Thinking About Buying Your 1st Home? Click here to read these tips!

 
  • ​​​​Find Out Your Credit Score

Your credit score is important in the process of obtaining a mortgage and you actually have more than one credit score. Credit scores are calculated based on the information in your credit reports. If the information about you in the credit reports of the three large consumer reporting agencies is different, your credit score from each of the companies will be different. Lenders also use slightly different credit scores for different types of loans.

There are four main ways to get a credit score:

  1. Check your credit card or other loan statement. Many major credit card companies and some auto loan companies have begun to provide credit scores for all their customers on a monthly basis. The score is usually listed on your monthly statement, or can be found by logging into your account online.
  2. Talk to a non-profit counselor. Non-profit credit counselors and HUD-approved housing counselors can often provide you with a free credit report and score and help you review them.
  3. Use a credit score service. Many services and websites advertise a “free credit score.” Some sites may be funded through advertising and not charge a fee. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score. These services are often advertised as “free” trials, but if you don’t cancel within the specified period (often as short as one week), you could be on the hook for a monthly fee. Before you sign up to try one of these services, be sure you know what you are signing up for and how much it really costs.
  4. Buy a score. You can buy a score directly from the credit reporting companies. You can buy your FICO score at myfico.com. If you decide to purchase a credit score, you are not required to purchase credit protection, identity theft monitoring, or other services that may be offered at the same time.
  • Look At Your Debt

If you have student loans, ensure that you are making regular monthly payments. Next, aggressively start paying off your high interest credit cards.  Make a list of all your loans and credit card debt, listing those with the highest interest rate first. As you pay one off, take the money from the one you have paid off and put that towards the next highest interest rate loan. At the end of the list, you will have additional money to save for your down payment. Paying off your debt also raises your credit score by lowering your overall debt which helps your debt-to-income ratio. The debt-to-income ratio is the number lenders look at to determine how much of a mortgage you can qualify for.

  • Save for a Down Payment

Different types of mortgages have different down payment requirements. For example, a conventional mortgage usually requires 20% of the purchase price as a down payment to avoid paying private mortgage insurance (PMI). PMI protects the lender in case you default. Many first time home buyers prefer an FHA loan, where a down payment is as low as 3.5% of the purchase price, depending on your credit. Some states such as Minnesota also have Rural Development Loans  which can be a zero down payment loan depending on available government funds, and buyers income level and credit rating. You’ll still need to pay off debt and begin saving as soon as possible. Consider putting any overtime, bonuses, cash gifts, or garage sale proceeds into your down payment fund.

  • Create Your Budget

This is a necessary exercise to actually determine how much you can spend on your new home. Write down your monthly expenses, rent, food, insurance, medical, utilities, etc. Make sure you include estimates of your variable/discretionary expenditures such as haircuts, entertainment, clothing, etc.

The next step is to develop a budget for your perspective new home. Your expenses will change when you own a home versus renting your home. You will have things such as home owner’s insurance, home maintenance costs, cost of lawnmower, and of course all the things you want to do to make it your home.

  • Shop for a Mortgage

Shop ahead of time for a mortgage plan that fits your circumstances, paying particular attention to the competitive interest rates. The lower the rate, the more money you will save over the life of the loan.

Mortgage calculators are particularly helpful when looking at how the different variables such as down payment, interest rate, and length of the loan affect the mortgage payment.

  • Lastly, Don’t Forget Your Loan Closing Costs

When you get a mortgage, regardless of what type of loan you get, there will be closing costs. The amount of the costs are dependent on the purchase price. Multiply the purchase price by 3% to 5% to get an estimate of how much you’ll need to bring to closing. You can ask Sellers to pay some (or all) of the closing costs as part of the sale. Often the amount that can be paid by the Sellers is limited so plan on having some money in the bank to pay whatever this cost may be. Your lender will be able to help you with what your estimated closing costs will be.

Thinking About Buying Your 1st Home? Click here to read these tips!, Red Wing, Minnesota

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