You are about to embark on one of the most amazing and rewarding experiences that can ever come from spending money: buying a home. If you are buying a home in 2019, you should know that the entire process is not quick, but when all is said and done, there are few things more exhilarating than buying a house. This guide will help equip you with what you need to buy a house this year.
1. Check Your Credit Score
Before applying for a loan and certainly before ever making an offer on a house, you should know your credit score. Why is your credit score important? Well, it’s not only the difference between getting a low-interest rate on a home loan versus a high one, but it will also directly impact how much a bank or lender will actually loan you. There are several websites you can use to check your credit score, here are a few to consider: TransUnion, Equifax, Experian.
You can check your own score as much as once a day without affecting your credit, also known as a soft inquiry. Hard inquiries are when financial institutions check your credit score, typically when you’re applying for a loan or credit card. Hard inquiries lower your credit score a few points, so try to keep hard inquiries to a minimum.
2. Improve Your Credit Score
“When looking to improve your FICO score, you should regularly monitor your credit reports and work towards reducing the total utilization ratio across all open and closed accounts that reflect balances. Your payment history will incur the most significant impact, as it makes up a staggering 35% of your overall FICO Score calculation.
Though you can easily implement steps to help your credit score, keep in mind that this is a marathon and not a 100-meter dash, but certainly worth the time and effort that can result in potentially saving you tens of thousands of dollars over the course of a lifetime. Here are three tips to help improve your credit score, and recommended by John McConnell, Director of Operations at Pyramid Credit Repair:”
- Review Your Free Credit Report: The Fair Credit Reporting Act (FCRA) gives you the option to obtain a free credit report from each of the three nationwide consumer reporting companies once every twelve months. And, in order to improve your credit score, you first need to know what information is on your credit report, including your residences both past and current, your payment history on bills, bankruptcies, foreclosures and more. Understanding the information on your credit report will help you know what to address so you can focus on how to improve your credit score.
- Use a Credit Report Repair Company: Your credit history is 35 percent of your FICO score, and more than 40 million Americans have something that is incorrect on their credit report, according to a 2013 study by the Federal Trade Commission (FTC). While a late payment may seem harmless, it can have long-standing consequences, such as staying on your report for seven years. If you have errors on your credit report, consider working with a credit repair company. Companies like these can navigate the complexities of credit repair, contact the credit bureaus and help remove any errors as quickly as possible.
- Spread Out Your Credit Card Debt Across Multiple Cards: If you have multiple cards, spreading the balance out between them could make sense if any of your cards are close to the maximum, which are red flags for lenders. For example, instead of having one card that is 95 percent maxed out while your other cards have a zero balance, a simple thing like having a 30 percent balance on each card can help your credit score. Eliminating or reducing overall debt is always the best option; however, spreading out your balance can have a positive impact on your credit.
3. Know What You Can Afford
The best way to determine how much house you can afford is to simply use an Affordability calculator. Though calculators such as these do not necessarily account for all of your monthly expenditures, they certainly are a great tool for understanding your larger financial situation.
After you figure out what you can comfortably afford, you can then start online window shopping for houses and really begin to narrow down what you want in a house versus what you can afford. Are you looking at specific neighborhoods? How many bedrooms do you want? Do you need a large yard, big deck, swimming pool, man cave, she shed, etc?
Understanding what you can afford in the area you want to buy will help keep you grounded and focused on what you actually want in a house versus what might be nice to have.
4. Save Up For a Down Payment
Unless you want to pay Private Mortgage Insurance (PMI), you really want to save up for a sizable down payment. PMI is an added insurance charged by mortgage lenders in order to protect themselves in case you default on your loan payments. The biggest problem with PMIs for homeowners is that they usually cost you hundreds of dollars each month. Money that is not going against the principal of your mortgage.
How much should you save for a house? Twenty percent down is typical with most mortgage lenders in order to avoid paying for PMI. However, there are other types of home loans, such as a VA loan if you have served in the military and qualify, that may allow you to put down less than twenty percent while avoiding PMIs altogether.
As an added benefit to having a sizable down payment, you may also receive a lower interest rate that will save you tens of thousands of dollars in interest over time. So start saving now!
5. Build Up Your Savings
Lenders like to see a healthy savings account and other investments or assets (i.e. 401k, CDs, after-tax investments) that you can tap into during hard times. What they really want to see is that you are not living paycheck to paycheck. A healthy savings account and other investments are a good idea in general as it will help you establish your future financial independence, but it is also a necessary item on your checklist of what you need to buy a house in 2019.
