8 Steps to Getting Your Finances in
Order
Budget Basics Work Sheet
8 Ways to Improve Your Credit
Where to Get Your Credit Score
5 Factors That Decide Your Credit
Score
How Big of a Mortgage Can I Afford?
10 Questions to Ask Your Lender
10 Things a Lender Needs From You
6 Creative Ways to Afford a Home
Common Closing Costs for Buyers
What Is Appraised Value?
Choices That Will Affect Your Loan
1.
Develop a family budget. Instead of budgeting what
you’d like to spend, use receipts to create a budget for what you actually
spent over the last six months. One advantage of this approach is that it
factors in unexpected expenses, such as car repairs, illnesses, etc., as well
as predictable costs such as rent.
2.
Reduce your debt. Generally speaking, lenders look for
a total debt load of no more than 36 percent of income. Since this figure
includes your mortgage, which typically ranges between 25 percent and 28
percent of income, you need to get the rest of installment debt—car loans,
student loans, revolving balances on credit cards—down to between 8 percent and
10 percent of your total income.
3.
Get a handle on expenses. You probably know how much
you spend on rent and utilities, but little expenses add up. Try writing down everything
you spend for one month. You’ll probably see some great ways to save.
4.
Increase your income. It may be necessary to take on a
second, part-time job to get your income at a high-enough level to qualify for
the home you want.
5.
Save for a downpayment. Although it’s possible to get a
mortgage with only 5 percent down—or even less in some cases—you can usually
get a better rate and a lower overall cost if you put down more. Shoot for
saving a 20 percent downpayment.
6.
Create a house fund. Don’t just plan on saving
whatever’s left toward a downpayment. Instead decide on a certain amount a
month you want to save, then put it away as you pay your monthly bills.
7.
Keep your job. While you don’t need to be in the same
job forever to qualify, having a job for less than two years may mean you have
to pay a higher interest rate.
8.
Establish a good credit history. Get a credit card and
make payments by the due date. Do the same for all your other bills. Pay off the
entire balance promptly.
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The first step in getting yourself in financial
shape to buy a home is to know what you make and what you spend now. List your
income and expenses below.
Income
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Take-Home Pay/All Family Members
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Child Support/Alimony
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Pension/Social Security
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Disability/Other Insurance
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Interest/Dividends
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Other
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Total Income
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Expenses
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Rent/Mortgage
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Life Insurance
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Health/Disability Insurance
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Vehicle Insurance
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Homeowners or Other Insurance
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Car Payments
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Other Loan Payments
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Savings/Pension Contribution
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Utilities
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Credit Card Payments
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Car Upkeep
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Clothing
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Personal Care Products
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Groceries
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Food Prepared Outside the Home
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Medical/Dental/Prescriptions
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Household Goods
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Recreation/Entertainment
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Child Care
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Education
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Charitable Donations
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Miscellaneous
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Total Expenses=
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Remaining Income After Expenses=
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Credit scores, along with your overall income and debt, are a big factor in
determining if you’ll qualify for a loan and what loan terms you’ll be able to
qualify for.
1.
Check for and correct errors in your credit report. Mistakes happen,
and you could be paying for someone else’s poor financial management.
2.
Pay down credit card bills. If possible, pay off the entire
balance every month. However, transferring credit card debt from one card to
another could lower your score.
3.
Don’t charge your credit cards to the maximum limit.
4.
Wait 12 months after credit difficulties to apply for a
mortgage. You’re penalized less for problems after a year.
5.
Don’t purchase big-ticket items for your new home on credit
cards until after the loan is approved. The amounts will add to your debt.
6.
Don’t open new credit card accounts before applying for a
mortgage. Having too much available credit can lower your score.
7.
Shop for mortgage rates all at once. Too many credit
applications can lower your score, but multiple inquiries from the same type of
lender are counted as one inquiry if submitted over a short period of time.
8.
Avoid finance companies. Even if you pay the loan on time, the
interest is high and it will probably be considered a sign of poor credit
management.
This information is copyrighted by
the Fannie Mae Foundation and is used with permission of the Fannie Mae
Foundation. To obtain a complete copy of the publication, “Knowing and
Understanding Your Credit,” visit http://www.homebuyingguide.org.
