All Things Considered

It’s always exciting to purchase a new (or new-to-you) home, but it’s not always the best time – and not every method is the best method. Before you get too far in the process, there are a few things you might want to consider.

First and foremost, do you have enough reliable income to make a house payment in full and on time every month? The standard guideline for computing how much house payment you can afford is to keep it at or below 28% of your gross monthly income. This assumes your total for all debt payments (including a house payment) is no more than 40% - 45% of your pre-tax monthly income. These are guidelines, however. It’s entirely possible to qualify for a loan amount on paper which you have no business accepting or to compute a monthly payment amount that meets all the guidelines but you can’t realistically afford. It’s better to be honest with yourself now than get in trouble with your house payments. In addition to severely damaging your credit and potentially sending your account to a collection agency or pursuing legal action, you could quite literally lose your home.

Live your dream, but do the math first. Always.

Second, consider location and value. Price is tied to the quality and size of the house, but also to location, location, location. How close do you realistically need to be to work? What school district will this home put your kids in? What’s the market doing in and around this neighborhood, and what direction is it likely to go? The value of your home over time is of secondary interest to your family’s daily wants and needs right now, but it should still be a serious consideration.

Third, how long are you likely to stay? If chances are good you’ll be moving in five years or less, it might make more sense to rent a house or apartment. If your time in the area is shorter than that, it’s worth checking local laws regarding capital gains or other taxes on home sales. They tend to be higher if the home looks more like a “flip” than a residence.

Finally, what do you want in a home and what do you truly need? As you begin shopping in earnest, you’ll very likely discover any number of homes that meet some of your wants and needs, but rarely one that meets all of them. It’s useful to decide in advance with considerations are non-negotiables and which would simply be nice to have. If you can get all of your essentials and some of your desirables at a good price in the right location, you have a potential winner.

How Will My Credit Impact My

Home Purchase Loan?

Lenders determine the cost of your mortgage in a few different ways. First, they check your three-digit credit score. This operates as a sort of “snap shot” of your creditworthiness in the most simplified terms possible. Most will also look at your recent credit history – especially any past record of house payments, automobile financing, or other indications of your reliability when it comes to making substantial monthly payments over a long period of time.

Lenders also factor in what’s called a “loan-to-value ratio,” or LTV. The LTV is essentially the amount of the loan being requested divided by the value of the home, which is usually very close to the total purchase price (although technically it can refer to the appraised value of the property instead). The higher the LTV, the more risk to the lender, particularly since it’s conceivable that at some point the balance remaining on the loan could exceed the actual value of the home. The most common way to improve loan-to-value ratio is to make a down payment of 10% or 20%. In addition to improving the math, most lenders take this as an indication of financial security and responsibility and feel better about lending the rest.

Your current and recent income are important factors as well. You’ll want to be prepared with documentation of your employment and all income sources. Any current debt is an additional consideration. Lenders want to know you can afford to make your house payment, making your debt-to-income ratio important to them. Even if you’re purchasing a home with bad credit, documenting your ability to pay and even a modest window of recent financial reliability may help your application substantially.

The better your credit score and the more impressive your credit history, the better terms you’re likely to be offered and the lower the interest rate you’ll be able to negotiate on your home loan. Even with the home itself acting as collateral, which helps keep interest rates manageable, lenders charge more for taking greater risk. The most obvious manifestation of this is interest rates, but it also impacts various up-front fees and may determine the nature of late penalties or other optional charges along the way.