What you can afford is what you can pay out each month for mortgage, taxes and insurance and still live. All your debts should be around 28% of your gross (before taxes) income. There are some programs that will go up to 40% debt income ratio. But be careful! You don’t want to be house broke!
As you are trying to save, keep in mind that closing costs are around 3% of the purchase price. You will also need to pay for your lawyer and have an Home Inspector evaluate the home. Because of the recent foreclosure crisis, we may have seen the last of the days of 3%, 5% or No Money Down home loans. The risk is too high when home buyers go into a mortgage with no equity. So start saving! Traditionally, to purchase a home, you needed 20% down and 6-9 months of reserves for emergencies. Talk to your mortgage broker about your circumstances and see what they suggest. With the proper research and preparation, you will soon be a home owner and earning all the privileges thereof!
