How do we get ready to apply for a home loan? There is a myth: “No one can tell you how to handle your money.” I ask that someone would help guide me through the mine fields and financial pitfalls! My life would be easier. I’d rather my learning be taught and not caught. I have applied for home loans to learn some knowledge about getting a loan.
I have applied for three loans and learned:
1. How much we owe and earn is called the Loan to Debt Ratio, which is very important. Ideally, we would like to owe less than 25% of what you earn each month. You’re over the top, when we owe 43% of what we earn. Above 43% debt, we are a risky borrower and a red flag goes up, when we apply for a home loan.
2. Credit comes from several places. First, the credit bureaus are owned by the Retail Merchants of America. The worse your credit, the more money they make from your paycheck. Poor credit payments equals paying back more debt. So, we need to know that the credit bureaus want us to do worse than better, then they make more money by charging higher interest rates to you. If we don’t pay or negociate a debt, and it goes to collection, we will pay a seven year higher interest penalty. That is a long credit prison sentence. Make every effort to avoid collections. We can call the creditor and make arrangements to pay in smaller parts.
3. We need credit cards. Two cards is a maximum. I know, everyone is saying get rid of them. How we handle them is the important issue. A mortgage lender doesn’t want us to have more than 45% of the max on each credit card. To raise your credit scores, it should be between zero and 25% owing. Keeping payments there will raise credit scores. Pay your credit cards on time and if you can, pay them through an online account. This saves paper and your payment date is the day you pay them. Paper in the mail takes too long. I ‘ve had late charges, even though I mailed the payments on time.
4. Where do you live and work right now? The mortgage lenders like us to live in the same place for two years. This proves your rent and shows your payment history. Moving around shows instability. Pay your rent on time every time. Your payment is like a house payment, but for someone else. Job stability requires a minimum of two years on the same job. You are rated on your gross income. Bonuses count, but they are not part of income ratio. IRAs are important. If your company has one, use it! It is a valuable asset.
5. Start saving money, today. We could put 10% in a savings account every paycheck. If you have a 401K at work and they pay half, that is 50% interest on your money. Sign up, today. You can borrow against 401Ks for a downpayment for a home loan.
6. There is a gifting program, when we are buying a home. Ask your mortgage lender how to do it. We cannot ask the seller of a home to pay your downpayment. You cannot borrow the downpayment or use credit cards for it. The down payment can be gifted to us. We could ask your parents or family to gift you the downpayment. Let’s say we are getting married, instead of wedding gifts, we could ask for gifts for your future home you will buy. Set up a money tree or box that people can give at the wedding for your first home. Avoid spending it on the honeymoon, but add to the amount each month to make your downpayment grow. You could skip the honeymoon, $3,000+ and move into a home sooner. Interest rates are low right now.
7. You could ask the seller to pay the closing costs.
8. Paying your monthly bills on time is a reflection of your reliability. It counts for 35% of your credit score. So pay the lights, the garbage, phone, cell phone, cable on time. If you cannot and you are late, that is an indication you need to cut back on your spending and cut some services. I cut my cable, my home phone line, lowered my cell phone payment and car insurance. I even cut my elect bill by washing in cold water, having shorter showers, unplugging appliances that pull power all day long when not in use.
9. Look at your three credit reports. If the credit reported is older than 7 years, ask the reporting company to remove it from your report. Read the report carefully. Your current FICO score is going to be 25% less than it shows for a home loan. It is the way the mortgage companies rate it. It is lower than you see on your score. Your house payment and loan borrowing rate relies on your FICO score. The higher your credit score, the lower your interest on the loan, and the more money you save.
10. A home is your biggest purchase in your life, unless you have a major medical accident. Plan for both. With some care and planning, you’ll have a home of your own.
The loan companies want someone who gets a paycheck. You can get a loan if you are self employed. You must have 2 years Profit and Loss Statements. If you just started a business, you may have to wait to buy a house. However, Proverbs says, Plow your fields and plant your crops, then build your house (while your crops are growing). When harvest comes, your house will be built, you harvest your crops and are ready for the winter.
These habits can make you wealthy. You will pay less in interest, have more buying power, and have more to spend in your pocket, instead of the lenders. You deserve to have a better financial life. Money and Credit management are how much you make, pay out and how much more you can keep.
When I learn more, I’ll update this post.
Filing your taxes is complicated. However, the Federal Government has been giving the Earned Income Tax Credit (EITC) for several years. So, if you need money to make a down payment or pay closing costs on a purchase of a home, get your taxes done, early, and use the funds to buy a home, while the interest rates are low. If you have children, someone who is handicapped, caring for an elderly person in your home and other family situations, you should ask your accountant or the IRS to verify your eligibility.