6. Have a Healthy Debt-to-Income Ratio (DTI)
Another key component banks and other lenders consider when issuing loans, and at what interest rate, is your debt-to-income ratio. The debt-to-income ratio is a lender’s way of comparing your monthly housing expenses and other debts with how much you earn.
So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better, but definitely, no more than 43% or you may not even qualify for a loan at all. There are two DTIs to consider as well.
The Front-End DTI: This DTI typically includes housing-related expenses such as mortgage payments and insurance. You want to shoot for a front-end DTI of 28%.
The Back-End DTI: This DTI includes all other debts you may have, such as credit cards or car loans. You want a back-end DTI of 36% or less. A simple way to improve this DTI is to pay down your debts to creditors.
How do you calculate your DTI ratio? You can use this equation for both front-end and back-end DTIs:
DTI = total debt / gross income
7. Budget for Extra Costs
There are a lot of little costs that go into buying a house that are overlooked by new home buyers all the time. Though there are some things, such as sales tax and home insurance, that can be wrapped into a home loan and monthly mortgage, there are several little things that cannot be included into the home-buying package and need to be paid for out of pocket.
Though these items can range in price depending on the area, size and cost of the house your buying, here is a list of extra costs you should consider (not all inclusive):
- Home Appraisal Fee
- Home Inspection Fee
- Geological study
- Closing costs*
- Property taxes**
- Home insurance**
- Utility hookup/start fees
- HOA fees
- Home remodeling/updating
- Existing propane gas
*Closing costs can sometimes be wrapped into the home loan, depending on the agreement with your lender.
**Property taxes and home insurance can be paid separately or your lender could include it into your monthly mortgage payment.
8. Don’t Close Old Credit Card Accounts Or Apply for New Ones
Closing a credit card account will not raise your credit score. In fact, in some cases, it may actually lower it. Instead, try to pay down the balance as much as you can, while continuing to make your monthly payments on time. If you have an old credit card you never use anymore, just ignore it, or at least don’t close it until after you have purchased your new home.
Opening new credit cards before buying a home is also not a good idea. You don’t want creditors checking your credit or opening new cards under your name, as you may lose some points on your credit score.
The absolute worst thing you can do is max out one of your credit cards, even if the limit on the card is low. If you do, your credit score may plummet. Try tackling your credit cards with the highest interest rate first, then as one gets paid off, focus on the next card until you’re free and clear.
9. A Solid Employment History
If you haven’t gotten the picture yet, lenders like consistency, including your employment history. Lenders like to see a borrower with the same employer for about two years.
What if you have a job with an irregular or inconsistent pay schedule? People with jobs such as contract positions, who are self-employed, or have irregular work schedules can still qualify for a home loan. A mortgage known as a ‘Bank Statement’ mortgage is becoming rapidly popular with lenders as more self-employed or what has been referred to as the ‘gig economy’ has taken off.
10. Know the Difference Between a Fixed Rate and an Adjustable Rate Mortgage
The difference between these two types of mortgage rates really lies within their names. A fixed rate loan is exactly that, an interest rate that will never change the moment it’s locked in. You will pay the same amount the very first month you pay your home loan and will continue to pay that same exact amount over the course of thirty years (or however long the loan term is).
An adjustable-rate mortgage (ARM) is typically a mortgage that starts out as a lower rate than fixed interest rates but then is adjusted each year typically resulting in a rate higher than a fixed rate. A 5-1 ARM is a popular mortgage offered by lenders, which is a hybrid between fixed and adjustable rate mortgages. Your mortgage would start out at a lower fixed rate for the first five years, then after that time period has elapsed, the rate would then be adjusted on an annual basis for the remainder of the loan term.
11. Follow Interest Rates
It is important to know what interests rates are doing. The big question is are they on the rise or are they falling?
When the economy is good the Federal Reserve typically raises the interest rate in an effort to slow down economic growth in order to control inflation and rising costs. When the economy is in the dumps the Fed does the exact opposite. They lower the interest rate in order to entice more people to make larger purchases that require loans (i.e. land, cars, and houses) to help stimulate the economy.
As new soon-to-be homeowners, it’s a good idea to know how the overall economy is doing, and more importantly, how it’s impacting the interest rates you’ll soon be applying for. In 2018, after years of bottom of the barrel interest rates, the Fed raised interest rates three times and is projecting to raise it three more times in 2019.
Why are small hikes in interest rates so important to you? To put it into perspective, even a one percent increase in your interest rate on a home loan is the difference of paying or saving tens of thousands of dollars in interest payments on your home loan over time.
