Most of the time, once you have decided to buy a home, the questions that will first come out of your mind would be, how big the home is, the kind of amenities you can enjoy, the travel time, the kind of neighbors that you will have, etc. However, the right questions to ask and should be answered are all about money.
True enough, unless you do have a stash of cash that's worth millions or you have been granted an inheritance, you should be able to identify as to how you will be able to financially survive the payment for your dream home.
Here are four questions you need to ask yourself before you start looking for homes to buy.
What is My Credit Score?
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This is the same and the first question that your lender will ask you. Credit Score is based on five factors in an elaborated algorithm that a few people know and understand, but let me tell you the basics:
- Payment History - it is accountable for 35% percent of your score. Late Payments are definitely a big deal.
- The amount of your debt - it is accountable for 30 % of your score. Paying off existing debts as much as possible is one of the best steps to do before filing for a home loan.
- The length of your Credit History -it is accountable for 15 % of your score - the longer, the better.Most especially if you've got a good payment history.
- A mix of debt accounts - it accountable for 10 percent of your score. Have you got any student loan, auto loans or credit cards?
- New credit - it is accountable for 10 percent of your score. Lots of new credit is a common red flag to lenders especially if most of it are credit cards. They may wonder if you do have enough cash to pay for your basic necessities, let alone a house.
These are the factors that make up your overall credit score. A higher score means a higher chance of easily getting a mortgage at the best interest rate possible. Lower scores can lead to an offer with a higher interest rate or worst to your disqualification.
- Great credit: 760 - 850
- Good credit: 700 - 760
- Okay, but not good credit: 620 - 700
- Poor credit: 620 and lower
Before buying a home, it is best t know what your credit score is. If needed, you can strive harder to raise it if it goes under 700. AnnualCreditReport.com lets you check your credit report for free once a year. Although it will not give you the numbers, it will tell you if you are on the right track and what to avoid that will hurt your credit score.
How Much Down Payment Can I Afford?
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The 20% down to buy a home, which is a common knowledge, isn't exactly accurate. A lot of good reasons can put it down or go higher when you buy. A mortgage can be lower, you can have more equity walking in, and you don't need to pay Private Mortgage Insurance (PMI). However, not everyone can afford that much for a down payment.
A three, five, or even zero percent down payment can be offered by a lot of lenders. It is dependent on the status of the buyer (first time or not), your income level and others factors like your credit score. Situational basis, you can qualify for a VA loan if you're a military (retired or active duty), or an FHA loan. These government backed up mortgages lets you buy a home with low or no down payments required.
What is My Debt-to-Income Ratio?
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As this question hasn't crossed your mind for a while, it is important to know the answer to it. Lenders will need to know your numbers as they decide to qualify you for a home mortgage.
Your debt-to-income ratio is your total monthly amount of current debts (not including housing) - loans, credit cards, etc. - divided by your total monthly income. 36 percent or less is the magic number - It is the good ratio. A higher ratio, although won't disqualify you, won't help either. Another one would be, you housing cost ratio. 28 percent or less is the spot to achieve. Your total monthly housing costs (mortgage, insurance, interest, taxes, and PMI) divided by your monthly income gives you this number. You may lose your dream home if it will fall out of your price range once it costs more than 28 percent of your monthly income.
How Will I Pay for My House?
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The moment a lender decided that you're a good credit risk, next thing that they would want to know is how you will pay your mortgage each month. You'll be asked a lot of information to verify your income and any assets that you may have - other properties, bonds, stocks, investment, etc. It is important to show them that you will still be capable of paying off your home loan even when things get tough.
Having savings in the bank of more than your closing costs is also important, if not a must. If a lender thinks that buying a home will leave you at a wipe out of everything, then its a no no and isn't going to make the loan. Chances of getting an approval will be much higher if you get more money in the bank than what you need.
Decorating your home, deciding which furniture goes where and checking out the amenities of your neighborhood is an exciting phase of moving in. However, before getting that far, it is best to be ready and equipped with the right tools - financially. If you can easily provide the answers to these questions, then you are good to go to the next step of buying your home. If not, it won't hurt to pay off your debt and keep saving. You can always reach out to a lender to see if they can provide any programs that can help you.
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