MY HOME: BEFORE I BUY
Buying a home is a major financial decision that requires preparation, research, thought and time but it’s worth it when you finally have a place of your own. Start with knowing your financial situation; your credit history and credit score, review your budget; know what price range you can comfortably afford and the amount needed for a down payment. Once you know your financial picture you can get started setting goals that will help you achieve your new home purchase!
Know Your Financial History
Your credit score and your financial history will not only help determine whether you are approved for a mortgage, it can also determine the interest rate and fees you will be charged and the cost of your homeowner’s insurance. It’s important to have a history of making payments on time and keeping your credit balances low. Start by reviewing your credit report and knowing your credit score. You can visit any of the three major credit bureaus; TransUnion, Experian or Equifax. To get a copy of your credit report visit www.annualcreditreport.com.
Credit Report – review for accuracy and correct any discrepancies.
Credit Score – to obtain the best rate and fee structure, a credit score of 740 or higher is usually required.
- Payment History – the largest factor in your credit score, so having a history of making payments on time is critical.
- Amounts Owed – the second largest factor in your credit score; keep balances low and avoid using maximum credit limits.
- Additional factors are length of credit history, new credit and types of credit used.
Know What You Can Afford
Budgeting – utilize M3TM (My Money Manager) to review and make budget adjustments to reach your home buying goals.
Price Range – the suggested amount should be no more than two to two and a half times your annual income on a home. So a family with an annual household income of $80,000 would want to stay in the $160,000 to $200,000 price range.
Monthly Payment - a suggested monthly payment should be no more than 28% of your gross monthly income. With an annual household income of $80,000 the monthly gross income is $6,667 and therefore your monthly mortgage payment (principal, interest and taxes) should not exceed $1,866 ($6,667 x .28).
Total Debt-to-Income - a general rule is your total monthly debt should not exceed 36 percent. If possible, pay off minor debts and do not incur any new debt. For more information refer to Establishing Credit and Managing & ReEstablishing Credit.
Utilize the TCU Mortgage Center Calculators to get an idea of your monthly payment.
Down Payment, Closing Costs & Points
A home is probably the most expensive purchase you will make so it’s never too early to start saving. The amount of your down payment will help determine your mortgage options, including interest rates and if private mortgage insurance will be required. Start saving today, talk to a TCU Representative for savings options that will help you reach your goals.
Down Payment – when your down payment is less than 20%, PMI (private mortgage insurance) is required. Private Mortgage Insurance is an additional cost, however, it can help a borrower purchase a home much sooner or even purchase a more expensive home with less of a down payment. It also protects the lender against non-payment should the borrower default on the loan. The insurance premium is based on loan to value ratio, type of loan and the amount of coverage required by the lender. Usually the premium is included in your monthly payment and one to two months of the premium may be required at closing. It is possible to eliminate private mortgage insurance once your loan balance is reduced to a certain amount usually below 75% to 80% of the property value. There are loan programs available that require as little as 3% to 5% down, although the interest rate may be higher and the equity would build more slowly.
Closing Costs – are in addition to the purchase price of the home. Usually costs include loan processing fees, appraisal fee, title insurance, taxes and home inspection fees. Also required is a deposit into an escrow account that will cover your homeowner’s insurance, property taxes and PMI if required. As an estimate, closing costs can be anywhere from 3% to 5% of the home’s purchase price.
Points – are considered a form of interest. Each point is equal to one percent of the loan amount. You may want to pay them, up front, at your loan closing in exchange for a lower interest rate over the life of your loan. This means more money will be required at closing, however, you will have lower monthly payments over the term of your loan.