First Time Home Buyers: Can You Afford to Buy?

By
Real Estate Agent with 406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) 10301213186

The following is an update to information I first published in 2011.  

 

This is the second of a three-part series for First Time Home Buyers.   The first part discussed the differences between renting and owning a home.  Once you've decided that you do want to own your own home, the next logical question is whether you can afford to do so.  This blog will help you make that determination.

 

When you start looking for a home, one of the first things a real estate agent will ask you is whether you have been pre-approved for a mortgage.  Pre-approval is necessary not only so you know how much you can really spend on a new home and focus your search appropriately, but also so you may make an offer when you find a property you like.   Offers are accepted only by pre-approved buyers, and you will have to provide proof of your pre-approval when making the offer.  If you're not ready, you may lose the house you love to another buyer who was ready with their pre-approval.

 

So how do you get pre-approved, and what does it really mean?

 

You can contact any mortgage company or bank directly, or you may use a mortgage broker who can find you the best rate among multiple companies.  One of the first things any mortgage broker will do is to check your credit score.  A "good" or "excellent" credit score is usually necessary to get a mortgage, so the first thing any home buyer should do before they start home shopping is to check their credit score and improve it as necessary.

 

Obtaining your credit report:   You can get one free credit report per year.  If you access the Annual Credit Report site and fill in all required information, select one of the three listed credit companies, you will be able to obtain and print your credit details.  This report will show all information that is negatively (or positively) impacting your credit.  If you are late with payments, or have any collection issues, this information will be provided on that report.

 

Improving your credit:  Once you have this information, there are many ways to improve your credit, and many websites that will help you.  The basics are as follows:

 

  • credit cardHave credit.  This may seem obvious, but if you don't have a credit card, get one.  Use it and pay off the balance immediately.
  • Pay down credit.  If you have credit cards, pay them down or off.  There should be a big gap between your credit limit and the credit you're using.  Try to use 10% or less of your available credit.
  • Check your charge card limits.  Make sure the credit bureaus are using the right limits, so the % mentioned above is the best it can be.
  • Don't cancel unused charge cards.  This might seem counter-intuitive, but canceling an old card could actually lower your score.
  • Pay your bills on time.  If you have late payments, get them caught up and then stay on top of them.
  • Immediately clear up any errors that you find on the report.  This includes collection items that don't belong to you, incorrect credit card limits, and anything else you see that is incorrect.

 

Credit Score:  Your actual credit score, though, is not included in the free report mentioned above.  In order to see your actual score, you will need to pay one of the companies to obtain it OR you could use a free service such as CreditKarma to get an estimate of your score.  (I say an estimate, because when I pulled my own Credit Karma report, it was slightly lower than the three credit companies indicated.  It was, however, in the right ballpark.)

 

What does your credit score mean?  So you have your credit score, but what does it MEAN?  Scores range from 350-850.  The higher the score, the better you're doing.  While various industry sources bucket scores differently, in general you can follow the below guidelines.  If your score is:

good scoresBelow 620: your chances of obtaining an attractive interest rate are low and you may have difficulty obtaining a mortgage loan.  In this category you could pay 3%+ more in interest rates than someone with excellent credit.

621 to 674: this is a below-average score, and you will have to pay a higher interest rate than someone with excellent credit.

675 to 719: while these are not the highest scores, you should have little problem finding a decent interest rate.

720 and higher:  this is an excellent credit score, and will allow you to be able to utilize a lender's best rates.

 

What else is required besides credit score to be pre-approved for a mortgage?

 

When you're discussing pre-approval with your mortgage broker or bank, they will require specific information such as your social security number, date of birth, full name and address of the borrowers, monthly expenses and income and information on assets and liabilities.  This information is utilized to determine your ability to pay back the loan, and to determine what kind of loan you might qualify for (conventional, FHA, SONYMA, others).  If you are not being asked for this level of information, you are being pre-qualified not pre-approved.

 

What if I have a small down payment?

 

stack of billsWhen determining the amount of money you need to purchase a home, you need to ensure you will be able to cover a down payment and closing costs.

 

If you do not have a large down payment, your mortgage specialist can help you find the right loan.  There are specific loans, such as an FHA loan, or a USDA loan that may require a very small (or in some cases no) down payment and may charge no or low points. 

 

In addition, there may be programs which can provide down payment assistance for first time homebuyers.  These programs may provide loans or grants (which do not need to be paid back) to assist with either your down payment or your closing costs.  

 

Depending on your mortgage loan, you may also be able to request that the seller help with closing costs. Sellers are not obligated to do so, but certain loans will provide that option if sellers are interested in participating.

 

In summary

 

If you want to buy a new home, don't let credit score worries or small down payment funds stop you from pursuing your dream and investigating your options.  Check your credit report, make any adjustments to improve it, and contact a quality mortgage broker to assist with pre-approval. 

 

Next time, I'll provide information regarding the importance of choosing a real estate agent to assist you.

 

Posted by

 

Kat Palmiotti, The House Kat

Licensed Associate Broker, CBR®

Grand Lux Realty, Inc.

