HBI's Top Home-Buying Tips for First-Time Buyers
The Home Buying Institute offers more than 1,000 articles and tutorials for first-time buyers. But it's not always easy to find the information you need on such a large website. So we have condensed much of this information into a two-part tutorial for first-time buyers.
Credit Reports and Scores
All of the home buying tips in this section relate to credit in some way. Mortgage lenders use your credit score as a way to measure risk. A lower score suggests a higher level of risk to the lender, and vice versa. Mortgage companies also use this information when determining your interest rate. So you should find out where you stand, early on in the home-buying process. Here are some tips to help you navigate this step.
- Get copies of your credit reports from all three of the reporting bureaus. This is the starting point for your research. You can do this by visiting AnnualCreditReport.com.
- By law, you are entitled to receive one free report every year, from all three of the reporting companies (Experian, TransUnion and Equifax). Home buyer tip: You should never pay for this information -- if you do, you've been the victim of a scam.
- There are hundreds of websites offering "free" credit reports, but with a catch of some kind. Most of them require you to sign up for some kind of identity-theft prevention service. If you're only after your credit reports, you should use AnnualCreditReport.com. It's the only website regulated and monitored by the federal government.
- Home buying tip: When you request your reports online, you may be given the opportunity to purchase your credit scores as well. The fee for this is usually less than $20. I recommend purchasing this information. You'll need it at some point, and you might as well do it all at once. We will talk more about FICO scores later on.
- Once you have your reports, start checking them for accuracy. The most important thing to check is the account history. This will show your payment history for credit cards, personal loans, etc. Make sure all of the accounts listed are yours.
- Keep an eye out for derogatory information on your credit reports. This includes late payments, charge-offs, bankruptcy filings, foreclosures, etc. If the negative entries are legitimate, there's not much you can do about them. They'll come off your reports at the seven- or ten-year mark. But if you find erroneous entries, you need to have them removed ASAP.
- You can dispute errors on your credit reports by visiting the website of the reporting agency that produced it (TransUnion, Equifax or Experian). Your reports are unique to the particular company that provides them, so the dispute process is company-specific as well.
- Home buying tip: Start this process as soon as possible. Better yet, start today. It takes time to have discrepancies removed from your reports. The sooner you get started, the better.
- You should also check your FICO credit score. This is a three-digit number between 300 and 850. It is based on the information found within your credit reports. This number tells lenders how you have borrowed and repaid money over the years.
- A high score is a sign of a responsible borrower -- the kind of borrower that mortgage lenders love to work with. A low score suggests that you've had problems repaying your debts in the past.
- A higher FICO number benefits you in two ways. It helps you get approved for a home loan, and it also helps you secure a lower interest rate on the loan. This can save you thousands of dollars over the term of the loan.
- In order to qualify for a conventional mortgage loan, you will probably need a score of 620 or higher. You might be able to qualify for an FHA loan with a score lower than this.
- You can maintain a credit score (or fix a bad one) by paying all of your bills on time, reducing your balances on open accounts, protecting the length of your credit history.
- Home buying tip: Derogatory entries will lower your credit score, reducing your chances of getting approved for a mortgage loan. Late payments do the most damage. If you fall behind on your payments for a loan or credit card, it could lower your FICO score by 100 points or more.
Budgeting Tips for Home Buyers
This section of home buying tips deals with mortgage affordability and budgeting. It's important to establish a budget for yourself, before you start shopping for homes. Believe it or not, it's possible to qualify for a home loan that stretches your income to the limit. This is often referred to as being "house poor." Here's how to avoid such mistakes.
- You need to determine how much you can afford to spend on a mortgage payment each month. Here's how to go about it:
- Find out how much you make every month, after taxes are taken out. This is your net monthly income, or take-home pay. It's also a key part of the budgeting process. If you don't know exactly how much you earn each month, look at your pay stubs (or the online equivalent).
- Next, start adding up your monthly expenses. All of them. This list should include your grocery expenses, credit card payments, car loan payments, entertainment expenses, and whatever you contribute toward retirement / savings.
- Tip: You can leave your current rent or mortgage payment off the list. This item will be replaced by the mortgage payment on your new home. You are trying to find out what your non-housing expenses are each month.
- Subtract these expenses from your net monthly income. Let's call this the "leftover" amount. This is the amount of income you have left over each month, after your non-housing debt obligations have been met. This is the maximum amount you should be spending on a mortgage payment.
- Home buying tip: I recommend setting your housing budget significantly lower than the leftover amount. This will give you a financial cushion in case of emergencies.
- For example, let's assume you're making $5,700 per month, after taxes. You're spending about $2,200 a month on your debts and other expenses. This leaves you with $3,500 left over each month. You would be wise to set your mortgage limit below this amount, to create a financial cushion. I would recommend spending no more than $2,900 on a mortgage payment.
- You can learn more about the budgeting process in this article.
- Home buying tip: Don't trust the mortgage lender to determine your financial comfort zone. This job is yours and yours alone. If you don't have a monthly spending limit in mind before applying for a mortgage loan, you could end up with a monthly payment that's too big for you.
- Once you have a housing budget on paper, you're ready to get pre-approved for a home loan. This is another important step in the home buying process, because it gives boundaries and direction to your house-hunting process. We will talk more about it in Part 2 of this tutorial...