The majority of Bostonians hate writing a check to their landlord every month, particularly if you live in Roxbury, Jamaica Plain, and Lower Mills areas. Sometimes you are cursed with noisy neighbors, or a super strict landlord who is looking for any reason to push you out so he can get the next highest paying tenant.
If any of the above applies to you, you probably want to buy a home…yesterday! Wanting to buy a home and being ready to do so are two different things. Are you financially ready for the monthly mortgage payment and budgeting for repairs?
Here are five signs that you’re not ready to buy a house just yet. But don’t fret; even if you are struggling with these financial issues, you can still become a homeowner. You’ll just need a bit of patience and improved financial skills.
Buying a home is expensive. You’ll need money for a down payment. If you are buying a home with an FHA loan, you’ll need a down payment of 3.5% of your home’s final purchase price, depending on your credit score. For a $300,000 home, that comes out to a down payment of $10,500. Thanks to Mass Housing, we have a 3% down payment program, but that still equates to $9,000. These numbers do not include closing costs, moving costs and other miscellaneous costs associated with moving into a new home.
Closing costs are the fees that mortgage lenders, title insurers, attorneys and others charge you to originate your mortgage loan. We generally tell people plan for an additional 2% to cover these costs which equals $6,000.
It’s true that you can get help with some of these costs. You can use gift money from relatives, for example, to pay for all or part of your down payment. You might be able to convince a home’s seller to pay for all or part of the closing costs. In our current market, sellers are not inclined to do closing cost assistance unless you plan to purchase well above asking.
What to Do
It’s best to start searching for a home only after you’ve saved enough money to cover a down payment and your estimated closing costs. Another option would be to look into programs available by your municipality that encourages home ownership by providing financial assistance. There are also some non-profits and other organizations that allow you to purchase with 0% or a rate lower than industry standard. (NACA.com)
Sign 2: Your Credit Score Is Bad
Your credit score is a key number when you’re applying for a mortgage. The best interest rates go to individuals with the best credit scores (above 740). The lower your score, the higher your interest rate and subsequently, the higher your monthly mortgage payment. You can purchase a home with a 580 credit score according to FHA guidelines but there are only a few lenders willing to accept a score this low.
What to Do
First, order at least one of your three credit reports from AnnualCreditReport.com. You are entitled to one free copy of each of your three credit reports — maintained by the national credit bureaus of Experian, Equifax, and TransUnion — once every year. Once you get your report, read it carefully. It will list how much you owe on your credit cards and how much you owe on student loans and car loans. It will also list whether you have any late or missed payments during the last seven years. Those late or missed payments will send your credit score tumbling.
Next, order your FICO credit score. You can do this from the credit bureaus, too, but you’ll have to pay about $15 to do so. If your score is low, and there are negative marks on your credit report, it’s time to start a new history of paying all your bills on time. You also need to pay down as much of your credit card debt as possible. Both of these actions will steadily increase your credit score, though it could take months or even more than a year before your score recovers enough to make you a good candidate for a mortgage loan.
Sign 3: You Have Mount Everest of Credit Card Debt
Your debt-to-income ratio is another key number when it comes to buying a home. Lenders want your total monthly debts, including your estimated new mortgage payment, to equal no more than 43% of your gross monthly income. If your debt-to-income ratio is too high, you’ll struggle to earn approval for a mortgage. Some lenders will go as high as 50% due to the high cost of rent but generally, they want to see that you are not up to your eyeballs in debt.
What to Do
I would say pay off your credit card debt but if you could have, you probably would have by now. I will STRONGLY recommend you always make more than your minimum monthly required payment.
Sign 4: You Routinely Miss Your Monthly Payments
Making late payments, or missing payments completely, is a sure sign that you’re not ready for the financial responsibility of owning a home.
If you miss a mortgage payment by more than 30 days, your credit score will fall by 100 points or more. If you miss enough, you could lose your home to foreclosure. This is not like a landlord where you get warnings before it affects your credit… this is immediate.
What to Do
Learn better financial habits before you apply for a mortgage. Set up reminders on your phone or computer alerting you when bills are due or use my favorite method… automatic payment. You could set aside one day each month dedicated to paying bills if you prefer the old fashioned paper method. Don’t apply for a mortgage until you’ve broken the habit of regularly missing your monthly payment due dates.
Sign 5: You Don’t Have a Stable Job
You’ll need a steady, reliable stream of income if you use a mortgage to finance the purchase of a home. If you’re worried that you’ll lose your job, or your income is sporadic with no real pattern, you should probably NOT purchase a home. Generally, you need 2 years of full time work history. If you are self employed, you will need other documentation to help qualify you for a loan.
What to Do
Find a job that is reliable and that pays you a stable income each month. Don’t take the risk that everything will work out. You don’t want missed mortgage payments on your credit reports. And if your job is unstable? You’ll greatly increase the risk of these red marks. If you are self employed or you operate on seasons… then you should think of yourself as a chipmunk… get good at storing away for the slow months.
I hope this advice was helpful. We strive for our clients to be responsible home owners and want to ensure you will not be putting your home up for sale due to foreclosure. We want to help you BUILD WEALTH THROUGH REAL ESTATE!