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For those who want to acquire a house, it helps to get your finances in order. That way, you can quickly and effortlessly navigate the homebuying journey without having to worry about how you'll afford your dream house.
There are many quick, easy ways to straighten out your finances before you embark on the homebuying journey, such as:
1. Assess Your Credit Score
Your credit score ultimately can play a major role in your ability to secure a great mortgage. If you understand your credit score, you may be able to find ways to improve it prior to conducting a home search.
It is important to remember that you are entitled to a free copy of your credit report annually from each of the credit reporting agencies (Equifax, Experian and TransUnion). Request a free copy of your credit report today, and you can take the first step to evaluate your credit score.
If you find that your credit score is low, there is no need to worry. You can always pay off outstanding debt to improve your credit score over time.
Also, if you identify any errors on your credit report, you'll want to address these mistakes immediately. In this scenario, you should contact the agency that provided the report to ensure any necessary corrections can be made.
2. Look Closely at Your Monthly Expenses
When it comes to buying a house, it generally helps to have sufficient funds for a down payment. The down payment on a house may fall between 5 and 20 percent of a home's sale price, so you'll want to have enough money available to cover this total for your dream residence.
If you evaluate your monthly expenses, you may be able to find ways to save money for a down payment on a house.
For example, it may be beneficial to cut out cable TV for the time being and use the money that you save toward a home down payment. Or, if your dine out frequently, cooking at home may prove to be a substantial money-saver that could help you speed up the process of saving for a down payment.
3. Get Pre-Approved for a Mortgage
With pre-approval for a mortgage, you can enter the housing market with a budget in hand. Then, you'll be better equipped than ever before to narrow your search to houses that fall within your price range.
To get pre-approved for a mortgage, you'll want to meet with banks and credit unions. These financial institutions can teach you about different mortgage options and help you assess all of the options at your disposal.
Furthermore, don't hesitate to ask banks and credit unions about how different types of mortgages work. This will enable you to gain the insights that you need to make an informed decision about a mortgage based on your financial situation.
If you need extra help as you prepare to pursue a house, you may want to hire a real estate agent as well. In fact, a real estate agent can help you find a high-quality house at a budget-friendly price in no time at all.
Buying a home represents a dream come true for many individuals. However, to transform this dream into a reality, you'll likely need to qualify for a mortgage.
Finding the right mortgage may seem difficult, particularly for a first-time homebuyer. Fortunately, we're here to help you make sense of all of the mortgage options at your disposal so you can select the right option based on your budget and lifestyle.
Here's a closer look at three of the most common mortgage options for homebuyers.
With a fixed-rate mortgage, there are no cost fluctuations. This means that you'll pay the same amount each month for the duration of your mortgage, regardless of economic conditions.
For example, if you sign up for a 15- or 30-year fixed-rate mortgage, you'll wind up paying the same amount each month until your mortgage is paid in full. In some instances, you may even be able to pay off your mortgage early without penalties.
A fixed-rate mortgage often serves as a great option for those who don't want to worry about mortgage bills that may fluctuate over the years. Instead, this type of mortgage guarantees that you'll be able to pay a consistent monthly amount for the life of your loan.
An adjustable-rate mortgage represents the exact opposite of its fixed-rate counterpart. The costs associated with this type of mortgage will change over time, which means you may wind up paying a fixed interest rate for the first few years of your loan and watch this rate go up a few years later.
For instance, a 5/1 adjustable-rate mortgage means that your interest rate is locked in for the first five years of your loan. After this period, the interest rate will adjust annually. Therefore, a rising interest rate may force you to allocate additional funds to cover your mortgage costs in the future.
An adjustable-rate mortgage may prove to be a viable option if you plan to live in a home for only a short amount of time. Or, if you're a college student or young professional, an adjustable-rate mortgage may help you pay less for a home now, secure your dream job and become financially stable by the time your initial interest rate period ends.
3. VA Loans
The U.S. Department of Veterans Affairs (VA) provides loans to military service members and their families. These loans are backed by the government and enable individuals to receive complete financing for a house. Thus, with a VA loan, an individual is not required to make a down payment on a house.
If you ever have concerns or questions about mortgage loans, banks and credit unions are available to help. Also, your real estate agent may be able to offer mortgage insights and tips to ensure you can secure a mortgage quickly and effortlessly.
Learn about all of the mortgage options that are available, and by doing so, you can move one step closer to buying a home that matches your budget and lifestyle.
Although challenging life situations like a job layoff, rising mortgage rates and divorce can damage your ability to continue to make your monthly mortgage payments, you don't have to be hit with an unexpected shift to strain to meet your mortgage obligations. As an example, simply taking on another financial responsibility like a car payment, college tuition or small business loan could put you at risk of defaulting on your home loan.
Lower mortgage choices that hurt
To keep from defaulting on your mortgage, you could work a second job, put in longer hours at your first job or cut back on other expenses. Instead of getting a degree, you could try to make your current educational background help you land work opportunities that you really want.
But, those choices hold you back. They keep you from doing what you really want to do. Taking on a second job and working longer hours at your first job put you under too much stress. Fortunately, there's another option that you could take to reduce your mortgage.
This option is often overlooked when homeowners get into financial hot spots. A reason for that may have to do with the fact that some people buy houses to avoid connecting with others more deeply. That's right. Some people use their house as a hiding place.
If your relationships are good, you may be a prime candidate for this mortgage reducer
There's fallout from this decision. The fallout limits your ability to create rewarding relationships. And you definitely need rewarding relationships to take advantage of the overlooked mortgage reducer. A great place to start trying out this shortcut to a smaller mortgage is with your parents.
Similar to how you may have moved back in with your parents after college when you were trying to pay off your student loans and before you landed your first full-time job, open to the idea of living with your parents again. The difference is that this time you'll ask your parents to move in with you.
