Affording a Home
What can you afford?
No matter where you choose to live, you will have expenses. Some will need to be paid monthly, some annually and others at different times during the year. You may find after examining your finances that you will need to rent or save for a while to be able to afford to buy or build your own home.
If homeownership is your goal, nothing will help like a good plan. Housing counselors are available to work with you to decide what steps you need to take to own your own home.
As a rule, the cost of your house should be about two and one half times your annual total income. The rule can vary based on interest rates, the amount of your current debt and the type of loan program you apply for. However it is a good rule to use to get started.
Remember, the cost of buying a home is more than the actual cost of the house. Other costs can include:
- Home inspections - inspections are conducted throughout the buying process and include building, termite and radon inspections
- Down payment - your contribution to secure the loan, generally 5% of the price of the house
- Closing costs - credit report fees, appraisal fees, application processing fees, transfer taxes, lawyers, etc.
- Escrow - special account that sets aside money for taxes and insurance
- Reserves - an amount set aside that is equal to your mortgage and expenses for two months
- Moving expenses - start-up fees for utilities, painting, cleaning, furniture, decorating, appliances, moving companies, etc.
Programs are available to qualified individuals to help with down payment and closing costs, especially if this is your first home. A housing counselor can help you identify these programs.
Meeting with a lender can also help you understand how much you can afford to spend on a home. Most lenders will prequalify you for a given amount by looking at your savings, credit history and annual income. Prequalifying does not guarantee that you will get a loan for this amount but it will give you an idea of what housing price range you should be looking at.
Prequalifying will also give you an idea of what your monthly mortgage payment should be. Once you find that payment amount, you should redo your monthly expenses worksheet to see how this new expense affects your life.
Working With a Lender
At some point in their life, most people will decide they want or need something that costs more than the money they have on hand.
If the item you want is very expensive, such as a house, you may need to work with a bank or other lender to get a loan for the amount you need. Before the bank will lend you the money, they want to make sure you will be able to pay them back.
How's your credit?
One of the ways banks decide if you can pay them back is by looking at your credit history. Your credit history will show if you are currently paying your debts on time and how you have handled your debts for the past seven years. Debt is the amount of money you owe on loans, credit cards or to utility companies for past bills.
You can find out what your credit history is by getting copies of your credit report from a credit reporting bureau. Once a year, you can get a copy of your credit report for free by calling:
- Experian 1-888-397-3742
- Trans Union 1-800-916-8800
- Equifax 1-800-685-1111
Fixing Your Credit
Your credit history does not have to be perfect to get a loan and, in many cases, bad credit can be fixed.
Bad credit is usually caused by failure to pay your bills on time or not paying your bills at all. Bad credit can also be caused by judgments against you, bankruptcies or credit cards at their limit.
If your credit report shows that you have had bad credit in the past, you can take steps to improve your credit rating.
- Call your creditors or collection agency and establish a bill payment plan.
- Write letters explaining why you missed payments or payments were late and ask that these letters be placed in your file.
- Take a look at your budget to see where you can save money - take your lunch to work instead of eating out or give up cable TV until your debts are paid.
- Get a copy of your credit report and look for old information - after seven years, you can request that damaging information be removed from your credit report.
You may also want to consider working with a credit counselor to get back on the good credit track. Often, solutions suggested by creditors, such as discounted payoffs and debt-management plans, can still show up on your credit report and affect your credit rating.
Credit counselors can help you create a plan to improve your credit and get out of debt.
If you have no credit history, you will need to establish credit before many banks will give you a loan. Starting a savings account and making regular monthly deposits is a good way to establish credit.
You can also establish a good credit history by keeping your rent receipts, phone bills or utility bills that show you make regular monthly payments on time, or by having a credit card that is paid in full.
Having someone you know co-sign a loan with you can also help you establish a good credit history, as long as you make full payments on time.
Printed materials are available in Braille, electronic format, cassette tape and large print.