Homebuying 101: Getting your credit in order

Congratulations! You're considering buying a home - it even may be your first! It's a big step in life and it can be exciting, but it can also be intimidating at first. There's lots of lingo to learn and lots of things to do between now and the day they hand you the keys. But, trust us, you got this! And we're here to help.

In this article, "Getting Your Credit in Order," we'll make sure you get off on the right foot by making sure you are taking the right steps now to get the right loan and make that dream home a reality.

Start saving!

Rarely will someone have enough cash to purchase a home without a mortgage. So, the first step, as you surely know, is to start saving for a down payment … now.

Saving for a down payment on a house is a big deal. The average home price on Long Island has risen to roughly $425,000 and it’s possible the house you are considering costs even more.

Most people would tell you that the goal is to save for a 20% down payment; if you consider buying a house for $425,000, that means you would need to save $85,000 just for the down payment. This doesn’t take into account closing costs (roughly 3% of the mortgage amount) and money you might need to prep the house for moving in. To start your savings plan, you must establish a personal budget and most importantly ‘pay yourself’ first out of every paycheck by automatically moving some of your pay to a separate account, such as a high-yield checking account, money market or CD where you can earn interest and have your savings grow. Don’t worry, if you cannot save the 20% there are a number of loan programs where you can obtain a mortgage with as little as 3% down and we’ll talk about things you should consider in that situation a little later.

Lenders also expect that you will have what is called ‘reserves’ after your closing. This is money available to you that could theoretically be used for your mortgage payments if you were unable to work and earn an income but still needed to make all payments on a timely basis.

Check your credit score!

Alright, now you understand why saving is important when buying a home, so let’s talk about the next key to getting a loan. That’s your credit score and credit history.

Credit scores provide lenders with an indication of how you pay your bills and they range from 300 to 900 (the higher the better). You should shoot for a minimum score of 680; however, based on other characteristics, lower scores could still result in loan approval. Your credit score is calculated using algorithms a third party has developed - lenders are only ‘users’ of the score, not creators. It’s also important to note that there are many scores available to lenders and not all use the same ones. What you receive from one lender may differ from that of another. There are several ways to access your credit score. Often lenders provide it on statements or on online banking accounts. You can also purchase a score at www.myfico.com.

If your score is lower than you’d like, don’t worry. You can improve it! Be sure to pay your bills by the payment due date each month, limit the amount you borrow and don’t close older revolving accounts like credit cards even if you do not use them anymore. The length and depth of your credit history is important too!

Credit reports summarize your borrowing history. Every consumer is entitled to a copy of their credit report annually from each of the 3 major credit reporting agencies: Trans Union, Experian, and Equifax. Consumers can set up an account with each and obtain access to their information. You can also use a website like www. freecreditreport.com for a copy.

Upon receipt of your credit report be certain to check it for accuracy. Ensure that all accounts you have (for example: personal loans, credit cards, store cards, student and car loans) are listed and that the payment records appear accurate. Should you find a mistake, contact the credit reporting agency immediately so that they can ensure the creditor researches your account and appropriately reports and/or corrects the information. You can also reach out to the creditor directly and ask them for assistance. While mistakes are rare, they can impact your score and ability to get approved for the loan.

It is important to note that Mortgage Lenders will obtain your score and credit report from all three agencies and use them to evaluate your application. It will be the ‘middle score’ of the three to determine if you qualify for the loan program you have requested and what rate you pay for that loan.

Understanding how much you can borrow.

All lenders will calculate what is called your debt-to-income ratio (DTI). This is represented by a mathematical formula. Your total monthly debt payments (including your new monthly mortgage payment) will be divided by your gross monthly income. (if there are two borrowers requesting the loan the debts and income are combined for this calculation). The general rule of thumb is this should not exceed 43% (including your new mortgage payment). As an example, if your gross monthly household income is $6,250 ($75,000 per year), all your debts combined, including mortgage, taxes, insurance, car payments, credit card, student debt and any other monthly payments you are responsible for cannot be more than $2,688 per month. If you have a car loan payment of $300 per month, a student loan payment of $200 per month and minimum credit card payments of $100 per month and you assume the annual real estate taxes on the home you are purchasing are $10,000 ($833 per month) for the year and homeowner’s insurance premium is $1,200 for the year ($100 per month), you would qualify for a mortgage of roughly $225,000 (using income of $75,000 per year).

You can quickly see how debt and other costs can really restrict how much home you can afford.

Speak with a mortgage expert regarding your options.

Not everyone can save 20% of the dream home purchase price, not everyone has pristine credit and a 750 credit score. Its important you find a lender that can work with you and has various options that will meet your needs.

What do I do if I don’t have 20% down? Find a lender that offers low down payment programs. When you do, you should expect to be required to have private mortgage insurance (“PMI”). Your lender will arrange it for you and include the monthly premium in your payment (and factored into your debt to income ratio). You will need to carry it until your loan balance falls to 78% of your home’s value. It increases your monthly cost but will alleviate the need to save thousands of dollars before buying your home.

What if I don’t have a great credit score. Most lenders will make loans to individuals with scores as low as 620. There are certain programs that are available at even lower scores. Your lender can help you find one that works for your specific circumstances. Contact us for a mortgage consultation. Our mortgage experts will ask questions, collect documents for income and asset verification and guide you in making a sound financial decision. Also, in just 15 minutes you can apply for a mortgage via our online or mobile application. Additionally, you can upload documents and communicate us throughout the process via a personalized and secure portal.