Even if your parents are living on a fixed income, they could help pay a portion of the mortgage. Not only may you and your parents grow closer with this arrangement, you'll both have someone to communicate with. Siblings, adult children and friends are other people who could move in with you and split the mortgage.
Tenants reduce mortgages, letting you stay in a good house
Shortcut to a smaller mortgage can also open up for you if you rent out a portion of your house. If your house has three levels, you could rent out the first and second levels to tenants. You'd have to make sure that the rented space meets local housing codes.
But, unlike living with family, you'll have to develop legal leasing contracts with the tenants. Of course, you could enter into legal written agreements with family members too, detailing when rent is due and the types of maintenance that you are responsible for at the property.
What do buying a house, opening a credit card, and getting approved for an auto loan have in common? They all depend on your credit score.
Building credit is a multifaceted undertaking. In a way, this is a good thing--you wouldn’t want lenders to base their opinions solely on one aspect of your financial history. The downside is that understanding just what makes up your credit score can be difficult.
To complicate matters further, there isn’t one standard method for scoring your credit, and different credit bureaus each use their own criteria.
In this article, we’re going to talk about some of the factors the major credit bureaus use to calculate your credit, and give you some ways you can boost your credit.
But first, let’s talk about some of the implications of having a good credit score.
Why credit matters
Typical credit scores range anywhere from 250 to 850. The three main reporting agencies (Equifax, TransUnion, and Experian). Most lenders use a combination of those scores that is reported by FICO.
Most credit reports will rank your category from “bad” to “excellent.” Here’s an example of what a credit ranking might look like:
Good: 700 - 749
Fair: 650 - 659
Poor: 550 - 649
U.S. legislation makes it possible for Americans to receive a free report of their credit score and to challenge and correct the score if it contains inaccuracies.
If you’re thinking about buying a house, opening a new line of credit, or taking out a loan of some kind, then the provider will likely run your credit score. Those providers are going to want to see a return on their investment, so they’ll charge interest.
If you have a high credit score, it tells the lenders that you are a low-risk investment, and therefore they can offer you a lower interest rate, saving you money in the long run.
Components of a credit score
There are five main factors that credit bureaus take into consideration when formulating your credit score. Not all of the factors are treated equally. Your ability to pay your bills on time, for example, is considered to be more important than the types of bills you have. Here’s a breakdown of the five components that make up a credit score:
35% - Bill and loan payments
30% - Current total amount of debt
15% - Amount of time you’ve had credit (since you took out your first loan or opened your first credit card)
10% - Types of credit (cards, loans, etc.)
10 % - New credit inquiries
Quick tips for building credit
It takes time to build credit and improve your score. So, if you’re hoping to buy a home within the next few years, now is the time to start working on your credit. Here are some best practices for building credit:
Set up autopay for your bills to avoid late payments. Even if the service doesn’t offer autopay, you can likely set up recurring payments through your bank.
Settle outstanding debt. Avoiding debt that you can’t pay off will only hurt you more in the long run. Call your creditor and see if they offer debt relief programs. More likely than not they’d rather work with you to ensure they receive some repayment rather than none at all.
Start budgeting the right way. New budgeting software like Mint and “You Need a Budget” are easy to use and link up with your accounts. They’ll help you monitor your spending and start paying off debt.
Don’t open new lines of credit close to when you want to take out a loan. New credit inquiries can briefly lower your credit, especially if you make more than one. Viewing your free credit reports doesn’t count as an inquiry, so feel free to do that as often as needed to check your progress.
Get credit for bills you’re already paying. You can report your monthly rent payments, switch bills into your name that you contribute to, or take out a credit builder loan. All three will help you build rent without changing your spending habits.
If you’re in the market to buy a home, you’re probably learning many new vocabulary words. Pre-approved and pre-qualified are some buzz words that you’ll need to know. There’s a big difference in the two and how each can help you in the home buying process, so you’ll want to educate yourself. With the proper preparation and knowledge, the home buying process will be much easier for you.
This is actually the initial step that you should take in the home buying process. Being pre-qualified allows your lender to get some key information from you. Make no mistake that getting pre-qualified is not the same thing as getting pre-approved.
The qualification process allows you to understand how much house you’ll be able to afford. Your lender will look at your income, assets, and general financial picture. There’s not a whole lot of information that your lender actually needs to get you pre-qualified. Many buyers make the mistake of interchanging the words qualified and approval. They think that once they have been pre-qualified, they have been approved for a certain amount as well. Since the pre-qualification process isn’t as in-depth, you could be “qualified” to buy a home that you actually can’t afford once you dig a bit deeper into your financial situation.
Getting pre-approved requires a bit more work on your part. You’ll need to provide your lender with a host of information including income statements, bank account statements, assets, and more. Your lender will take a look at your credit history and credit score. All of these numbers will go into a formula and help your lender determine a safe amount of money that you’ll be able to borrow for a house. Things like your credit score and credit history will have an impact on the type of interest rate that you’ll get for the home. The better your credit score, the better the interest rate will be that you’re offered. Being pre-approved will also be a big help to you when you decide to put an offer in on a home since you’ll be seen as a buyer who is serious and dependable.
Things To Think About
Although getting pre-qualified is fairly simple, it’s a good step to take to understand your finances and the home buying process. Don’t take the pre-qualification numbers as set in stone, just simply use them as a guide.
Do some investigating on your own before you reach the pre-approval stage. Look at your income, debts, and expenses. See if there is anything that can be paid down before you take the leap to the next step. Check your credit report and be sure that there aren’t any errors on the report that need to be remedied. Finally, look at your credit score and see if there’s anything that you can do better such as make more consistent on-time payments or pay down debt for a more desirable debt-to-income ratio.