Sharply higher mortgage rates have caused a sudden pullback in home sales, and now sellers…
Living from one paycheck to the next may be the norm for many people. But homebuyers need a better strategy. “If buying a home is your goal, then it needs to be your priority,” says Tim Kirchner, formerly vice president of MetLife Bank in Irving, Texas. “Most people need to sacrifice a little and stick to a budget in order to save for a home.”
A good budget plan begins one or two years before the buyer makes an offer. Here are four tips for renters who plan to become homeowners.
No. 1: Build strong credit
When it comes to securing a loan at the best mortgage rate, credit is king. “The most important focus for all potential buyers should be improving their credit score,” says Jean Badciong, chief compliance officer of Inlanta Mortgage in Brookfield, Wisconsin. “A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate.”
Where to get the credit score
Greg Holmes is national director of sales and marketing for Credit Plus, a company in Salisbury, Maryland, that provides credit reports to mortgage lenders. He says potential buyers should request their free credit report at AnnualCreditReport.com. “Some people who think they have good credit don’t, while people who think their credit is bad may be surprised that it is actually OK,” Holmes says. “Everyone should check their report for accuracy and fix any mistakes. It can take months to correct errors.”
How to raise the credit score
To improve their credit scores, buyers should pay off past-due bills, pay every bill on time and reduce their balances to less than 30 percent of the credit limit on every account, Holmes says. Also, it is best to have three to five credit accounts, such as a car loan, student loan or credit card, for one year or longer. Holmes recommends against frequently switching credit cards to get the best rate, though. “Lenders do not want to see a lot of credit inquiries or too many new accounts because this could indicate someone who is about to take on a lot of extra debt,” Holmes says.
Beware the pitfalls
Kirchner says people often do not realize the consequences of paying bills late or missing a payment, which can stay on your credit report for a long time. Some young people assume they can improve their credit scores as an authorized user on a parent’s card. But Badciong says this will have no impact on their score. “Every consumer should establish three lines of credit such as an installment loan and a credit card or two, keeping the balance low and paying them on time, in order to generate a strong credit report,” says Christine Howard, formerly a senior loan officer with Inlanta Mortgage.
Practice making house payments
Howard urges future homebuyers to make “virtual” mortgage payments today as a way to build up savings and learn to budget for actual mortgage payments down the road. “Renters can estimate a mortgage payment and set aside the difference between that payment and their rent each month,” Howard says. “If they are paying $800 in rent and estimate their mortgage will be $1,100, they can put $300 per month in a special savings account. Not only does this help them save for a down payment, but it demonstrates to a lender their ability to afford that higher housing payment.”
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