The following is a guest post
When you first anticipate the reality of wanting to become a homeowner, it will also be the time when you get serious about where your credit card stands.
Consumers that tend to pre-plan for all things financial should recognize the importance of getting the financial house in order, including attention to their credit scores. However, that is not always the case with perspective homeowners and as a result they end up losing thousands or hundreds of thousands of dollars over the lifetime of a loan.
Importance of Advanced Planning For those who are not advanced planners, getting approved for a mortgage may prove more difficult than initially thought. Mortgage lenders in today’s economy expect a lot more from borrowers than they have in the past decade. Lending requirements are much stricter and borrowers will need to be prepared to meet these expectations.
Time for Credit Repair
The first place all consumers need to start concerns their credit score. Approaching a lender with little more than a decent score likely means a credit risk red flag will be thrown and the lender will only be able to offer a mortgage loan at a higher-than-average interest rate. The difference between a decent credit score and an excellent score can literally add up to thousands, if not hundreds of thousands of dollars.
To serve as an example of the savings a good credit score can provide, consider this calculation:
$200,000 home at 4% with a 30 year term = $143,739.01 in interest
$200,000 home at 7% with 30 year term = $279,017.80 in interest
Total savings: $135,278.79
Time for Down Payment Savings
The second important part of planning for home ownership involves the down payment required by the majority of lenders. Lenders want to know that you have at least 20% of the home’s purchase price in savings when applying for a loan. Depending on the price of the home you plan to buy, it can take several years to save up the necessary cash to cover closing. Additionally, borrowers will also need to have the funds to cover closing costs which vary from hundreds to several thousand dollars.
Unless you have a special type of loan such as with the FHA, the 20% down payment will be as key to securing a reasonable loan as a good credit score. Lenders want to know borrowers are serious and committed to repaying the balance on the mortgage.
Another important factor to consider about the home buying process is the affordability of the new home. Those used to renting may not realize the impact homeownership can have on a budget. Besides the mortgage payment, there are insurance costs, property taxes, and maintenance/repair costs to consider in addition to the regular monthly utility bills and other financial obligations. There are also costs associated with moving.
While you may be able to get through the mortgage approval and closing processes, you may have difficulty getting adjusted to the new budgetary guidelines the home has established. Be sure to have a financial cushion to help you transition to the new obligations in your financial life.
Taking the Steps for Better Credit
Long before you visit a mortgage lender, visit the website of the consumer credit reporting bureaus and obtain a copy of your credit history reports and relevant scores. If you are unfamiliar with what is contained in your credit report, now is the time to review the data for accuracy and understanding. Credit reports now are accompanied with explanations and highlights of the strengths and weaknesses of your credit score.
Review the recommendations as provided by the credit reporting bureau. Be sure to dispute any inaccuracies contained in your report. Utilize the history report to get a clear visual of your outstanding debts and make a plan to eliminate as much debt as you reasonably can while still saving towards your home ownership goals.
It is also important to make bill paying a priority and be sure to never miss a payment or even pay balances due later than the due date. After several months of consistent bill paying, no new established lines of credit, and corrections of credit report mistakes, recheck your credit scores again to assess if any further action to improve credit scores needs to be taken before visiting perspective mortgage lenders.
J.D. Roberts is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.
|SB is a husband and working as a software professional for a Fortune 100 corporation in Florida. Thanks for visiting the blog.
You can receive free full-text articles from One Cent at a Time in your email inbox, on the days we publish fresh content, by entering your email below. Your email will only be used for subscription, and each email will include a link you may use to unsubscribe at any time. You can also become our Facebook fan or follow us via Twitter