12. Know How Much Time it Takes to Buy a House
The home buying process from start to finish is time-consuming and very relative to individual circumstances and the housing market in your area. However, there are some general universal constants that you can expect, such as a cash offer on a house is usually much quicker than a traditional loan, and if there is a perfect house in a good neighborhood and at a great price, you better expect competition and added time for a seller to review offers.
Depending on the housing market in your area and possibly which season you’re buying in, it can take you a couple of weeks to find a home or more than a year. But after you find your home you can typically expect the entire process from making an offer on a house to walking in its front door, to be as little as a few weeks to a couple of months on average.
13. Find a Knowledgeable Real Estate Agent
There are several ways to find a knowledgeable real estate agent. Many people rely on recommendations from friends and family, while others look to online reviews. While both of these scenarios work really well and can land you a great real estate agent, the reason these agents rise above the others as the best of the best or the crème de la crème is because of their intentions.
A good real estate agent isn’t trying to get you into a house as quickly as possible so they can earn a commission. Instead, you want an agent that will act as your guide through the home buying process, while having your best interests in mind. A good agent will be able to tell you straight if they think a house is a good fit for you, or if you should keep looking. They should also be expert negotiators so that you get the best deal possible.
14. Find a Mortgage Lender
There are a few things to keep in mind when researching a mortgage lender. The first thing that comes to most people’s’ minds is what mortgage rate can they get. You may have to shop around to find the best rate because lower the rate the more money you save.
Secondly, how does that mortgage lender rate compared to other lenders? By looking at positive and negative online reviews you can usually establish a theme pretty quickly of the strengths and weaknesses of the lender, and what you can possibly expect for a level of service down the road.
Ask the lender what their average length of time is to close on a house after the offer has been accepted? A good lender versus a bad one can be the difference of moving into your new home two to four weeks earlier. You want to find out how streamlined their processes are.
15. Get Pre-approved
When being approved by a mortgage lender, you should be aware that there is a small but relevant difference between the typical fast pre-approval for a home loan versus an underwritten pre-approval.
The fast pre-approval usually encompasses a credit report and a loan officer review and can be done in less than a couple of hours. This basic pre-approval allows you to quickly know how much you can afford and then make an offer on a house that may have just come on the market.
The underwritten pre-approval usually takes about twenty-four hours and includes a credit report, loan officer review, underwriter review, and a compliance/fraud review. Though this process takes longer, your offer on a house is actually stronger. Eventually, if you’re planning on buying a house, you will have to go through the underwritten pre-approval process anyway, so it’s better to jump on it from the start.
16. Research Neighborhoods or Areas You Want to Live
There are many variables to think about when researching your future residents. The key to beginning your research is to determine those variables most important to you. Are you looking for a good school district, a large house, convenience to commuter options, or a specific neighborhood that is extremely friendly and ranks high on Walk Score?
Your real estate agent will most likely tell you to figure out your list of the things you absolutely want in a house versus the extra features that you would like to have, but wouldn’t deter you from a house if it wasn’t there.
Your list will help your agent narrow down the number of houses they’ll show you, saving you time by only showing you houses you’d actually be interested in.
17. Shop For Your Home and Make an Offer
Now that you know where you want to live and you’re pre-approved, the fun begins. You get to look at houses! Once you find the house you know would be a great fit for you and your family, you’ll want to make an offer.
There are numerous variables to consider and hopefully, your knowledgeable real estate agent will help you through this process. Understanding the market conditions, how houses have been selling in the neighborhood and at what price (above or below asking), and knowing if there are other competing offers will help you assess and determine how you’d like to make an offer.
Negotiating an offer on a house can be emotionally taxing, so do your research and rely on your agent’s advice so you come to the table prepared.
18. Get a Home Inspection
Congratulations are in order! The sellers have accepted your offer. Now you want to get the home inspected to make sure there are no underlying issues that could cost you thousands of dollars down the road, such as a bad roof or foundation. Usually, a home inspection is a contingency built into the initial offer, and your real estate agent will help you set this up. Though you can waive this contingency if you’re trying to make a competitive offer in a hot market. Just be aware that if you do waive a home inspection contingency, you may be taking on considerable risk.
There are several types of home inspections, but in general, a typical home inspection involves a certified inspector that will go in, around, under, and top of your house looking for anything that could be of concern. Though they will go into crawl spaces and attics as part of their inspection, they will not open walls to see if the plumbing or electrical is good. However, they look for signs that could possibly point to those issues.
Then they will put their findings into a nice little booklet for you with pictures that basically becomes a miniature instruction manual for your house. If there are fixes that need to be addressed, they will certainly let you know.
