Home
buying and selling can be an intimidating process, especially with home values shifting
daily. Below is everything you need to know when you’re in the market for your new
dream home.
1) Home Loans
A home loan is usually referred to as a mortgage: a long term, high dollar value
commitment on your part to the lender. The lender may be a bank, a credit union,
or other mortgage loan originator.
Steps to getting a Home Loan:
- Consider your ability to pay (or afford) a loan on a home. You will need to determine
the maximum amount you are eligible to borrow, the length of time you want to pay
on the loan, the amount of interest the lender will charge, and the insurance and
other fees related to a home loan. You can use an on-line calculator to determine
the maximum loan amount for which you can qualify.
- Know your income, expenses, and all debts. You’ll need to reveal them to ensure
your financial capability to successfully handle the loan, reducing the risk to
you and the lender.
- As in a car loan, you should get a copy of your credit report and fix any errors.
- Consider the terms of the loan as well as any penalties for being late on payment
or prepayment fees.
- Consider the services of a realtor and mortgage broker to find your ideal home and
how to finance it. They can assist you in other factors, such as home inspections,
homeowners associations and their fees, taxes, insurances, escrow accounts, and
other matters relevant to a home purchase.
2) Credit Reports and Scores
Nationwide consumer reporting companies sell the information in your credit report
to creditors, insurers, employers, and other businesses that use it to evaluate
your applications for credit, insurance, employment, or renting a home. There are
three national credit-reporting agencies in the United States—Experian, Equifax, and TransUnion . The Fair Credit Reporting
Act requires each of the nationwide consumer reporting companies to provide you
with a free copy of your credit report, at your request, once every 12 months.
What’s in a Credit Report?
A credit report includes information on where you live, how you pay your bills,
and whether you’ve been sued or arrested, or have filed for bankruptcy. Because
nationwide consumer reporting companies get their information from different sources,
the information in your report from one company may not reflect all, or the same,
information in your reports from the other two companies. That’s not to say that
the information in any of your reports is necessarily inaccurate; it just may be
differently interpreted.
What your Credit Score means:
A credit score is a three-digit number that lenders use to help them decide whether
you’re a reliable candidate for a mortgage, credit card or some other line of credit;
it also helps determine the interest rate you are charged for this credit. Fair
Isaac has developed a unique scoring system for each of the three credit bureaus,
taking the following five components into account:
- Payment history (35%)
- How much you owe (30%)
- Length of credit history (15%)
- Type of credit (10%)
- New credit or inquiries (10%)
Scores range from approximately 300 to 850. The higher your score, the better the
terms of credit you are likely to receive. The riskier you appear to the lender
– or the lower the score – the less likely you will get credit or, if you are approved,
the more that credit will cost you. In other words, you will pay more to borrow
money.
Your Personal Finance Counselor (PFC) can provide you with your credit score
for free. Contact them!
3) Debt-to-Income Ratio
Calculating your debt-to-income ratio is as simple as adding up all of your debt
and subtracting it from your income. Some calculations may exclude things like mortgage
payments and property taxes, but to really get a complete picture it’s best to include
everything.
To determine your debt-to-income ratio simply take your total debt payment number
and divide it by your total monthly income.
Example: If you came up with a $2,000 total debt payment number
and monthly income of $6,000, that leaves you with a debt to income ratio of 33%.
Lenders tend to look at two key debt-to-income ratios when it comes to mortgages:
- The front ratio: The debt-to-income ratio that includes all housing
costs
- The back ratio: The non-mortgage debt-to-income ratio
Generally speaking, lenders would like to see your front ratio at 36% or less and
your back ratio at 28% or less. The FHA rates are 29% and 41%, back and front respectively.
Keep in mind that these ratios are only guidelines and there are many other factors
that go into determining how much you can borrow and at what rate.
4) Home Insurance
Lending institutions usually require mortgage customers to purchase home insurance,
and they suggest certain coverage limits, which must be maintained by the mortgagee.
Home insurance includes the structure, the contents (your possessions), and liability
should someone get injured on your property. Before buying home insurance, understand
the difference between "replacement cost" and "actual cash value."
Actual cash value is an item´s replacement cost, minus depreciation. Replacement
cost is how much it would take to replace the item or home without depreciation.
Extended replacement cost coverage pays a certain amount above the policy limit
to replace a damaged home, generally 120 or 125 percent.
What you need to know when deciding coverage:
- Don’t rely on the coverage levels mandated by your bank or mortgage company. Those
levels are designed to protect the house itself, but not necessarily your possessions.
- Insure your house for the cost to replace it (i.e. construction costs), not its
market value, and don't factor in the value of your land. Once you know the proper
level of coverage, consider special add-ons for valuables such as jewelry, your
computer equipment and other pricey possessions.
- You might also need additional coverage for earthquakes, flooding or windstorms,
depending on where you live. Each homeowner’s insurance policy provides a combination
of property and liability coverage and covers loss of use resulting from damage.
Factors that go into determining the premiums for a homeowner’s policy:
The age of your home, the materials used to build it, where it’s located, the square
footage and its distance from a fire hydrant all play a role in determining rates.
The insurer will be able to give you an estimate for rebuilding your house in the
event of a total loss.
5) HELOC (Home Equity Line of Credit)
A home equity line of credit is a form of revolving credit in which your home serves
as collateral. Because a home often is a consumer's most valuable asset, many homeowners
use home equity credit lines only for major items, such as education, home improvements,
or medical bills, and choose not to use them for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit. Many
lenders set the credit limit on a home equity line by taking a percentage (say,
75%) of the home's appraised value and subtracting from that the balance owed on
the existing mortgage.
In determining your actual credit limit, the lender will also consider your ability
to repay the loan (principal and interest) by looking at your income, debts, and
other financial obligations as well as your credit history. Home equity lines of
credit typically involve variable rather than fixed interest rates. The variable
rate must be based on a publicly available index (such as the prime rate published
in some major daily newspapers or a U.S. Treasury bill rate). In such cases, the
interest rate you pay for the line of credit will change, mirroring changes in the
value of the index.
Remember that your home is at risk when you take out a HELOC—use the line of credit
only when you must, and have the ability to repay it.
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