Julie and Walt just bought and moved into their first house. They’ve been married two years and Julie’s about a month away from delivering their first child. They saved to put down 22% down on the house and were able to get an $8,000 first-time buyer tax break. Their fixed, 30-year mortgage is at 5.075%.
In a year when the economic news seems to get worse and worse, there is one bright spot for buyers: falling housing prices and low interest rates mean it’s your market. Especially those buying for the first time, who can take advantage of that tax break. What about you?
Here’s what you’ll need:
Credit you can take to the bank
A house (or rather the mortgage, the financial vehicle that makes it possible) is the holy grail of your credit score: arguably the biggest single financial move you’ll ever make. Just like you’d start saving for a down payment long before you buy, you need to start getting your credit in order well before you’re ready to apply for a mortgage.
If your credit history is good overall but there are one or two blemishes like a late payment, many mortgage lenders will simply ask for a written explanation. The most important time period in your credit history is the preceding year or two. If the explanation is reasonable and believable, many lenders will overlook the isolated problem especially if it occurred some time ago and your credit has been on track since.
More than just your score
As credit scoring in mortgage loan decisions has become more sophisticated, lenders have also begun looking at other factors in your credit history. They might be concerned if your credit cards are "maxed out", indicating potential problems with debt management. Or they might worry that if you have large lines of available credit it could mean future unmanageable debt. It’s critical to be sure the information in your credit report is accurate. Inaccuracies or the damage due to credit or identity fraud might determine whether or not mortgage lenders will offer you a loan.
Lenders also look at the number of recent inquiries into your credit report. They interpret a large number of inquiries to mean that you have recently applied for a large amount of credit. They may decide you have too much credit available to be a good credit risk if you’ve been applying for numerous lines of credit. They might foresee you getting into trouble by using them excessively, or assume other lenders have rejected your loan applications.
The right place for you
One question to ask yourself is if you’re prepared to stay in this house (or condominium) for a long time. Experts advise against buying a home unless you plan to stay in it at least three to four years because the high transaction cost of buying and selling property means you could lose money on the deal. Look at this purchase as a long-term investment, something permanent…in other words, home!
Financial security—at least some
Before you sign the mortgage papers on the dotted line, take a look at your income. Is it steady and documented? Could you cover the costs of closing, moving, and a down payment? Will you be able to also pay other associated expenses of homeownership like maintenance and repairs, homeowners association or condo association dues, insurance, utility bills, major appliance replacement or repair? And could you also continue to meet other expenses such as student or car loans and all your other costs?
If you feel like you’re ready to take on the financial challenges of home ownership, the rewards can be significant—a major investment, security for your future, even the stability of having a permanent address. Following these steps will help put yourself in the best position to get a great mortgage rate. This will make it all the sweeter when you turn the key to your new front door for the first time.
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