Preparing for Home Ownership
Two couples look at purchasing a house for $150,000. They each have $15,000 saved for the purchase. One couple has some credit problems in their past that are not resolved. The other has done their research in advance and reviewed their credit report. Both find financing for the purchase.
The couple who had prepared and done their research obtained a mortgage for $135,000 ($150,000 minus the $15,000 down payment) at 5.5% and no points for a principle and interest payment of $767. Over the course of their loan they will pay $140,945 in interest.
In order to get their loan approved, the couple with the unresolved credit problems had to pay points (prepaid finance charges reflected as a percentage) in the amount of $3000, reducing the amount of their down payment to $12,000. That leaves $138,000 ($150,000 minus $12,000) to be financed at a higher rate of 7.5% because of their credit. The monthly payment for principal and interest will be $965. Over the course of their loan they will pay $209,369 in interest.
Not only does the “unprepared” couple face a mortgage payment that is $198 higher per month than the first couple, in the end, they will pay out over $71,000 more in interest. Additionally, the “unprepared” couple is also at greater risk of losing the home to foreclosure or becoming bankrupt due to the greater demand the higher payment will place on their budget. The stress of maintaining their budget may also impact their relationship, as the number one cause cited for marital breakups is still financial problems.
As the previous example shows, it is definitely worth your while to take some steps to ensure you are prepared to obtain and maintain home ownership.
How can you prepare?
- Obtain and review copies of your credit report (at minimum 3 months before you plan to start looking to purchase).
- File complaints with the credit reporting agency to remove any inaccuracies.
- Identify outstanding debts on your reports that have a negative rating and create a repayment plan.
- Save for the down payment.
- Research mortgage lenders — rates, fees and other costs.
- Research what you can afford for a payment. Make use of on-line calculators (like on our website — www.creditadvisors.org). Remember, your mortgage payment should not exceed 28% of your gross (before taxes) monthly income.
- Make certain you look at your other plans and goals before you get into a house that will max out your budget.
- Make sure your referral from your current living arrangements is sound. You will most likely need a payment reference from the last 24 months of renting/leasing.
If you know what you can afford, have an adequate down payment for that house, have a great rental reference, have savings in addition to the down payment, have reviewed your credit report and had what was incorrect removed, have paid your outstanding bad credit references off and can prove it, then you are ready to buy a house. Not just buy a house, but buy a house on terms that are good for you and your financial future.