While the types of debt you carry have an impact on your credit scores, making regular payments makes up 35% of your credit score. Therefore, if you make every monthly mortgage payment on time, your credit score will gradually increase. Many lenders offer automatic bank transfers for borrowers to help them avoid forgetting a mortgage payment.
While buying a house can help your credit improve over time, it may initially have a negative impact on your score. Every time an institution checks your credit, a hard credit inquiry will appear on your report. Sometimes, credit checks will be a “soft” inquiry which will not affect your score. But major loans such as auto, or mortgages, will definitely be a hard credit inquiry. These inquiries last for two years. Enough of these, and your credit will drastically drop.
Provided a change in circumstances doesn’t cost you your home, you can expect to eventually pay off the mortgage. Whether you remain in the house for the duration of the loan term or sell the home, the fact that you paid off a large debt will appear in your credit report. The paid-off mortgage will remain within your credit history for seven years and demonstrate to future lenders that you can be trusted to pay your debts responsibly.
Although lenders and creditors will look favorably upon your status as a homeowner, your monthly mortgage payment is a liability until you pay off the loan in full. When you apply for a new loan, your lender will compare your monthly debts to your income when determining whether you can afford the payments. Regardless of how high your credit score is, a costly mortgage payment can hurt you if it impedes your ability to qualify for other loans.
Before you begin searching for a home, it is imperative to be realistic about your circumstances. You must know how much of a house you can afford, if you can afford one at all. Sometimes, after reviewing your current situation, you may need to stay a renter for a little longer until you can purchase a home without going bankrupt. Here are the top factors lenders typically consider when determining how much house you can afford.
One of the first factors a lender will analyze is your debt-to-income ratio. Lenders use this measurement to ensure that you’ll have enough income to cover both your new mortgage payment as well as any outstanding loans you already have. Examples of other debt may include student loans, credit card debt, or auto loans. Lenders will expect your new monthly mortgage payment to not exceed 36% of your other outstanding debts. You can calculate this ratio yourself by taking your total monthly debt load and dividing it by your monthly gross income.
Your credit is the most important thing when looking to purchase a home. It will determine whether you are able to buy a home at all, how much of a loan you are able to get, as well as the interest rate. Credit scores are based on your previous payment history, overall level of debt, length of credit history, types of credit and applications for new credit.
Lenders will be apprehensive to lending to you if your credit, or age of credit is less than ideal. If this is the case, you may still be able to obtain a loan, but you will more than likely be paying a higher mortgage and interest rate, and also be required to submit a higher down payment.
There are great deals out there for first time home buyers. That being said, there is almost no way to get out of having straight cash for a down payment. A down payment is typically 20% of the home. You will always get a better interest rate for a loan on a home (and really any other loan for that matter) if you are able to pay a down payment of at least that percentage. Furthermore, that amount does not include closing costs, which usually amount to about 2-5% of the total sale price of the home.
If your credit is poor or lacking, consider waiting to purchase a home until you improve your credit score, and/or are able to increase your income. Ideally, you should be debt-free when purchasing a home, and also have 3-6 months of your expenses saved before making the leap. Of course, this is in addition to having money for a down payment and the costs of closing on the house. Check out the following article about Will Having a Mortgage Improve My Credit Score?
Think long-term and think re-sale. You might be planning to live in your first home for only a few years. In that case, who is your target audience when it comes time to sell the house? If you buy a house in a very bad school district or a house on a very busy street, when you are ready to sell the house, most families with children will be out of your list of potential buyers.
Make a list of items to check: Home-buying is an emotional process. Ideally, you should set aside all your emotions when evaluating a house. Practically, that is impossible. Instead, make a checklist of your must-haves, and any other “requirements,” that you seek in a home. If you fall in love with the house, but it has none of the amenities you want, it will at least make you pause and think.
Look at ALL the expenses when you are budgeting for the house: When budgeting for the house, you must add in utilities, cost of commuting and upgrades. Call the utility companies that service the house you are considering and ask for an estimate of what the cost will be. Utilities and commute factors are often overlooked, which is unfortunate, because little costs like these add up to a lot of money.
If your long term plan is to rent out the house when you move away; keep in mind, once you identify the neighborhood you like, ask for a copy of the HOA contract after going to an open house in the area. It may be that none of the houses in your area can be rented out. If you are buying a house that is part of an HOA, it is absolutely essential to read the HOA contract before you do anything else.
There are many different options based on profession (grants for teachers, farmers, etc.) as well as the area of the potential house (whether it’s in a rural area, high-poverty area, etc.) Research all the grants and funding options you are eligible for before you automatically decide you won’t qualify for anything.
A house is probably the largest purchase you will ever make in your life, so make sure you understand the terms of your contract. If you don’t understand any of the terms, ask your mortgage broker and your real estate agent. If they won’t explain the terms clearly to you, fire them; there are enough people who will be more than happy to help you and work for your business.
Also be sure to learn about the neighborhood demographics.If you are buying a house in a neighborhood full of renters, it only takes a few bad renters or bad landlords to drive the neighborhood down fast. If the neighborhood is full of single people, will you be happy there if you have very young kids?
Be sure to look past the “staging,” of the home. This can be hard to do. Don’t be fooled by the recently decorated home. Unless you are also purchasing everything in the house, it is going to look different when you move your things in. Unfortunately, the psychology does work; staged houses look far better than houses that are still being occupied. When you are considering a house, mentally try to remove the staging. Pay more attention to the layout of the house and the structure itself. Ugly wallpaper and paint can be easily fixed later. Read this great article by HGTV on Essential Tips for First-Time Homebuyers.