After deciding that buying a home is the best decision for you, what's next?
Being Prepared
It will be good for you to evaluate how prepared you currently are to buy a home. Perhaps you have been making steps towards this goal for a while or maybe this is all new to you. Either way, the ways you have equipped yourself for this venture will be major determining factors on which loan program you choose. Do you have an amount for a down payment? What is your income to debt ratio? How is your credit status? There are a number of ways you can be prepared for this process.
Ways To Be Prepared
The best way you can begin the home buying process is to be prepared. To do this in the best manner, you'll want to consider all aspects of your finances and determine the current status of your savings, credit, debt, and income. All these elements set the stage for you to begin buying the home you want.
Your Down Payment
The amount you may or may not have available for a down payment will be one major deciding factor on which mortgage program that best suits you.
In today's environment, there tend to be more opportunities and choices available for those buyers who are able to provide a larger down payment. However, even if you may not have the funds available for a substantial down payment, you still can find loan programs that allow a low or no down payment option.
To prepare yourself to contribute a down payment towards the purchase of your home, there are a few simple things you can do:
Your Credit History
A major determining factor lenders use in deciding whether or not to approve you for a loan is your credit history. You'll want to know how your credit score is derived and also ways to keep your credit clean.
How Your Credit Score is Derived
Developed in 1956, a Fair Isaac Corporation Score (commonly called the FICO Score) is a three digit number ranging from 300-850 and is calculated according to the following risk factors:
Once the borrower's score is derived, most lenders use a standard 'grading' system to categorize the results. While some lenders develop their own systems for classification of scores, below is a general guide of score interpretation. Used as a general reference, this can help you interpret the credit score you've been given based on a grading system typically used in schools:
A+ to A 670 and above
A- 650
B+ to B- 620
C+ to C- 580
D+ to D- 550
E 520 or below
Fixing Credit Report Errors
Under the Fair Credit Reporting Act, you have the right to dispute the accuracy and comprehensiveness of information in your credit file. Unless the credit reporting agency believes a dispute to be "frivolous or irrelevant," it must reinvestigate and record the current status of the disputed items within a "reasonable period of time." A disputed item must be deleted if the credit reporting agency cannot verify it. The credit reporting agency also must correct any erroneous information in the report. Any incomplete item must be completed by the credit reporting agency as well.
In the instance that your file indicates that you were behind on making payments for a period of time but neglects to record that you currently are on time with payments, the current agency must confirm you are now current with these payments. The credit reporting agency also will have to delete any file shown to belong to another person. Any report recipient who has checked your file in the past 6 months must receive a notice of correction from the credit reporting agency if you request it.
You send a brief statement to the appropriate credit reporting agency when you feel there are items in your credit profile that deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills). The information will be placed in your credit profile and will be disclosed each time it is accessed.
Fair Isaac Resolution Resources Helpline (800) 777-2066
Keep Your Credit Clean
Credit Cleaning Tips
Liens, garnishments, etc., typically are indicators of an unstable borrower. Any judgments, garnishments, or liens must be paid in full. Prior to closing, proof that the judgment, garnishment or lien has been cleared must be obtained; this can be reflected through a clear credit report supplement or a paid receipt form from the creditor. IRS tax liens also must be paid in full. Standard property tax liens do not have to be recorded as paid in full since they are not yet due or payable. Also, the borrower is obligated to provide a satisfactory letter of explanation.
Delinquent Child Support
Child support payments must be brought current, and specific documentation from the credit reporting agency evidencing this fact must be in the file with NO EXCEPTIONS! Because of the seriousness of the delinquency/default, which in many states can cause incarceration, the A letter from the court or the legal authority responsible for collection in the city/state (e.g. district attorney, sheriff, etc.) is acceptable. A letter from an ex-spouse and copies of personal checks are not acceptable, nor is an agreed upon, but not yet completed, payment plan.
Credit Bureaus:
There are a good number of reporting agencies that can provide you your credit score. Three of the leading services for this are:
Experian
www.experian.com
1-888-397-3742
Equifax
www.equifax.com
1-800-685-1111
Trans Union
www.transunion.com
1-800-888-4213
Above all, take note that even if you have encountered credit challenges in your past, you can still find ways to finance the home. Consult with your SymbolicLending Loan Officer to determine the choices that are available for you.
