How you can save thousands of dollars when you buy a new home
It's quite likely that the largest purchase you'll ever make in your life will be buying a house. It should come as no surprise that over half of the people who do, do not shop around for a lender. That shows a huge lack of common sense, even though it's a common practice.
Unfortunately, it's a simple mistake that could cost you a lot of money. Truth be told, you could end up spending tens of thousands of more dollars over the life of your loan by not comparing mortgage loan terms with several different lenders.
The best place to begin is to find out what your credit score is. This way, you can find out how credit-ready you are. When the lender prices you for a loan, they're going off your FICO score. The way that works is the higher your FICO credit score, the lower your interest rate is going to be on your mortgage.
FICO score ranges anywhere from a low of 300 to a high of 850. If you don't know what your score is, you need to find that out. There are some companies out there and some credit card outfits available and even some banks that will provide clients with their FICO score for free, but you can also get your FICO score from fico.com.
So if your credit score is too low, there are things that you can do to make it go higher. Unfortunately, you need to start this process long before you begin reaching out to mortgage lenders because the truth is it can take several months or even years to see a large change in your FICO score. This predominantly depends on how low it is when you start and where you wanted to get to.
The Perks of Budgeting
If you're willing to set up a budget and improve your spending habits, there are a number of free apps and free service is available that can help you. You can also contact a hud-approved housing agency that has a counseling department that puts you in touch with a one-on-one counselor that can help you as well. These types of situations usually will have online, telephone, and in-person options as well. Anytime you work with one of these agencies, they should be able to provide you with what services that they can use and a fee structure for each one before you begin.
You should be on the lookout for credit repair scams, however, because there are many companies operating in just that way. According to the Consumer Financial Protection Bureau, the signs to look out for scams include advance payment before providing services, which is illegal or a guarantee of a specific and huge increase in your FICO score. If you run into a company offering either of these, turn and run the other way.
Monitor Your Credit Score
One of the best things you can do in an attempt to get a higher FICO score is to check your credit report for errors. That score is based on information that is in your credit report, but you'd be surprised how many times errors occur. These errors will lower your score and make it harder for you to qualify for a lower interest rate on your mortgage loan.
You can always request a free copy of your credit report once a year from each of the three reporting agencies. The three agencies, Equifax, TransUnion, and Experian, offer information on how to dispute your entry individual to each one of their credit report format.
Anytime you dispute, you're going to want to include any documentation you may have, such as acknowledgment letters from creditors about what you're disputing. After you've gone through the process, of correcting any errors on your credit report; you’re then ready to begin contacting lenders. This is very important, you must comparison shop to make sure that you're finding a lender that you are 100% comfortable with and it's giving you the best rate you can get.
Outside of just your local bank, you're going to want to try credit unions or lenders referred by real estate agents or friends. Websites like Zillow can also help provide lenders and Loan estimates. You can use Zillow to anonymously compare offers from many different lenders all in one resource.
Consider Increasing the Size of Your Down Payment
The standard down payment on a home is 20% of the cost of the home. If you put more down, you'll have less money than you have to finance, which always looks good to the bank. If you don't have at least 20% to put down your private mortgage insurance or PMI. This insurance can be expensive and tedious to get. You should avoid it whenever possible.
If you can afford to pay more than 20%, this will help you immensely and getting a lower interest rate and reducing the amount of time you'll have to pay on the loan. If this is a struggle for you, you can always Google down payment resources to help you find programs in your area that can help you come up with the down payment money so that you can get the home of your dreams.
What’s Your Debt to Income Ratio?
Another concern is what is called your debt to income ratio, also referred to as the DTI. As a general rule, you do not want this amount to exceed 43% of your income. Whenever you purchase large things like appliances or furniture, you add large amounts to your monthly debt, which will increase your DTI, and this could be a problem when it becomes time to close on your loan. It could even cause you to be turned down for the loan.
Short Sales
If the home that you currently own is worth less than what you owe on it, it's referred to as being upside down. You may have to do what's called a short sell. You'll have to get the approval of the lender before you can do a short sell because essentially, what you're going to do is accept less money than what the home is worth. This is normally done to avoid foreclosure.
As a buyer, you want to keep your eyes open for a short sale because it can enable you to get a property at a considerable discount because the seller is in trouble and has very few options. If you opt to go this route, you'll need to be patient because a short sale may take some time.
As stated, usually short sales are an option to keep homeowners who are in trouble from going into foreclosure. For many distressed homeowners, this becomes the only alternative to avoid foreclosure.
There are some requirements when it comes to doing a short sale. First of all, you'll have to prove your hardship. This can be done by showing that your income is too low, that the house is not worth what you owe on it, and it's become cumbersome for you to be able to sell it for what you owe on it. The lender will analyze your income, and they're going to look at everything just like they did when you purchase the home.
If the lender approves the short sale, you can put it on the market either on your own or with a real estate agent. Any offers that you get will have to be run by the lender first before you can accept them.
The real downside here is that generally, on a short sale, your credit score will drop 75 to 200 points after selling the property. It just depends on how severe is short sale was, but it's still better than a foreclosure. Foreclosures typically cost at 200 to 300 Point drop.
Also, the short sale is going to stay on your credit report for a full seven years; however, you will be able to finance a new home within 1 to 4 years of a short sale depending, of course, upon your credit score at that time. When you go through foreclosure, it can take three to seven years before you can even begin to try to buy another home.
Buying a short sale property can allow you to make a purchase of a home at a considerable discount; however, the transaction will take significantly longer than the sale of a normal property. If you're willing to be patient and take your time as a buyer, you can get a significant discount on a great house by looking for short sales and following the proper procedures.