Mortgages, Credit Ratings, and Downpayments: 5 Things to Know Before Buying a Home
When I wanted to buy a house, the only thing I had going for me was want to buy a house. i had a ton of debt
, a few dollars in my name and no idea where to start.
It was seven years ago. Last month i did to buy a house
after finally figuring out what to do before getting started. Here is what worked for me as well as other things that will get you into the right house.
1. Improve your credit score
If you are considering taking out a mortgage (most people do), youris the most important factor in buying a home. Lenders look at your credit rating and history to see if you (and, if applicable, a co-borrower) are a responsible credit borrower. The higher your credit score, the more likely you are to get a home loan at the lowest rate available.
It also means that the lower your credit score, the higher your interest rate will be, if you qualify. You can increase your score by:
- Make timely payments: The most important factor in calculating your credit score is your on-time payment history. If your payment history is a bit spotty, start making payments on time immediately. Sign up for Auto Pay whenever you can to make sure your payments are never late.
- Reduce your credit usage: If you have a monthly balance on your credit cards, lenders might think you don’t have enough cash on hand to make mortgage payments. Reduce your credit usage by paying off your credit cards in full at the end of the billing cycle. If your credit score is good enough, ask your credit card issuer for an increase in your balance. It will also reduce your credit usage, or the ratio of your credit card usage to available credit.
- Delete bad grades: Check your credit score for free at AnnualCreditReport.com. You can retrieve your credit report from the three major credit bureaus: Experian, Equifax, and Transunion. From there you will be able to see if there are any errors. If you have any errors, contract the office to report it. Also contact the creditor who reported the error to see if there is anything you need to do to correct it.
2. Start – and contribute – to a down payment
If you don’t have the cash on hand, now is the time to start saving for a down payment based on the price of the house you are targeting. Saving for a down payment can delay your home buying schedule, but it makes a big difference in what you can buy.
Even if you don’t need the standard 20% deposit, it is still recommended. You can qualify for a mortgage – an FHA or conventional – without one, but you’ll have to pay private mortgage insurance in addition to your monthly payments. PMI payments do not go to your principal or interest balances; it’s paid to your mortgage lender as a layer of protection in case you can’t pay off your loan. With a 20% down payment, you will avoid PMI payments and get a lower interest rate (without pay points).
Where you keep your down payment depends on when you plan to buy your home. If it’s over the next year or so, you might want to stick with a high yield savings account, like Marcus or Ally. The returns are not as high as they would be if you were to invest in the stock market, but you will not lose money and you will earn a lot more than what standard checking and savings accounts offer, usually around 0. 09%.
If you have a little extra time to buy, consider investing your money in the stock market. You can go with a traditional brokerage house or, like . Robo-advisers automatically manage your assets by investing in low-cost exchange-traded funds. These advisors assess your risk using a survey asking you what type of investor you are and when you plan to withdraw your investments. This way, you can still invest in the stock market without selecting individual stocks or worrying about the technicalities of trading.
To get the most out of your down payment investments, find a way to contribute often. See if you can set up automatic monthly or bi-weekly contributions. Think of it as a bill you pay each month to avoid paying yourself last.
Avoid borrowing money, either through a personal loan or your future with a 401 (k) loan.allows you to withdraw money from your retirement fund to cover the costs of buying a home, such as your down payment or closing costs. Even if you can use the funds, try to avoid it. Even when you pay back that money, you will lose any potential funds that would have increased by investing it.
3. Get pre-approved
Before you start browsing your dream homes, find out how many homes you can buy. Lenders base their approval on your credit score, debt-to-income ratio, income, work history, and whether you own any assets.
Pre-approval helps you buy homes that fit your budget. It also shows sellers that you are serious about buying a home and making an offer. To get pre-approved, you can apply with your bank, broker, or online lenders. Since pre-approvals are loan applications that trigger a high demand for credit, check to see if you are prequalifying first. A prequalification involves answering a few questions based on your credit history and income to see if you qualify for a loan. A pre-approval is when a potential lender checks your background to make sure you’re eligible for a loan. While a prequalification is based on your responses, a pre-approval is based on what is available through credit bureaus, your bank accounts, and other financial information.
4. Find a real estate agent
Navigating the world of buying a home is not easy. There are constantly evolving rules, which means having an expert around can make a complicated process a lot more manageable. Realtors are helpful in explaining what you need and finding the right people to meet those needs. For example, they can identify neighborhoods with the best schools and negotiate costs with vendors when it comes time to make your offer. They can also explain contractual information when things get confusing, like seller disclosures and how much money to put on deposit.
The best way to find an agent is to ask around to see who your friends and family recommend. You may also want to find an agent who is familiar with the neighborhoods you are exploring.
5. Establish your housing budget
When a bank or broker pre-approves your loan, they provide a pre-approved loan amount. But even if you’ve been pre-approved for that amount, it’s not necessarily the right amount to spend on a home.
What is the most money you can spend on a house each month? Determining your ideal monthly payment will help you determine the best target price for a home. Your monthly payment is determined by your principal payment, your interest rate, your taxes, your home insurance and whether or not you will pay the PMI.
To do this, review your budget and include what a potential payment for a new home looks like. Don’t forget to add your property taxes, utilities, and any maintenance that comes with your new home (like pool maintenance, for example). This will give you an idea of how your finances will be affected when you buy a new home.
Browse the houses (finally!)
While looking at potential homes is one of the last things you’ll do, it’s because it doesn’t make sense to do it earlier. Without having an idea of how much home you can afford and a pre-approval letter, all you would do is hurt yourself looking at homes that you may never be able to buy.
Use your agent to find homes within your budget in neighborhoods you like. If these neighborhoods are out of your budget, ask your agent to see if there are any similar ones nearby. Your agent will know the market better than most people you know – use them.
Whether you are attending open houses or making an appointment to tour the homes on your own, see as many as you want. Buying a home will probably be the most expensive purchase you will ever make. Don’t settle for anything less than what’s best for you.
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