19. Have the Home Appraised
Home appraisals are an important part of the process because oftentimes house prices can quickly skyrocket when the housing market is hot, and banks do not like to loan out more money than what a home is worth. A home appraiser will not only tell you what the home is actually worth for the area and for the current housing market, but this appraisal will also directly affect the size of loan the bank will give you.
If the home appraisal comes back and states that the house is worth $300,000, but you made an offer of $310,000, the bank will most likely only lend you $300k. You will then either be stuck with paying the additional $10k out of pocket, or you may try to renegotiate the price with the sellers to see if they would be willing to come down. Or you may lose the house altogether.
Also, the mortgage lender will usually set up the home appraisal so you can take this time to focus on other home-buying tasks that need to be finished up.
20. Close the Sale and Sign The Papers
Congratulations, you’re a homeowner! Your real estate agent should help you map out the last details, such as when and where you should sign all the papers to take ownership of the house and, of course, the handing over of the keys. Welcome to your new home.
Written by: Jeff Anttila
This entry was originally posted on RedFin.com
Does Leasing a Car Help Your Credit? Learn More About it Here
A car lease gives you an opportunity to rent a car of your choice for an agreed period. Just like loan repayment, leasing a car requires you to pay monthly installments and is, therefore, a major contributor to your credit history.
So, does leasing a car help build your credit score? The short answer is that, if you make all your payments on time, an auto lease can improve your credit score. Here’s what you need to know about car leases and credit scores:
How Leasing a Car will Help you Build Your Credit Score
While it is not a requirement, most legit car lenders, and dealers, report your payment activity to the three major credit bureaus: Experian, Equifax, and Transunion.
Once your payments are reported, they become part of your payment history which influences 35% of your credit score.
Below, here are some highlights of what you can do to improve your score during the term of your car lease.
Late or defaulted payments reflect negatively on your credit history. This consequently lowers your credit score. To ensure that you can make your payments every month and do it on time, settle for an affordable monthly payment spread out over a longer period as opposed to higher payments over a shorter period.
- Check out your Credit Reports Regularly
To understand your current credit health, check your credit reports regularly. By so doing you will be keeping tabs on your debts and any errors that prospective lenders might see on your report.
More importantly, getting the report is the first step towards disputing errors on your lease terms. In such cases, you can raise a dispute with the company responsible for the inaccuracy in time to ensure that your score is not affected negatively.
Besides your car lease, having varying lines of credit reflects on your ability to manage multiple lines of credit. And although a credit mix accounts for only 10% of your score, it can provide a much-needed boost to your score.
With that in mind, it’s worth noting that a car lease is classified as an installment account. This makes a lease different from revolving accounts such as credit and gas station cards.
- Minimize Credit Card balances
Boosting your score with a car lease would not make sense if you hurt it in other ways. Credit card utilization ratio, or the percentage of the money you are using out of the credit you have available, accounts for 30% of your score.
It is calculated for each of your credit cards and also across all of them. Even as you go for a credit mix, it is paramount to keep your credit utilization ratio at 30% or below.
Keeping old lease accounts open will help your score by increasing the age of your credit, also known as credit history. This accounts for about 10% of your credit score.
Can you Lease a Car with Bad Credit?
Despite the fact that leasing companies mostly consider consumers with good credit, you could improve your odds of getting approved for a lease and get an opportunity to start rebuilding your score. Here’s how:
Make a Down Payment
Making a huge down payment not only shows your commitment to the leasing agreement but it also helps to reduce the overall amount of the lease. This also means lower monthly payments.
Consider a Cosigner
If you are not financially stable, consider asking someone with a positive credit history to co-sign the lease with you. Since both of you share responsibility for the account, it affects both of your credit reports. Good payment history will, therefore, help rebuild your score.
Improve your Debt to Income Ratio
Debt-to-income-ratio is the comparison of how much you owe against how much you earn. A high DTI ratio indicates that you have trouble meeting your debt obligations.
So, before you attempt to get a car lease with bad credit, reduce your DTI. Among the measures, you can employ include getting a second job or clearing credit card debts.
It is apparent that leasing a car can help build your credit score. However, this works hand in hand with your other lines of credit as they together make up your credit report. As such, put all your financial obligations into consideration before you sign a car lease to avoid causing more harm to your score.
Developing an Action Plan to Boost Your Credit
A quick action plan to boost your credit score
Once you have your credit report and your credit score, you will be able to tell where you stand and where many of your problems lie. If you have a poor score, try to see in your credit report what could be causing the problem:
- Do you have too much debt?
- Too many unpaid bills?
- Have you recently faced a major financial upset such as bankruptcy?
- Have you simply not had credit long enough to establish good credit?