Debt to Income Ratio
The debt to income ratio is the relationship between your total monthly debt payments (including proposed housing expenses) and your gross monthly income; this calculation is used by your lender in determining the mortgage amount that you qualify for. Typically, lenders prefer that only 36% of your monthly income goes towards your monthly debt and housing costs.
Keeping these beginning points in mind can strategically position you to move forward with your home purchase.
Your Monthly Payment
Your next concern starts to be which loan program fits your needs and how to structure your monthly mortgage payments. Before moving forward, you'll want to consider those items that make up your monthly payment and the factors that influence them.
Typically referenced as PITI, your monthly mortgage payment is comprised of Principal, Interest, Taxes and Insurance.
One of the issues that most concerns homeowners is their mortgage interest rate. This is for good reason as the interest rate directly affects the monthly payments for the life of the loan. Because of this, homebuyers search for steps they can take to obtain the lowest rate available.
Contributing factors to the interest rate include whether the homebuyer decides to:
· Fixed and Adjustable Rate Mortgages ·
The differences between fixed rate and adjustable rate mortgages can be found in their names. With a fixed rate mortgage, your monthly mortgage payments stay the same since they are set with an interest rate that does not change for the life of the loan. The rate of on an adjustable rate mortgage is designed to change with the movements of the market index to which it is linked.
· More specifically with an adjustable rate mortgage, interest rates are initially lower for a set period (ranging from 1 to 10 years) than those of fixed rates loans. You can find that this will help save you money at the beginning and also can assist you in qualifying for a more expensive home. However, after the initial set interest rate period, you may find your interest rates rising -- causing your monthly payments to increase as well. At that point, the amount of your payments is determined by the direction, up or down, of the market index. 'Rate caps' are established to put a limit on how high or low your rates can go.
· Deciding What Is Best For You ·
When trying to determine if you should go with a fixed or adjustable rate mortgage, it basically comes down to how long you plan to own the home.
· If your plans are to own the home for seven years or more, then a fixed rate mortgage might be the best choice for you. This plan will provide you with established and predictable monthly mortgage payments. Likewise, the fixed rate also will protect you against your payments rising with rising rates. If lower rates should happen to prevail in the market during the life of your loan, you can choose to refinance your mortgage.
· If your plans are to own your home for less than seven years, you might find an adjustable rate mortgage is a better fit. With low rates established for a set initial period, you can save money towards the start of the life of the loan. After that beginning term, however, rates adjust to reflect market changes. If you own your home longer than the initial term, your monthly mortgage payments my increase with these adjustments.
· Discount Points ·
Choosing to pay a discount point is basically the same as paying your lender for a part of the interest rate. Paid at closing, one discount point equals 1% of the loan amount.
· The advantages of paying discount points are clear. By doing so, you lower your interest rates, thereby your monthly mortgage payments, over the length of the mortgage term. The interest rate on a mortgage often times can decrease by one quarter of a percentage point for every discount point you pay.
· As a reminder, this does not lower or affect the amount that is borrowed. It solely lowers your interest rate and thus your monthly payments.
· Deciding What Is Best For You ·
As with deciding between a fixed or adjustable rate mortgage, deciding to pay discount points is best determined by considering the length of time you plan to own the home. More benefits exist if you plan to own the home for a longer period of time. It may not be worth the effort if you plan to sell the property or refinance your loan in the near future. The goal is to be invested in the property long enough to enjoy the advantages of paying discount points provides.
· Length Of Your Loan ·
With the many different loan programs that exist, repayment schedules can vary greatly. Fifteen to thirty years are the most commonly found repayment schedules with the 15 year mortgages typically offering lower interest rates than those found with 30 year mortgages. Likewise, you would pay substantially less in total interest if you were to stay with the 15 year mortgage through the life of the loan.
· Deciding What Is Best For You ·
Again, the same question that applies to whether you pay discount point or whether you choose a fixed or adjustable rate also applies to deciding on the term length of your loan. How long do you plan to own the home?
· A shorter term often is the best choice if you plan to own the home for the full life of the loan. Although this can set you up with higher monthly payments, it will decrease your interest rate and reduce the amount of interest you pay over all.
· On the flipside, if you have plans to own the home for less than seven years, you may be best served by going with a longer term of repayment. While this could set you up with a slightly higher interest rate, it could provide you with lower monthly payments since they are spread over a longer period of time.
