January 2010

Know Your Credit Score

If you’re looking into purchasing your first home, one of the very first things you should look at is your credit score. While the amount of money you make is very important, and the size of your damage deposit will matter, a poor credit score will sink your mortgage application faster than any other problem. Nothing else matters quite as much as your credit score; even a high-paying job can’t help you if you are a risk to lend to.

If you do have poor credit, there are ways of improving it, prior to applying for a mortgage. Make sure that all of your bills are paid on time, including your credit cards. If you need more help, talk to a credit specialist, and see if they can recommend ways to improve your overall score.

This sort of thing will take some time to see results, so the best time to worry about your credit score is not when you want to buy a house, but years sooner. Keep an eye on your credit at all times, and work to remove any negative reports. That way, when you decide to look for a house, your credit report does not keep you out in the cold.

Finding a Mortgage Broker

All right, you want to buy a home. You have decent credit, very few debts, and no outstanding bills. You have a good job that pays well, with a decent employment history to review. You have the money for a down payment… you’ve got it all, right?

Nope. You need a mortgage broker.

A mortgage broker will be able to take the information you give them, and turn that into a pre-approval. They will walk you through the process of finding the right mortgage for you, signing all of the paperwork and providing all the documentation required. They will help you every step of the way and make sure that getting the mortgage does not interfere with your plans to find the perfect house.

Where can you find a mortgage broker? You can check online, but the best resources are the people you know – friends, family and co-workers. Ask around, and see if anyone recommends the broker that they used. A personal reference is much more reliable than an ad on a website or a listing in the yellow pages. And of course, if the broker is any good, you can then recommend them to your associates when the time comes for them to find a home.

Knowing Is Half The Battle

If you are interested in finding your first home, the worst thing you can do is just start looking around. Why? Because you might be setting yourself up for a big disappointment. If you start looking without knowing what your actual budget is, you will have no idea what sort of home, or which areas you should be looking at.

So, the first step in looking for a new home should be to sit down with your bills and your pay stubs and figure out your financial plans. Look at how much you pay for rent currently – can you afford more? Don’t forget that owning a home costs much more than renting, so include those extra costs into your considerations.

Once you know what you can afford, talk to a mortgage broker. They will be able to set you some limits based on what you can be pre-approved for. This will tell you what sort of price range you should be looking in for your new home.

Once you have these steps in place you can start your search in earnest, knowing that the properties you are viewing are realistic for your lifestyle, and the money you bring in. Otherwise, it’s just window shopping.

First, Pay Off Old Debts

If you are looking into purchasing your first home, you might be tempted to start saving every penny you can for your down payment. But in reality, there are some other payments you should be making first…

If you have any outstanding debt, the time to pay it off is now. Not only will a reduced debt load make it easier for you to qualify for a mortgage, but you will find that the costs of homeownership will quickly eat into any money you had planned on putting aside for paying old bills. Old debts also collect interest, which means the longer you hold on to them, the more they cost you.

But as far as homeownership goes, the biggest problem with old debt is the approval for a mortgage. Less debt and smaller debt payments will mean a mortgage company will trust you with a larger amount to purchase your home with. A higher debt load may limit the size of your mortgage, forcing you to look at smaller homes than you were hoping to see, or look in neighborhoods that you had hoped to avoid.

Either way, you should adjust your savings to unload some debt, and still have some savings left for the down payment.

Beware of Longer Term Mortgages

As you know, there are a lot of different mortgages on the market these days, and it can be tough to know which one is right for you. Some people swear by the traditional 25 year mortgage, meaning that your house will be completely paid off in a quarter of a century. But recently, companies have been coming out with much longer term mortgages, from 30, 40 and even 50 years in length.

The benefit of these longer term mortgages is that your monthly payments are reduced – but the big problem is, you end up paying a lot more for your house in the long run. All the extra interest that is racked up over those extra years means that your house will end up being way more expensive than you ever realized.

The real kicker is that your monthly payments will not go down that much by adding years to the back end of your mortgage – usually only going down by a hundred dollars or so.

So while that extra amount might be the difference for some people between being able to afford a home or not, you should avoid these long-term mortgages if at all possible, and save yourself some money in the long term.