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Helpful Hint: Under
the FACT Act amendments to the Fair Credit Reporting Act, you are entitled to
one free Personal Credit Report in a 12-month period. Don’t pay unless you need more!
Equifax
Experian
(formerly TRW)
Trans Union Corporation
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Credit scores range between 200 and
800. Scores above 620 are considered desirable for obtaining a mortgage. These
factors will affect your score.
1.
Your payment history. Whether you paid credit card obligations
on time.
2.
How much you owe. Owing a great deal of money on numerous
accounts can indicate that you are overextended.
3.
The length of your credit history. In general, the longer the
better.
4.
How much new credit you have. New credit, either installment
payments or new credit cards, are considered more risky, even if you pay
promptly.
5.
The types of credit you use. Generally, it’s desirable to have
more than one type of credit—installment loans, credit cards, and a mortgage,
for example.
For more on evaluating and
understanding your credit score, go to http://www.myfico.com/CreditEducation/.
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Not only does owning a home give
you a haven for yourself and your family, it makes great financial sense, too.
This calculation assumes a 28
percent income tax bracket. If your bracket is higher, your savings will be,
too.
Rent: _________________________
Multiplier: X 1.32
Mortgage payment:
__________________
Because of tax deductions, you can make
a mortgage payment—including taxes and insurance—that is approximately
one-third larger than your current rent payment and end up with the same amount
of income.
For more help, use Fannie Mae’s online mortgage calculators.
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Be sure you find a loan that fits your needs with
these comprehensive questions.
1.
What are the most
popular mortgage loans you offer?
2.
Which type of mortgage
plan do you think would be best for us? Why?
3.
Are your rates, terms,
fees, and closing costs negotiable?
4.
Will I have to buy
private mortgage insurance? If so how much will it cost and how long will it be
required? NOTE: Private mortgage insurance usually is required if you make less
than a 20 percent downpayment, but most lenders will let you discontinue the
policy when you’ve acquired a certain amount of equity by paying down the loan.
5.
Who will service the
loan? Your bank or another company?
6.
What escrow requirements
do you have?
7.
How long is your loan
lock-in period (the time that the quoted interest rate will be honored)? Will I
be able to obtain a lower rate if they drop during this period?
8.
How long will the loan
approval process take?
9.
How long will it take to
close the loan?
10. Are there any charges or penalties for prepaying the
loan?
Used with permission from
Real Estate Checklists & Systems.
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1.
W-2 forms or business
tax return forms if you’re self-employed for the last two or three years for
every person signing the loan.
2.
Copies of one or more
months of pay stubs from every person signing the loan.
3.
Copies of two to four
months of bank or credit union statements for both checking and savings
accounts.
4.
Copies of personal tax
forms for the last two to three years.
5.
Copies of brokerage
account statements for two to four months, as well as a list of any other major
assets of value, e.g., a boat, RV, or stocks or bonds not held in a brokerage
account.
6.
Copies of your most
recent 401(k) or other retirement account statement.
7.
Documentation to verify
additional income, such as child support, pension, etc.
8.
Account numbers of all
your credit cards and the amounts of any outstanding balances.
9.
Lender, loan number, and
amount owed on other installment loans—student loans, car loans, etc.
10. Addresses where you lived for the last five to seven
years, with names of landlords, if appropriate.
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If your income and savings are making buying a home a
challenge, consider these options.
1.
Investigate local, state,
and national down payment assistance programs. These programs give loans or
grants to cover all or part of your required down payment. National programs
include the Nehemiah program (http://www.getdownpayment.com) and the American
Dream Down payment Fund from the U.S. Department of Housing and Urban
Development (http://www.hud.gov).
2.
Get the seller to
provide financing. In some cases, sellers may be willing to finance all or part
of the purchase price of the home and let you repay them gradually, just as you
do a mortgage.
3.
Consider a
shared-appreciation, or shared equity, arrangement. Under this arrangement,
your family, friends, or even a third-party may buy a portion of the home and
thus share in any appreciation when the home is sold. The owner/occupant
usually pays the mortgage, property taxes, and all maintenance costs, but all
investors’ names are usually on the mortgage. There are companies that can help
you find such an investor if your family can’t participate.