· Contact your SymbolicLending Loan Officer to determine what would be best for your personal plans and financial goals.
There are other special considerations that you may want to consider as you evaluate your mortgage options.
Special Considerations
The final decision that you and your SymbolicLending Loan Officer reach about your loan program is also affected by other special factors.
Next: Chapter 3 - Putting it Together
Being Prepared
It will be good for you to evaluate how prepared you currently are to buy a home. Perhaps you have been making steps towards this goal for a while or maybe this is all new to you. Either way, the ways you have equipped yourself for this venture will be major determining factors on which loan program you choose. Do you have an amount for a down payment? What is your income to debt ratio? How is your credit status? There are a number of ways you can be prepared for this process.
Ways To Be Prepared
The best way you can begin the home buying process is to be prepared. To do this in the best manner, you'll want to consider all aspects of your finances and determine the current status of your savings, credit, debt, and income. All these elements set the stage for you to begin buying the home you want.
Your Down Payment
The amount you may or may not have available for a down payment will be one major deciding factor on which mortgage program that best suits you.
In today's environment, there tend to be more opportunities and choices available for those buyers who are able to provide a larger down payment. However, even if you may not have the funds available for a substantial down payment, you still can find loan programs that allow a low or no down payment option.
To prepare yourself to contribute a down payment towards the purchase of your home, there are a few simple things you can do:
- Spend Less: A bit of an obvious choice, but by avoiding some of the large ticket, unnecessary items, you'll find more of your financial resources available to put towards a down payment. It's a good time to start distinguishing between your wants and your needs in regards to your purchases.
- Put Some Aside: Contact your Human Resources Department and look into their direct deposit option. Look at your monthly budget and determine how much you could safely afford to have directly transferred from your paycheck into a savings account.
- Be Realistic: No matter how much you desire to purchase a home and how excited you are to move forward in the process, be sure that the efforts you make towards saving for a down payment don't hinder your overall goal -- purchasing a home. As you look at your monthly expenses and income, be realistic about how much you can truly afford to set aside. Don't do too much today that will hurt you dreams for tomorrow.
Your Credit History
A major determining factor lenders use in deciding whether or not to approve you for a loan is your credit history. You'll want to know how your credit score is derived and also ways to keep your credit clean.
How Your Credit Score is Derived
Developed in 1956, a Fair Isaac Corporation Score (commonly called the FICO Score) is a three digit number ranging from 300-850 and is calculated according to the following risk factors:
- Payment History (35% of score)
- Payment information on many types of accounts
- Public record and collection items
- Details on late or missed payments -- specifically:
- how late they were
- how much was owed
- how recently they occurred
- how many there are
- Amounts Owed (30% of score)
- Amount owed on all accounts
- Amount owed on different types of accounts
- Whether you are showing a balance on certain types of accounts
- How much of the total credit line is being used
- How much of installment loan accounts is still owed
- Length of Credit History (15% of score)
- How long your credit accounts have been established, in general
- How long specific credit accounts have been established
- How long it has been since you used certain accounts
- New Credit & Inquiries (10% of score)
- What kinds of credit accounts you have and how many of each
- Total number of accounts you have
- Types of Credit (10% of score)
- How many new accounts you have
- How long it has been since you opened a new account
- How many recent requests for credit you have made
Once the borrower's score is derived, most lenders use a standard 'grading' system to categorize the results. While some lenders develop their own systems for classification of scores, below is a general guide of score interpretation. Used as a general reference, this can help you interpret the credit score you've been given based on a grading system typically used in schools:
A+ to A 670 and above
A- 650
B+ to B- 620
C+ to C- 580
D+ to D- 550
E 520 or below
Fixing Credit Report Errors
Under the Fair Credit Reporting Act, you have the right to dispute the accuracy and comprehensiveness of information in your credit file. Unless the credit reporting agency believes a dispute to be "frivolous or irrelevant," it must reinvestigate and record the current status of the disputed items within a "reasonable period of time." A disputed item must be deleted if the credit reporting agency cannot verify it. The credit reporting agency also must correct any erroneous information in the report. Any incomplete item must be completed by the credit reporting agency as well.
In the instance that your file indicates that you were behind on making payments for a period of time but neglects to record that you currently are on time with payments, the current agency must confirm you are now current with these payments. The credit reporting agency also will have to delete any file shown to belong to another person. Any report recipient who has checked your file in the past 6 months must receive a notice of correction from the credit reporting agency if you request it.