428 Main Street

Armonk, NY 10504 *

* still supporting Monroe NY, Orange & Rockland counties.

 

914-419-0270 (cell)

email: kat@thehousekat.com

www.thehousekat.com

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Rainmaker
2,036,474
Patricia Feager, MBA, CRS, GRI,MRP
DFW FINE PROPERTIES - Fort Worth, TX
Selling Homes Changing Lives

Kat... as always you provide good information to the consumers! You truly know your business well and I would definitely recommend anyone thinking about buying to contact you, even if they are just thinking. They need to know the steps of what it takes and to have the proper guidance.

Kat you are GREAT!

Feb 23, 2014 11:09 PM #1
Rainmaker
1,446,007
Kat Palmiotti
406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) - Kalispell, MT
The House Kat

Patricia - Thank you so much for your kind words!   

Feb 23, 2014 11:53 PM #2
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Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Hi there Kat - great series to breath new life into. Obviously, first-time home buyers will always need some extra guidance. This post ( and rest of the series) will be so valuable.

Feb 24, 2014 02:04 AM #3
Rainmaker
1,446,007
Kat Palmiotti
406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) - Kalispell, MT
The House Kat

Debb - Thank you for your comment; for first time homebuyers, it's all new!

Feb 24, 2014 02:21 AM #4
Rainmaker
1,948,762
Andrew Mooers | 207.532.6573
MOOERS REALTY - Houlton, ME
Northern Maine Real Estate-Aroostook County Broker

PURR -fect .. no hair balls in this blog post. Covered the A to Z and this is the catnip for the buying, financing whole nine yards of what to do to avoid the "house" trap snap, bruises, scrapes and tight spots to stay away from. Don't get divorced, change jobs, buy a new car or major item... keep it steady as she goes to get to the closing. Have a set of home keys slid your way to make the first time property purchase.

Feb 24, 2014 02:28 AM #5
Rainmaker
1,446,007
Kat Palmiotti
406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) - Kalispell, MT
The House Kat

Andrew - Steady as she goes is the key!

Feb 24, 2014 07:27 PM #6
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Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

Kat, this is excellent. I am seeing some lenders saying yes to 600 credit scores again. It all depends and this is good news for some buyers.

Feb 24, 2014 09:39 PM #7
Rainmaker
3,202,171
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Kat,  What a great blog,  first time buyers should be calling you.  I would run a semiar for new time home buyers at a church or high school.

Feb 25, 2014 12:08 AM #8
Rainer
1,756,848
Conrad Allen
Re/Max Professional Associates - Webster, MA
Webster, Ma, Realtor

How smart Kat.  Be prepared to buy.

Feb 25, 2014 08:42 AM #9
Rainmaker
1,446,007
Kat Palmiotti
406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) - Kalispell, MT
The House Kat

Debbie - Interesting about lower scores being approved.  I'll have to make sure even those who don't think they can get a mortgage at least check!

Will - Hmm,that's a great idea.

Conrad - Yes, preparing saves a lot of grief later.

Feb 25, 2014 07:27 PM #10
Rainmaker
1,675,413
Larry Johnston
Broker, Friends & Neighbors Real Estate and Elkhart County Subdivisions, LLC - Elkhart, IN
Broker,Friends & Neighbors Real Estate, Elkhart,IN

Hi Kat,  Great blog. I have had potential buyers tell e they couldn't buy a home becuse they had bad credit.  I had them contact my favorite mortgage lender. He was able to give them direction in correcting their debts and rising their credit score. The were able to buy a home that same year.  It pays to talk to a good mortgage lender.

Feb 25, 2014 10:18 PM #11
Rainmaker
1,446,007
Kat Palmiotti
406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) - Kalispell, MT
The House Kat

Larry - It definitely pays to talk to a good mortgage lender, I agree.  Thanks for your comment.

Feb 26, 2014 12:53 AM #12
Rainmaker
1,948,762
Andrew Mooers | 207.532.6573
MOOERS REALTY - Houlton, ME
Northern Maine Real Estate-Aroostook County Broker

("Feels like the first time" song up and under...) Great tips, pointers to make the date with the house end up going around all the bases, hitting a home run to get your first time home buyer's hands on the set of keys to that new place you have listed.

Mar 01, 2014 09:31 PM #13
Rainer
51,155
Michele Webler -Farm and Ranch Specialist
Idaho Real Homes LLC - Rathdrum, ID
Serving North Idaho and E. Wa

Great advice.  Happy to see you include the not canceling there credit cards.  Had that come back and bite a deal in the butt a time or two.

Mar 02, 2014 12:22 AM #14
Rainmaker
1,446,007
Kat Palmiotti
406-270-3667 (MT), 914-419-0270 (NY), Broker in NY with Grand Lux Realty and in MT with (coming soon!) - Kalispell, MT
The House Kat

Andrew - Yes, a home run is exactly what we want to happen!

Michele - I probably should add that they shouldn't buy anything big....

Mar 02, 2014 09:47 PM #15
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