4.
Get help from your
family. Perhaps a family member will loan you money for the down payment and/or
act as a cosigner for the mortgage. Lenders often like to have a cosigner if
you have little credit history
5.
Lease with the option to
buy. Renting the home for a year or more will give you the chance to save more
toward your down payment. And in many cases, owners will apply some of the
rental amount toward the purchase price. You usually have to pay a small,
nonrefundable option fee to the owner.
6.
See if you can qualify
for a short-term second mortgage to give you the money to make a higher down
payment. This may be possible if you
have a good income and little other debt.
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The lender must disclose a good
faith estimate of all settlement costs. A check to cover your closing costs
will probably have to be a cashier’s check. The title company or other entity
conducting the closing will tell you the required amount for:
§
Downpayment
§
Loan origination fees
§
Points, or loan discount
fees, you pay to receive a lower interest rate
§
Appraisal fee
§
Credit report
§
Private mortgage
insurance premium
§
Insurance escrow for
homeowners insurance, if being paid as part of the mortgage
§
Property tax escrow, if
being paid as part of the mortgage. Lenders keep funds for taxes and insurance
in escrow accounts as they are paid with the mortgage, then pay the insurance
or taxes for you.
§
Deed recording fees
§
Title insurance policy
premiums
§
Survey
§
Inspection fees—building
inspection, termites, etc.
§
Notary fees
§
Prorations for your
share of costs, such as utility bills and property taxes
A Note About Prorations: Because such costs are usually paid on either a
monthly or yearly basis, you might have to pay a bill for services used by the sellers
before they moved. Proration is a way for the sellers to pay you back or for
you to pay them for bills they may have paid in advance. For example, the gas
company usually sends a bill each month for the gas used during the previous
month. But assume you buy the home on the 6th of the month. You
would owe the gas company for only the days from the 6th to the end
for the month. The seller would owe for the first five days. The bill would be
prorated for the number of days in the month, and then each person would be
responsible for the days of his or her ownership.
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It’s an objective opinion of value,
but it’s not an exact science so appraisals may differ.
For buying and selling purposes,
appraisals are usually based on market value—what the property could probably
be sold for. Other types of value include insurance value, replacement value,
and assessed value for property tax purposes.
Appraised value is not a constant
number. Changes in market conditions can dramatically alter appraised value.
Appraised value doesn’t consider
special considerations, like the need to sell rapidly.
Lenders usually use either the appraised
value or the sale price, whichever is less, to determine the amount of the
mortgage they will offer.
Used with permission from Kim Daugherty, Real Estate
Checklists and Systems.
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§
Mortgage term. Mortgages are generally available at 15-, 20-, or
30-year terms. The longer the term, the lower the monthly payment if the same
amount is borrowed. However, you pay more interest overall if you borrow for a
longer term.
§
Fixed or adjustable
interest rates. A fixed rate allows
you to lock in a low rate for as long as you hold the mortgage and is usually a
good choice if interest rates are low. An adjustable-rate mortgage (ARM) is
designed so that interest rates will rise as interest rates increase; however
they usually offer a lower rate in the first years of the mortgage. ARMs also
usually have a limit as to how much the interest rate can be increased and how
frequently they can be raised. ARMs are a good choice when interest rates are
high or when you expect your income to grow significantly in the coming years.
§
Balloon mortgages. Balloon mortgages offer very low interest rates for
a short period of time—often three to seven years. Payments usually cover only
the interest, so the principal owed is not reduced. However, this type of loan
may be a good choice if you think you will sell your home in a few years.
§
Government-backed
loans. Government-backed loans,
sponsored by agencies such as the Federal Housing Administration (www.fha.gov)
or the U.S. Department of Veterans Affairs (www.va.gov), offer special terms,
including lower downpayments or reduced interest rates—to qualified buyers.
Slight variations in interest
rates, loan amounts, and terms can significantly affect your monthly payment.
For help in determining how much your monthly payment will be for various loan
amounts, use Fannie Mae’s online mortgage calculators.
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Copyright
2005. All rights reserved. www.REALTOR.org/realtormag