You send a brief statement to the appropriate credit reporting agency when you feel there are items in your credit profile that deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills). The information will be placed in your credit profile and will be disclosed each time it is accessed.
Fair Isaac Resolution Resources Helpline (800) 777-2066
Keep Your Credit Clean
Credit Cleaning Tips
- Review your credit report line-by-line, specifically search for errors, omissions, duplications, and "common name" errors.
- If you encounter errors, write out exactly what should be corrected and why. You are able to add 100 words or less to your reports on questioned items.
- You can find assistance through credit counselors which are available through the various credit bureaus.
- Federal law requires credit bureaus to contact all creditors on items where mistakes were made. According to the Fair Credit Reporting Act of 1971, if these firms fail to respond to you in writing within 30 days, they are obligated them to remove the disputed items from your records.
- Most merchants are willing to negotiate customized repayment plans for those that find themselves with considerable debt.
- Chapter 13 bankruptcies stay on an individual's record for seven years. Chapter 7 bankruptcies stay on an individual's for seven years.
Liens, garnishments, etc., typically are indicators of an unstable borrower. Any judgments, garnishments, or liens must be paid in full. Prior to closing, proof that the judgment, garnishment or lien has been cleared must be obtained; this can be reflected through a clear credit report supplement or a paid receipt form from the creditor. IRS tax liens also must be paid in full. Standard property tax liens do not have to be recorded as paid in full since they are not yet due or payable. Also, the borrower is obligated to provide a satisfactory letter of explanation.
Delinquent Child Support
Child support payments must be brought current, and specific documentation from the credit reporting agency evidencing this fact must be in the file with NO EXCEPTIONS! Because of the seriousness of the delinquency/default, which in many states can cause incarceration, the A letter from the court or the legal authority responsible for collection in the city/state (e.g. district attorney, sheriff, etc.) is acceptable. A letter from an ex-spouse and copies of personal checks are not acceptable, nor is an agreed upon, but not yet completed, payment plan.
Credit Bureaus:
There are a good number of reporting agencies that can provide you your credit score. Three of the leading services for this are:
Experian
www.experian.com
1-888-397-3742
Equifax
www.equifax.com
1-800-685-1111
Trans Union
www.transunion.com
1-800-888-4213
Above all, take note that even if you have encountered credit challenges in your past, you can still find ways to finance the home. Consult with your SymbolicLending Loan Officer to determine the choices that are available for you.
Debt to Income Ratio
The debt to income ratio is the relationship between your total monthly debt payments (including proposed housing expenses) and your gross monthly income; this calculation is used by your lender in determining the mortgage amount that you qualify for. Typically, lenders prefer that only 36% of your monthly income goes towards your monthly debt and housing costs.
Keeping these beginning points in mind can strategically position you to move forward with your home purchase.
Your Monthly Payment
Your next concern starts to be which loan program fits your needs and how to structure your monthly mortgage payments. Before moving forward, you'll want to consider those items that make up your monthly payment and the factors that influence them.
Typically referenced as PITI, your monthly mortgage payment is comprised of Principal, Interest, Taxes and Insurance.
- The initial amount you borrow to purchase the home and the remaining outstanding balance throughout the life of the loan is the PRINCIPAL.
- The charge for borrowing money is the INTEREST.
- Collected in an escrow account, your TAXES are assessed by your local government and typically paid to your lender as a portion of your payment. The lender will then pay them to the government upon their due date.
- Established in a similar fashion as your taxes, INSURANCE is collected by the lender and put into an escrow account. Your insurance is composed of two prominent types of coverage. Homeowner's insurance provides you coverage for damages inflicted by hazards such as (but not limited to) wind and fire. Mortgage insurance typically is required for those making a smaller down payment on their loan; it provides protection for your lender in the instance that you are not able to fulfill the mortgage requirements and repay your loan.
One of the issues that most concerns homeowners is their mortgage interest rate. This is for good reason as the interest rate directly affects the monthly payments for the life of the loan. Because of this, homebuyers search for steps they can take to obtain the lowest rate available.
