Can You Really Afford a House on Your Salary?
Although buying a new home may seem like an American Dream or romantic venture, the reality is that the house you can afford depends on your current income and debt obligations. You must be able to pay your mortgage, satisfy all your current debt, and still have money left over each month to put in the bank. When you consider all these issues, you may find you will actually be shopping for a lower-priced house than the anticipated dream home.
If after careful financial evaluation, you realize you cannot afford the house of your dreams, do not feel tempted to count on expected annual raises, thinking that eventually you'll be able to afford the higher payments. Most raises are generally 4% to 7%. In bad times, you will not get a raise, while inflation overtakes you. In the worse case scenario, you may get laid off and you will not be able to afford your monthly bills. If you do not have a budget that includes a savings account worked out on a spreadsheet, you are faced with a serious debt problem waiting to happen. If you cannot recite from memory all the creditors you owe and how much you owe them, you have a credit problem.
Monthly Budget Sheet
At the top of your planning list, you must determine what your mortgage payments will be, while not ignoring other monthly expenses. Remember, you need this complete research, and an organized budget sheet, to guard against becoming seriously in debt.
Besides the home loan, monthly expenditures to add to your budget sheet may include:
- Homeowners insurance
- Homeowners Association Fees (HOA)
- Flood insurance
- Mortgage insurance
- Utilities
- Garbage
- Cable TV
- Groceries
- Lawn service
- Pet groomer
- Doctor and veterinarian bills
- Auto loan and/or unexpected auto repairs
- Dry cleaning bills
- Savings account
- Lunch money for spouses and kids, and many other obligations.
Second on your list is to clean up your credit report.
Your Credit Report
Your credit score is the single most important factor determining whether you will get approved for a mortgage, car loan, refinance loan, or credit cards, and what your APR will be. If your score is low, you will pay very high interest rates...up to 23%! Almost all insurance companies will run a credit check on you before selling you insurance.
Calculating Your Credit Score
You should pull your credit report at least once per year to verify its accuracy and to make certain your credit score is up to par. If your credit is clean and you have your down payment ready to go, you will not need as much time to plan for a new home.
Credit scores are calculated at the time your credit report is requested. It is based on over 100 different proprietary variables and algorithms developed by Fair Isaac (FICO). The range is 300 to 850. You can get your credit score from Equifax Score Power, True Credit, or Consumerinfo.
Most lenders consider people above 680 to be prime borrowers, meaning they will most likely be approved at favorable rates. According to a credit report from Equifax, 71% of the people with a credit score from 500-550 will default on their credit. Another 51% of buyers with a credit score from 550-600 will default on their credit. It is for this very reason that lenders run your credit report and focus on your FICO Beacon score.
Factors Affecting Your Credit Score
The most important factor affecting your score is the length of your credit history. College students generally have low scores, while 30-somethings have higher scores. However, if you have too many accounts open, this can actually lower your credit score. Opening several department store credit card accounts and excessive financing accounts can also lower your beacon score.
It takes about 30 days for the closing transactions to appear on your credit report. Once you successfully dispute and remove negative items from your credit report, wait 30-60 days and order another copy of your report to verify that the bad debt was removed and that you now have a higher score.
Comments(0)