Realizing the American dream
■ Anthony G Moya / Contributed
Among the most desired things a person wants is to own a property they can call their very own. Home ownership is a major goal that many Americans desire to acquire in their lifetime of achievements.
For the most part, we all grew up in a home or shelter without receiving any background as to how to best prepare for this major investment that is before us. Our focus in our educational system is to learn certain subjects to become a contributing member of society. Even if one goes through and earns a master’s degree or a doctorate, not one single course is about buying a house which represents the most expensive purchase in their lives.
Should you buy a home for $300,000 you will end up paying at least $900,000 imbedded in monthly payments, and that is not counting the expense of maintenance or any improvements that are made while in possession of the home. With the average median being around $350,000 in Hemet you can imagine the total cost would be over one million dollars.
According to the U.S. Census Bureau, homeownership rates are above 64 percent as of the first part of the first quarter of 2018. Back in 2004, a historical peak hit 69.2 percent of homeownership. The swing is beginning to move the millennial generation into home buying for the next few years. What this swing will mean is that due to the fact that there is a shortage of properties, the new purchases will be escalating prices. Furthermore, this will bring about a sellers’ market and thus the buyers need to be prepared not only to compete, but qualify for, the new purchase.
Have a plan to buy a house
Deciding to buy a home requires making strategic financial decisions to be in the best position to qualify for a loan. However, it is more than that. Let us start with the financial aspect of home buying. The most basic and fundamental consideration is to recognize that it will be a financial obligation that needs to be taken seriously. Managing money is key to success in staying current and on time with mortgage payments month after month after month.
It is of utmost importance that a household budget be created or refined if one exists already. As you undertake the task of creating a budget you will need to be realistic. Timing is critical in managing the household affairs. When undertaking a budget, which needs to be agreed upon by both spouses, partners or a person who shares in your housing needs. Fundamentally, a budget identifies items such as mortgage payments, which includes the home insurance, property taxes, and perhaps private mortgage insurance or equivalent.
Added to house payment are the car loan payments, insurance, maintenance, food, clothing, prescriptions, doctor fees, entertainment, gasoline, utilities such as gas, electricity, water, sewer, cable, and other items that you pay for monthly. Make the budget and record how much was spent each month on what you had budgeted for. This way you will see where you are spending most of your money. Are you spending too much on entertainment or gasoline? You will make wise decisions as to where you need to focus on saving money. Only by recording these expenditures can you know where your money is going monthly.
This is a very important category of which will be used to evaluate whether you may qualify for a mortgage loan to buy your first home. The question that the bureaus will be evaluating automatically is whether you paid back and whether you paid on time. Make it a goal to pay on time and never have a 30-day late payment at all costs. Pay all your outstanding debt on time and you will have a higher FICO score reported by the credit bureaus. Make a priority that you are paying on time.
Paying ahead tip
Actually, paying ahead will help your credit score big time. Paying on time is major when the credit bureau rate your credit score. There is a reward for making payments on time because you will have a higher FICO score and in return you will be able to get a lower interest rate simply because of how high your FICO score is. I highly recommend that, if you are able to, make the minimum payments showing on your monthly credit card statement to equal four times the amount when you pay. For example, if your minimum payment is $25 then make a $100 payment for four months in a row. You will be surprised how much this will jump your FICO score.
Another tip is to try to have your outstanding balance equal to 10 payments or less. Now, what is this about? You may not be aware, but you see if you only have 10 more payments to go before your balance is zero, the underwriter will not count that debt since it has 10 more payments to be paid. Say you own $1250 on an account and your minimum payment is $100 per month. Here you pay down to $1000 which is 10 payments and thus this $100 per month debt will not be counted into the total debt that is used to calculate you qualifying for a loan based on the debt to income ratio. I will be covering more on qualifying for a loan in more detail in another article. For now, keep in mind that you have accounts of 10 payments or less and that you can make extra payments to increase your FICO score. Knowledge is power.
What to do if you have no credit history
So far, this information presented is based on the fact that you already have established credit by either applying for a credit card, car loan, gas card or a department store credit card, such as Walmart, Costco, and so on. If you do not have credit, then this is what you need to do. Save enough money and open a bank account and deposit $600 to $1000. Then ask the bank for a credit card even if you have to secure it with your deposit.
Let us say that you are able to qualify for a signature loan for $500. Use that card wherever you can. Buy gasoline for your auto, pay for groceries, pay for movies and snacks or use it at fast foods or eateries. Pay in full the amount you charged on time and preferred that you pay ahead of when the payment is due. In due time the bank will issue you a credit card that is not secured and called unsecured credit. This will get you started in establishing credit. It is a golden opportunity to demonstrate that you are creditworthy and responsible individual.
Follow these examples and you are on your way to creating credit lines that will be offered by other banks through invitations for credit through the mail. Yes, you will get offers from a variety of credit companies offering you credit card line accounts. Again, pay on time. You can also use one credit card to pay off the other credit card through what is known as “credit card transfers.”
Free credit report
One more thing about credit. Know that you are entitled to a free credit report once a year by going to the internet to https://www.annualcreditreport.com. You will get a copy online of your credit history showing all your accounts that are being reported on your name monthly. The credit report will not give you a FICO credit score; however, will give you a list of all your creditors that you have credit with and can see whether they are reporting correctly. You are interested in the amounts that are showing up as the minimum monthly payments. These minimum amounts are what the underwriter will be basing your debt-to-income ratio. That way you can plan how you reduce your debt before you apply for a mortgage loan.
Income and employment history
You will need to show that you receive income from either a job, trade or self-employment. Underwriters require that you show evidence of income through copies of your last two years of federal tax returns, two months’ worth of paystubs and two month’s worth of bank statements. The underwriter is going to review if you make enough money monthly to pay your mortgage payment. Depending on what program you fit into will depend on how much you need to make. The more the better and higher price property.
If you desire to buy a $300,000 property and have saved enough to put five percent down, you need fifteen thousand dollars for your down payment. You still need money to pay for your closing costs. For the moment, let us focus on your qualification for income. With $15,000 down payment it means that you need a $285,000 loan. If based on your credit FICO score you qualify for an affordable interest loan. The method how a buyer qualifies for a loan will be presented in another article.
In conclusion following a plan, taking time to prepare and gaining knowledge will make it easy in buying a home. Most people make the mistake of buying a house by first driving around the neighborhood where they wish to live without first inquiring with a bank or mortgage professional long before they commit to buying a house. People make decisions with two major components which are logic and emotion. Using logic avoids problems; however, when it becomes an emotion it could lead to a frustrated state of mind during the home search. Being logical about the home buying process can go a long way to buying a house.
Anthony G Moya is a California licensed real estate broker and mortgage loan originator who founded his company in 1989 helping first time buyers with their home purchase. He is also an author writing about the events that transpired during the real estate collapse. His book is entitled “Global Collapse:D-Day When 150 million people stop making their house payments.” A book that educates the public about the lending industry and how to work with it. Moya holds an MBA and is licensed, CALBRE 01115153 NMLS ID 1652813.