By Ali Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
For homebuyers, long-term planning is the key to a successful home purchase because it entails committing to a long-term financial arrangement called a mortgage. So, if you’re preparing to do some home shopping this summer, start your planning with an eye towards making your credit the best it can be and get the best mortgage possible.
Today mortgage interest rates continue to hover at historic lows. In fact, according to the financial website www.bankrate.com, the benchmark 30-year fixed-rate mortgage (FRM) was 3.6 percent last week – lower than the 4.12 percent rate a year ago at this time.
So the first thing home shoppers will want to do to will be to improve their credit score to enable them to purchase the maximum home for the investment and translate into long-term savings over the life of the mortgage. Start by postponing any major purchases - especially those you will be putting on a credit card. Debt that you carry on your credit cards will limit what you qualify for from a lender. Lenders want to see a total debt service ratio that is less than 40 percent of your monthly income - so start paying down your debts.
Then, order your credit report from www.annualcreditreport.com. This is the only site authorized by Federal law that allows you to request a free credit report online, by phone or by mail once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. Check your credit scores from each of these agencies carefully to make sure they are all correct. If you find any mistakes or problems with any or all of these agencies, contact them immediately and find out how to repair any damage or dispute any incorrect information as soon as possible.
After you have updated your credit history and corrected any errors, calculate what you can actually afford to pay on a monthly basis. When determining the monthly payment you can afford, remember that in addition to the monthly principal and interest you will also be paying into escrows for property taxes, hazard insurance and possibly a homeowners or condominium association assessment. Mortgage calculators such as the one on the Bankrate site are a great way to figure out what your monthly payments would be based on interest rates and down payment amounts.
Also, visit the www.HUD.gov website of the U.S. Department of Housing and Urban Development (HUD) to find free housing counseling and seminars and other useful resources by clicking on “I Want to Buy a Home” on the opening page. Then, attend a first-time home buying seminar or talk to a credit counselor who does not work for a lender so that someone won’t influence you who has a financial interest in the home or loan you choose.
When you have done your research and are ready to move on to the next step, visit a lender to better understand the loan choices that would be available to you. One of the most important questions confronting new homebuyers face is choosing between a fixed - rate mortgage (FRM) or an adjustable rate mortgage (ARM). The difference between an ARM and an FRM is that ARMS generally offer a low initial cost yet carry a degree of uncertainty while FRMs offer rate and payment security but can be more expensive. Generally, homebuyers begin with an ARM due its affordability and refinance later with an FRM for greater security over the long run. Once you’ve determined the most suitable loan, get pre-approved for that loan. Since you will already know how much money you can borrow, you will know what price range you should be looking at and can move quickly. While a lender’s pre-approval would still be subject to a final verification of your credit and a satisfactory appraisal, it’s a big step toward becoming a homeowner.
For more helpful information on home shopping, buying or ownership; visit our www.nahb.com/consumers website and happy home shopping.