- Have you defaulted on a loan, failed to pay taxes, or recently been reported to a collection agency?
The problems that contribute to your credit problems should dictate how you decide to boost your credit score. As you read through this ebook, highlight or jot down those tips that apply to you and from them develop a checklist of things you can do that would help your credit situation improve.
When you seek professional credit counseling or credit help, counselors will generally work with you to help you develop a personalized strategy that expressly addresses your credit problems and financial history. Now, with this ebook, you can develop a similar strategy on your own – in your own time and at your own cost.
When developing your action plan, know where most of your credit score is coming from:
1.Your credit history (accounts for more than a third of your credit score in some cases).
Whether or not you have been a good credit risk in the past is considered the best indicator of how you will react to debt in the future. For this reason, late payment, loan defaults, unpaid taxes, bankruptcies, and other unmet debt responsibilities will count against you the most. You can’t do much about your financial past now, but starting to pay your bills on time – starting today – can help boost your credit score in the future.
2.Your current debts (accounts for approximately a third of your credit score in some cases). If you have lots of current debt, it may indicate that you are stretching yourself financially thin and so will have trouble paying back debts in the future. If you have a lot of money owing right now – and especially if you have borrowed a great deal recently – this fact will bring down your credit score. You can boost your credit score by paying down your debts as far as you can.
3.How long you have had credit (accounts for up to 15% of your credit score in some cases). If you have not had credit accounts for very long, you may not have enough of a history to let lenders know whether you make a good credit risk. Not having had credit for a long time can affect your credit score. You can counter this by keeping your accounts open rather than closing them off as you pay them off.
4.The types of credit you have (accounts for about one-tenth of your credit score, in most cases). Lenders like to see a mix of financial responsibilities that you handle well. Having bills that you pay as well as one or two types of loans can actually improve your credit score. Having at least one credit card that you manage well can also help your credit score.
As you can see, it is possible to only estimate how much a specific area of your credit report affects your credit score. Nevertheless, keeping these five areas in mind and making sure that each is addressed in your personalized plan will go a long way in making sure that your personalized credit repair plan is comprehensive enough to boost your credit effectively.
Understanding the Factors that Affect Your Credit Score
What factors affect your credit score?
If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won’t be able to very effectively improve your score because you won’t understand how the things you
do in daily life affect your score.
If you don’t understand how your credit works, you will also be at the mercy of any company that tries to tell you how you can improve your score – on their terms and at their price.
In general, your score is a number that lets lenders know how much of a credit risk you are. It’s a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.
In general, the higher your score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there. However, scores are a lot like GPAs or SAT scores from college days – while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on scores than others.
Some lenders will work with you if you have the scores in the 600s, while others offer their best rates only to those creditors with very high scores indeed. Some lenders will look at your entire credit report while others will accept or reject your loan application based solely on your score.
The score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a score from the information contained in your credit report.
Each credit bureau uses different methods to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system. FICO is an acronym for the score calculating software offered by Fair Isaac Corporation company.
This is by far the most used software since the Fair Isaac Corporation developed the score model used by many in the financial industry and is still considered one of the leaders in the field.
In fact, scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.
One other thing you may want to understand about the software and mathematics that goes into your credit is the fact that the math used by the software is based on research and comparative mathematics. This is an important and simple concept that can help you understand how to boost your credit. In simple terms, what this means is that your credit is in a way calculated on the same principles as your insurance premiums.
Your insurance company likely asks you questions about your health, your lifestyle choices (such as whether you are a smoker) because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on. This is based on research.
Studies have shown, for example, that smokers tend to be more prone to serious illnesses and so require more medical attention. If you are a smoker, you may face higher insurance premiums because of this.
Similarly, credit bureaus and lenders often look at general patterns. Since people with too many debts tend not to have great rates of repayment, your credit may suffer if you have too many debts, for example. Understanding this can help you in two ways:
1) It will let you see that your credit is not a personal reflection of how “good” or “bad” you are with money. Rather, it is a reflection of how well lenders and companies think you will repay your bills – based on information gathered from studying other
2) It will let you see that if you want to improve your credit, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills. You do not have to work hard to reinvent yourself financially and you do not have to start making much more money. You just need to be a reliable lender. This realization alone should help make credit repair far less stressful!
Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients – such as credit card companies and utility companies, to name just two – who provide them with information.
Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record. If you are late paying a bill, the clients call the credit bureaus and note this. Any unpaid bills, overdue bills, or other problems with credit count as “dings” on your credit report and affect your score.
Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit.
Your age, sex, and income do not count towards your credit score. The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are
among the things that count the most in tabulating credit from a credit report.
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