What Newbie Home Buyers Need to Know/ April 11th, 2016
Buying your first house is an exciting time, but admittedly a little scary, as well. The allies at your credit union have your back. They can help you minimize anxiety by being prepared.
If you haven't already, call a loan officer there and have a conversation about your questions and your goals. The lender is likely to share with you some version of these steps:
Know your credit report
Go to annualcreditreport.com and get your credit report from all three of the reporting agencies; you get one free report a year. This step is important because your credit score can make a huge difference in how much you qualify to borrow and what you pay for the money.
Usually, we suggest you order one credit report every four months from a different credit bureau. But when your plan is to buy a house, check all three at once because your goal is to identify anything that could scuttle your loan or drive up its cost. If you find errors, correct them. That won't happen overnight so, even if your home purchase is several months in the future, make sure your credit report is up to snuff now.
If the facts are accurate and reflect a sloppy credit history, expect to spend at least six to 12 months cleaning things up with flawless credit habits.
Here's how much difference it makes, if you qualify: On a $150,000 30-year fixed-rate (3.85% annual percentage rate) mortgage, with an excellent score of 760 or higher, your monthly payment would be $703 and you'd pay $103,033 in total interest. But a credit score of 620 would cost $846 a month (5.4% APR) and rack up $154,407 in total interest payments.
Know what other documents will be useful
When you talk with a lender about applying for a home loan, you might need several other records:
- W-2 forms. Make copies from the past two years.
- Paystubs. Copy your two most recent ones.
- Financial account statements. Collect statements, including those from retirement accounts, for the past few months.
- Lines of credit. If you've opened any in the past six months, you'll need copies of those statements because they might not show up on your credit report.
- Information about vehicles you own. Include make, model, and resale value.
- Auto-loan account information. Include account numbers and statements.
- Credit card account information. Include numbers and types of cards, balances, and minimum payments.
- Other loan account information. Include student loans and personal loans.
- Gifts. If any money for your down payment was given to you, identify how much and where it came from. Be prepared to document that it's a gift and not a loan.
When you call to make an appointment, ask what papers you should bring with you.
Know what you can afford
This depends on a few things: Your income and its stability, how much you have for a down payment, and your existing debt level are all elements that come into play.
Maybe you have heard the 28/36 guideline. This means:
- Your total monthly housing commitment—mortgage principal and interest, property taxes, and homeowners insurance—should be no more than 28% of your income before taxes and other deductions, called your gross monthly income. So, if your gross monthly income is $3,000, the monthly house payment should be $840 or less.
- Your total debt—meaning house payments plus student loans, car loans, and credit cards—should be no more than 36% of your gross monthly income. That means if your gross monthly income is $3,000, all monthly debt payments should top off at $1,080.
These are guidelines. You also have to consider how much of your monthly cash flow you want to put into house payments so you don't end up "house poor." Think in terms of what house payment you can handle and still have money for savings, education, vacations, entertainment, childcare, and other priorities.
Know your savings status
You'll have to come up with anywhere from 5% to 20% down on a conventional home loan—or from $7,500 to $30,000 on a $150,000 house. Here again, your credit union loan officer can help you learn about options you're eligible for that can bring the numbers within reach.
In addition to a down payment, be prepared for these expenses, which you can't roll into your mortgage:
- Closing costs for title search, appraisal fee, loan origination fee, and more
- Utility hook-up charges
- Prepayment of taxes, interest, and property insurance
- Moving expenses
You can expect to shell out for paint, window coverings, appliances, and other basics to make your new place move-in ready. That's why you don't want to draw down your entire emergency fund to come up with a down payment.
So if you don't have a down payment—and an emergency fund—it's a little premature to think about buying a house. Here again, your credit union lender can help you calculate what you need and how much you want to keep on hand for the inevitable expenses that arise after you buy a house.