Getting Ready For Homeownership – A Self Prep Guide
Neil Picart, P.A, Realtor®
Since you have decided to stop paying someone else’s mortgage (rent), and pay your own, what are the steps to make sure you are ready to purchase a home? Unless you are fortunate enough to purchase your first home cash, like the vast majority of buyers you will need a mortgage.
All lenders use what is commonly referred to as the 4 C’s to determine if you will get a loan. Good news is you are in control of all but one of those 4. What are the dreaded 4 C’s, Credit, Capacity, Capital, and Collateral. Credit, as in your credit score, either gets you in the starting blocks or keeps you off the field completely. Here is the undisclosed secret, no credit score is 100% more desirable than bad credit. The first one you can compensate for, the second you have to first fix and that can be costly in both money and time. In today’s post financial collapse world, all lenders and every loan program has a minimum credit score below which you won’t be considered for a loan. How do you maintain a decent credit score? 1. Pay all your bills on time. 2. Do not apply for every card that is offered to you. You only need 3 active lines to meet most lending requirements and if you have too much exposure that works against you. Remember the no credit scenario? There are loan programs out that will allow you to qualify using what is called non-traditional credit to build a credit profile, in effect a score, for you. They will consider how timely you are with your rent, cell phone and other monthly expenses. Of course all payments must be verifiable.
Capacity is your ability to make the required monthly payments. Lenders consider a ratio; that is the total amount of your payment obligations to your total income to determine your ratios, percentages. Middle school math does have some real world use after all. Two ratios are considered; the first is all your payments except your housing expense divided by your gross income and the second is everything including your housing payments divided by the gross income. A good guideline to use is 28/36, that is your first ratio should be around 28% and your second ratio 36%. These are not set in stone and will most likely be much tighter than the lenders ratios, but all that means is that you will be more qualifies for the loan when you decide to act. The higher your credit score and the more capital you have, the more flexible your ratios can be.
Speaking of Capital. How much do you have? Gone are the wild west days of the no money down loans. So if you want to borrow money for your home purchase you must be prepared to have some skin in the game. You have to commit to yourself before the lender will commit to you. You will need to have enough for your down payment, a minimum of 3.5%, your closing cost, and preferable 2, yes 2 months of payments in reserves. Good news is, apart from what you actually plan to invest – down payment and closing cost, that money does not need to be liquid. It can be in your retirement fund, in stock, or any other investment vehicle of your choice. If you need it, some programs do allow for gift funds from family members.
Collateral is what are you putting up to secure the loan? The house, of course. The lender will ensure that the home is worth at least what you want to pay for it. Value is a factor of the market and your realtor will assist you in determining a value for the home you choose before you make an offer.
One final word, maybe two. There are non-profit agencies that will help you clean-up your credit and get ready to qualify for a mortgage as well as assist you with qualifying for first-time home buyer grants, if they are available. The national banks are not your only choice for a mortgage, your community banks, your credit unions, and even your insurance companies are also good options to consider.
Next issue: House Hunting the Right Way