First Time Home Buyers, Part 2 – Can You Afford to Buy?

I recently shared information for potential first time home buyers about the differences between renting and owning http://activerain.com/blogsview/2346328/first-time-home-buyers-part-1-come-out-come-out-wherever-you-are

Once you’ve decided that you do want to own your own home, the next logical question is whether you can afford to do so.  This blog will help you make that determination.

When you start looking for a home, one of the first things a real estate agent will ask you is whether you have been pre-approved for a mortgage.  Pre-approval is necessary so that you know how much you can really spend on a new home, and so you may make an offer when you find a property you like.   Offers are typically accepted only by pre-approved buyers.

So how do you get pre-approved, and what does it really mean?

You can contact any mortgage company directly, or use a mortgage broker who can find you the best rate among multiple companies.  One of the first things any mortgage broker will do is to check on your credit score.  A “good” or “excellent” credit score is usually necessary to get a mortgage, so the first thing any home buyer should do is to check their credit score and improve it as necessary.

Obtaining your credit report:   Everyone is eligible to get one free credit report per year.  If you access https://www.annualcreditreport.com/cra/index.jsp and fill in all required information, select one of the three listed credit companies, you will be able to obtain and print your credit report.  This will show all information that is negatively (or positively) impacting your credit.  If you are late with payments, or have any collection issues, this information will be provided. 

Improving your credit:  Once you have this information, there are many ways to improve your credit, and many websites that will help you.  However, the bottom line is you need to:

  • credit cardHave credit!  This may seem obvious, but if you don’t have a credit card, get one.  Use it and pay off the balance immediately.
  • Pay down credit.  If you have credit cards, pay them down or off.  There should be a big gap between your credit limit and the credit you’re using.  Try to use 10% or less of your available credit.
  • Check your charge card limits.  Make sure the credit bureaus are using the right limits, so the % mentioned above is the best it can be.
  • Don’t cancel unused charge cards.  This might seem counter-intuitive, but canceling an old card could actually lower your score.
  • Pay your bills on time.  If you have late payments, get them caught up and then stay on top of them.
  • Immediately clear up any errors that you find on the report.  This includes collection items that don’t belong to you, incorrect credit card limits, and anything else you see that is incorrect.

Credit Score:  Your actual credit score, though, is not included in the free report mentioned above.  If you want to see your actual score, you will need to pay one of the companies to obtain it.

What does your credit score mean?  So you have your credit score, but what does it MEAN?  Scores range from 350-850.  The higher the score, the better you’re doing.  While various industry sources bucket scores differently, in general you can follow the below guidelines.  If your score is:

  • good scoresBelow 620: your chances of obtaining an attractive interest rate are low and you may have difficulty obtaining a mortgage loan.  In this category you could pay 3% more in interest rates than someone with excellent credit.
  • 621 to 674: this is a below-average score, and you will have to pay a higher interest rate than someone with excellent credit.
  • 675 to 719: while these are not the highest scores, you should have little problem finding a decent interest rate.
  • 720 and higher:  this is an excellent credit score, and will allow you to be able to utilize a lender’s best rates.

What else is required besides credit score to be pre-approved?

When you’re discussing pre-approval with your mortgage broker or bank, they will require specific information such as your social security number, date of birth, full name and address of the borrowers, monthly expenses and income and information on assets and liabilities.  This information is utilized to determine your ability to pay back the loan, and to determine what kind of loan you might qualify for (conventional, FHA, SONYMA, others).  If you are not being asked for this level of information, you are being pre-qualified not pre-approved.

What if I have a small down payment?

stack of billsWhen determining the amount of money you need to purchase a home, you need to ensure you will be able to cover a down payment and closing costs.

If you do not have a large down payment, your mortgage specialist will help you find the right loan for you.  There are specific loans, such as FHA (http://www.fha.com/)  and SONYMA (http://www.nyhomes.org/Home/Buyers/SONYMA/) that may require only a 3% down payment and charge 0 points. 

In addition, there are programs which provide down payment assistance for first time homebuyers.  These programs may provide loans or grants (which do not need to be paid back) to assist with either your down payment or your closing costs.  See www.downpaymentresource.com for more information.

To summarize – If you want to buy a new home, don’t let credit score worries or small down payment funds stop you from pursuing your dream.  Check your credit report, make any adjustments to improve it, and contact a quality mortgage broker to assist with pre-approval. 

Next time, I’ll provide information to help you decide whether or not to use a buyer’s real estate agent to assist you in your home hunt.

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