Contributing factors to the interest rate include whether the homebuyer decides to:
- select a fixed or adjustable rate
- pay discount points
- choose a short or long term loan
· Fixed and Adjustable Rate Mortgages ·
The differences between fixed rate and adjustable rate mortgages can be found in their names. With a fixed rate mortgage, your monthly mortgage payments stay the same since they are set with an interest rate that does not change for the life of the loan. The rate of on an adjustable rate mortgage is designed to change with the movements of the market index to which it is linked.
· More specifically with an adjustable rate mortgage, interest rates are initially lower for a set period (ranging from 1 to 10 years) than those of fixed rates loans. You can find that this will help save you money at the beginning and also can assist you in qualifying for a more expensive home. However, after the initial set interest rate period, you may find your interest rates rising -- causing your monthly payments to increase as well. At that point, the amount of your payments is determined by the direction, up or down, of the market index. 'Rate caps' are established to put a limit on how high or low your rates can go.
· Deciding What Is Best For You ·
When trying to determine if you should go with a fixed or adjustable rate mortgage, it basically comes down to how long you plan to own the home.
· If your plans are to own the home for seven years or more, then a fixed rate mortgage might be the best choice for you. This plan will provide you with established and predictable monthly mortgage payments. Likewise, the fixed rate also will protect you against your payments rising with rising rates. If lower rates should happen to prevail in the market during the life of your loan, you can choose to refinance your mortgage.
· If your plans are to own your home for less than seven years, you might find an adjustable rate mortgage is a better fit. With low rates established for a set initial period, you can save money towards the start of the life of the loan. After that beginning term, however, rates adjust to reflect market changes. If you own your home longer than the initial term, your monthly mortgage payments my increase with these adjustments.
· Discount Points ·
Choosing to pay a discount point is basically the same as paying your lender for a part of the interest rate. Paid at closing, one discount point equals 1% of the loan amount.
· The advantages of paying discount points are clear. By doing so, you lower your interest rates, thereby your monthly mortgage payments, over the length of the mortgage term. The interest rate on a mortgage often times can decrease by one quarter of a percentage point for every discount point you pay.
· As a reminder, this does not lower or affect the amount that is borrowed. It solely lowers your interest rate and thus your monthly payments.
· Deciding What Is Best For You ·
As with deciding between a fixed or adjustable rate mortgage, deciding to pay discount points is best determined by considering the length of time you plan to own the home. More benefits exist if you plan to own the home for a longer period of time. It may not be worth the effort if you plan to sell the property or refinance your loan in the near future. The goal is to be invested in the property long enough to enjoy the advantages of paying discount points provides.
· Length Of Your Loan ·
With the many different loan programs that exist, repayment schedules can vary greatly. Fifteen to thirty years are the most commonly found repayment schedules with the 15 year mortgages typically offering lower interest rates than those found with 30 year mortgages. Likewise, you would pay substantially less in total interest if you were to stay with the 15 year mortgage through the life of the loan.
· Deciding What Is Best For You ·
Again, the same question that applies to whether you pay discount point or whether you choose a fixed or adjustable rate also applies to deciding on the term length of your loan. How long do you plan to own the home?
· A shorter term often is the best choice if you plan to own the home for the full life of the loan. Although this can set you up with higher monthly payments, it will decrease your interest rate and reduce the amount of interest you pay over all.
· On the flipside, if you have plans to own the home for less than seven years, you may be best served by going with a longer term of repayment. While this could set you up with a slightly higher interest rate, it could provide you with lower monthly payments since they are spread over a longer period of time.
· Contact your SymbolicLending Loan Officer to determine what would be best for your personal plans and financial goals.
There are other special considerations that you may want to consider as you evaluate your mortgage options.
Special Considerations
The final decision that you and your SymbolicLending Loan Officer reach about your loan program is also affected by other special factors.
- If your credit history reflects large amounts of debt, foreclosure, bankruptcy, and/or other credit challenges, you will need to pay attention to the loans that are available with flexible qualifying criteria.
- If your loan amount exceeds Fannie Mae's and Freddie Mac's conforming loan limits, it will be classified as a 'jumbo loan.' This typically will establish a higher interest rate.
- If the loan is insured by the Federal Housing Administration (an FHA loan) or by the Department of Veterans Affairs (a VA loan), you will have the opportunity to pay a lower down payment as well as have more flexible qualifying criteria. To be eligible for a VA loan, you need to be a veteran or currently serving in military active-duty.
Next: Chapter 3 - Putting it Together