Budgeting household expenses
When you’re ready to buy a home, it’s important to look at your finances and find out what you can afford.
While mortgage programs and lenders vary, a general guideline is to spend no more than 31% of your gross income on housing costs. When you have a detailed picture of both your income and expenses, you can get an accurate look at how much you can afford to spend on a monthly mortgage payment.
Set up a budget >Helpful tip
Spend no more thanCredit score health
Lenders use your credit score to help determine your credit worthiness, and therefore the interest rate they’ll be willing to offer. Be sure to get your credit in order before you apply for a mortgage.
1) Check your credit reports
Make sure you get a separate report from all three major credit reporting companies because they collect information separately and may report different errors. Even if you think you have great credit, errors on your reports may be lowering your score. By law, you’re entitled to a free report from each of these companies annually. To request your credit reports, go to www.annualcreditreport.com.
Tip! Enroll in a monthly credit program to keep tabs on your credit. Take advantage of the courtesy discount through Richmond American and IdentityIQSM Get started >
2) Keep old accounts open
Closing old credit card accounts can affect your credit score negatively in two ways. First, it can shorten your average account age, making you look less reliable to lenders. Second, closing accounts reduces the total credit available to you, which makes any balances you do have appear larger in proportion.
3) Hold off on major purchases
Have money saved up for a new sectional or dining room table? You may want to hold off on your purchase. While increasing debt affects your credit score, keeping money in your savings account is also important. Mortgage lenders may see you as less of a risk if you have a cash reserve to get through tough times.
4) Don’t apply for new credit cards or loans
Although using credit cards responsibly may improve your credit, opening new accounts shortly before or during your mortgage application process can lower your average account age and result in a lower overall credit score. Increasing your debt during this timeframe with new loans for things like cars and furniture can also negatively affect your credit.
Want more information about credit score health? Get Richmond American’s free guide, 8 credit score management tips.
Saving for a down payment
Saving for a down payment is an important step in preparing to purchase your own home. You will need to secure a down payment of at least 3.5% of the purchase price, plus the amount of any closing costs. For an estimate, plan on paying between 3% and 5% of the purchase price on closing costs.
Here are some tips to help you build that nest egg:
1 Set up a separate savings account just for your down payment so the funds don’t get pulled for miscellaneous expenses.
2 Have a portion of your income automatically transferred into your savings account each month and you’ll save quickly without even thinking about it.
3 Although lenders do not let you borrow money to come up with a down payment, they will generally let you use gift money from a relative.
4 Check with Richmond American Homes to see if there are any special offers or financing options that could help you save on upfront costs.
Mortgage basics
From FHA to PMI, there’s a lot of loan lingo for our customers to learn. Let’s answer some common questions about what will make up your mortgage.
What is a mortgage?
It’s a basic question, but even seasoned customers don’t always know the answer. Technically, a mortgage is a pledge of your property as security for payment of your home loan. Typically paid in monthly increments, your monthly loan payment will be made up of four parts, commonly referred to as PITI:
P = Principal
The monthly principal portion of your loan payment.
I = Interest
The monthly interest portion of your loan payment.
T = Taxes
The monthly property tax portion of your loan payment (approximately 1/12 of the total property tax for the year).
I = Insurance
The monthly homeowners insurance portion of your loan payment (approximately 1/12 of the total hazard insurance premium for the year).
What will your additional expenses entail?
The components of PITI will typically make up your main home expenses each month. When estimating your monthly budget, you will also need to factor in these possible monthly costs:
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is a form of insurance typically required for customers who take out a conventional mortgage loan for more than 80% of the total value of the home. This added insurance protects the lender against loss if the borrower defaults on the loan. As a first-time homebuyer, PMI may allow you to buy a home with a down payment as low as 5%. If you have a down payment of 20% or more, you may not be required to carry PMI.Monthly Mortgage Insurance
Homeowners with a Federal Housing Administration (FHA) insured loan, which only calls for a 3.5% minimum down payment, are required to pay monthly mortgage insurance, even if they make a larger down payment.Homeowners’ Association (HOA) fees
A homeowners’ association is an organization that enforces covenants and rules for the community and maintains shared property such as open spaces, parks and community pools. If you buy a home in a community with a homeowners’ association, you will become a member of that HOA, and will be responsible for any HOA fees. Be sure to investigate the cost of membership ahead of time to make sure the added expense is within your budget.Additional taxes
Check to see if the home is located in a special district, sometimes called a Community Facilities District (CFD) or Community Development District (CDD). Property owners in these districts pay additional taxes to fund public improvements such as schools, parks and roads.Maintenance costs
Remember that one of the main differences between renting and buying is that you become responsible for any maintenance costs on your home. If you set aside an amount each month in a home maintenance account, you will have funds on hand when a need does arise.Want more info? Get up to speed with Richmond American's free guides.
Buying after bankruptcy, foreclosure or short sale
Many Americans have been through a major credit event and have gone on to become homeowners. If you’ve experienced a bankruptcy, foreclosure or short sale, the road may be more challenging, but it can be done when you take the proper steps to reestablish your finances.
1. Understand where you stand
A short sale, foreclosure and bankruptcy all affect your credit history. Lenders may see you as a higher risk, which may mean you have to wait to qualify for certain types of loans. In some cases, a larger down payment could be required and the interest rate you obtain may be affected. But your credit score isn’t set in stone. Check out the credit score tips above for ideas on how to get your score back on track.
2. Set your timeframe
No matter how well you’ve reorganized your finances and reestablished your credit, you will probably have a waiting period before you can arrange new financing. However, that waiting period may be shorter than you think. Everyone’s situation is different, so contact a loan officer at HomeAmerican Mortgage Corporation to determine when the time is right: 866-400-7126.
3. Set up a budget
When it is time to move forward with a purchase, it’s easy to fall in love with a home that’s outside your price range. Setting and sticking with a solid upper limit to your buying budget will not only safeguard you from overspending, but also save you time by focusing your search.
Want more information on how to build your credit? Need to see the real timelines and waiting periods associated with major credit events? We’ve got that information all in one convenient location. Download Richmond American's free guide, Buying a house after bankruptcy, foreclosure or short sale, today.
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