Financing A Home- Plan of Action
Financing a home can be hard for some people. Below are 11 things to use as a guideline and plan of action for what you can do to give yourself the best ability to acquire the lowest interest rate and terms from a home lender. There are many kinds of loans that we will explain later that don’t fit into the “normal” loan category. Fitting into the “normal loan” box will give you the best interest rate and since home loans are usually for 30 years, this can add up to be a lot of money.
Create A Plan Of Action Including:
Use receipts to create a budget that reflects your actual habits. This should cover most of the surprises, the actual bills, utilities and groceries. You’ll spot some areas to save, and making your coffee and meals at home for a few months might be all you need to do.
When financing is applied for, lenders look for a debt load (ratio- debt vs. income) of no more than 36 percent of your net income. Your ratios includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. Therefore you need to get monthly payments on the rest of your installment debt—car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income. Car loans are usually not counted as debt if you have 10 payments or less left.
Increase Your Income:
Now’s the time to ask for a raise! Family contributions might be an option too. Another option is to sell extra “stuff”. You may want to consider taking on a second job. Your goal is to get your income and savings at a level high enough to qualify for the home you want or to reduce debt.
Saving For A Down Payment:
Ideally 7%-22% of the purchase price is what you should have saved. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with 5 percent down or less, you will get a better rate and avoid mortgage insurance if you put down a larger percentage of the purchase price. Aim for a 20 percent down payment. Besides the down payment, there are closing costs.
Keep Your Job:
Having a job in the same line of work for two years is the guideline used. Don’t quit your job quite yet! Don’t become self-employed yet!
Establish A Good Credit History:
Financing can be tricky. The lenders package your paperwork and send it to an underwriter. An underwriter wants to see that you have a life and can afford to finance a new home. They want to see that you have a credit card or two and make payments by the due date. They want to see that you haven’t ever negotiated down a loan after not paying for awhile. If you’ve screwed up, give it 12 months to raise your credit score. Also pay all other bills including utilities on time. Utilities can be used as a credit reference with a FHA loan. AUTO-PAY EVERYTHING! Try to use only 1-2 credit cards and pay them off each month.
Obtain A Copy Of Your Credit Report:
Go to : www.annualcreditreport.com for your free annual credit report. Make sure it is accurate and correct any errors immediately. A free credit report provides a history of your credit, bad debts, and any late payments. It usually does not have your actual FICO score which is the magic number everyone wants to know. Paying for a credit report will give you your actual credit score- FICO. See if you can clear up negative credit.
Talk to your insurance agent to make sure you have no red flags that would hurt your chances of getting Homeowner’s Insurance. Also ask what percentage your car insurance would go down if they got an additional type of policy if you don’t currently own your home. TIP: If you are currently renting without renter’s insurance, call your auto insurance company. You should be able to add it for no additional cost by getting a multi-policy discount. Shopping car insurance rates might also save you money.
Payments and Loan:
Rule of Thumb- homes valued between two and three times your gross income will be in your price range. Your lender will tell you what you can finance based on your ratios. What’s really important is what size payment you feel comfortable with. Keep in mind that if you finance your home, you will probably have interest and property tax write offs. Do you want a 15 or 30- year loan? Fixed or adjustable rate mortgage? Note: If you have a 30 year mortgage and make a payment every 4 weeks, not every month, you will pay your house off 8 years sooner. With rates so low, you’ll probably want a fixed rate.
Investigate Down Payment Help:
Right now Nevada has a 3% grant program so ask your lender about it. If your lender doesn’t know about this program, call or email us and we will refer you to a lender who’s on top of everything. With many IRA and 401K plans, you can use money you’ve saved to buy your first home without a penalty. Trustees usually allow access to trust monies for home purchases. Give your broker or trustee a call so you know for sure! If family is gifting funds, get it and deposit it into your account 3 months in advance. All money must be trackable for at least three months. No cash- empty the mattress!
While In Escrow, DO NOT Spend Money:
A final credit report is done just before closing your loan. Any additions line items could change you from qualifying for a loan to not qualifying. Try to minimize the food in your cupboards and freezer. Don’t go shopping. Don’t put a deposit on anything. No pool yet! No new car yet! You can still blow your home financing out of the water. If this happens on the last day, you might lose your house and earnest money. So, let’s make a Rule of Thumb: DON”T GO SHOPPING UNTIL YOU HAVE KEYS! Hide your credit card, STAY HOME AND PACK!