The following web page will provide you some helpful advice if you are thinking
about taking the leap to home ownership. We aren’t trying to sell you anything
here so it’s straight forward information. All you’ll find is good, free advice
on how to strategically and wisely approach the process.
The path to home ownership should typically begin at least one year before you
are actually ready to shop for homes.
Establish a minimum of 3 traditional credit references. (auto loans,
student loans, credit cards,etc.). Make your payments on time! This will boost
your credit score.
This is especially true for those of you who currently live with your parents
while trying to save money for a house. You can have $10,000 or more saved, but
if you don’t have a generating credit score or a history of renting from a
landlord, you could still have a very difficult time qualifying for a loan.
Visit a lender or pull your own free credit report at (link to on-line
credit report). Make sure everything is “clean”. Pay off or resolve any old
collections or judgments that appear on the report.
If you make good, responsible decisions, you will basically approve yourself.
Banks will sometimes approve borrowers who do not have a generating credit score
because of lack of traditional credit. If you have a history of: rent payments,
a utility payment, and one or two other sources, you could still be approved.
The bank will want to see at least twelve months of payments on these
alternative credit sources.
Ideally you are aiming for a fixed rate mortgage. There aren’t many surprises
with fixed rate loans. Your payment will only change because of taxes or
homeowner’s insurance increases.
Be wary of Interest-Only Loans or Adjustable Rate Loans. These non-fixed loans
can be ok if you are only planning on staying in your home for 3-5 years,
because the initial rate is frequently lower than your standard fixed rate. For
the long haul, however, fixed rates are preferable.
Pre-approvals and Searching for that First Home
Getting pre-approved by a lender is always a good first step. Some home sellers
won’t accept your Offer to Purchase unless you’ve already been pre-approved.
If you’ve been pre-approved by a lender, don’t automatically look for the
maximum amount of house that you’ve been pre-approved for. Look at the monthly
payment associated with the pre-approval. Ask yourself, “Can I afford this?”
“Do I want to pay this much every month?”
The old saying goes: Own your house. Don’t let your house own you.
If there’s an emergency and you are faced with a $400 medical or mechanics bill,
will you be able to pay for it?
A good approach is to under-spend on a fixer-upper or an underdeveloped home
(unfinished basement or no landscaping, for example) and then add things you
want as you are able to afford them with cash.
Searching for Assistance (Grants!)
Grants are usually available for first time homebuyers and low to moderate
income families. Call your local Housing Authority (usually organized by
Also, ask your Loan Officer. Grants are usually offered by county. Local
lenders are typically most knowledgeable about grants available in your area.
A big factor in getting approved for a home is your debt to income ratio (DTI).
Banks place a limit on how high your DTI can go; typically between 41-45%. To
calculate your DTI take the monthly house payment (principal, interest, taxes,
hazard insurance, mortgage insurance) for the home you are trying to purchase,
plus the monthly payment for your other current debts (auto loans, credit cards,
student loans, child support or alimony, etc.) and divide that # by your base
income. Note, however, that you should have a strong 2 year work history that
proves your ability to earn that hourly rate or salary. If you’ve been working
part-time minimum wage jobs for the last three years and have just started a new
job last week as a loan officer, for example, you might have a hard time getting
a bank to offer a loan based on your new income. Banks want to see historical
proof that you can consistently make your base wage.
Banks will carefully scrutinize the property that you are purchasing. If the
property you are buying needs some work (new roof, for example), don’t assume
that the bank you’re trying to get your loan from will be ok with you intending
to fix it after closing. Banks want to make sure that the property they are
giving you a loan for will be instantly marketable if you stop making payments.
Therefore, expect potential problems with situations like old roofs, leaky
foundations, or other things that impact the structural integrity of the home.
If you don’t have 20% down payment when you buy your home, chances are you will
have to pay mortgage insurance. Lots of people get upset when they have to pay
for this insurance on a month by month basis. It’s basically insurance for your
bank. You pay for something that provides no benefit to you. The only solution
here is to have 20% saved for down payment. Mortgage insurance will eventually
be eliminated once you reach that 20% equity level.
If you have credit card balances in excess of $2000 or more that you carry from
one month to another, your lifestyle exceeds your income. Get your spending
under control and pay off your credit cards. Then you will know that you are
ready for a home.
If you have $200 in the bank and frequently overdraw your checking account, you
might not be ready. Build up a savings plan. The only exception here would be
in the rare instance that your new house payment would be less than your current
If you are planning on starting a family in the next 1-2 years, take child care
expenses into consideration. Child care can reach $1200 a month or more
depending on where you live, making a house payment difficult to handle.
The general rule is once the street rate is 1% lower than your current rate, it
might be worth your time to look into refinancing. However, this is a very
The best thing to do is call your loan officer (or call 3 or more loan officers
to try and get the best deal). Find out how much they charge for a refinance
(closing costs) and how much your payment would drop per month with the new
interest rate. If you can make up for the cost of the refinance in less than 12
months, you should seriously consider locking in and refinancing. Note: be wary
of other lenders that may try to get your business away from your current lender
by promising certain payments or rates. Your current lender is most likely
going to give you the most fair and honest deal.
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