Credit Wise – Using Credit Well Part 3 – Home Equity/Mortgages

Buying a house is probably one of the biggest milestones in your life. In many aspects, it is a social status to afford your own home. It reflects positively on your career status as well as your current stage in life.

There are other benefits to owning your home as well. One of them is the ability to have something to show for monthly payments every month. For those who rent apartments, an approximate range of monthly rent payments is between $550-$1,200. Some of you choose to rent a home instead. These payments are even higher! Prices range from $750-$2500 for homes in an average area. In both scenarios of renting, you are paying money towards someone else’s property every month. In twelve months at $550 (the lower range of apartments), you are paying $6,600. In twelve months at $750 (the lower range of homes), you are paying $9,000. Again, all of that money is paying towards a property you do not own. So why not think about buying your own house?

In both scenarios of renting, you are paying money towards someone else’s property every month. In twelve months, at $550 (the lower range of apartments), you are paying $6,600. In twelve months at $750 (the lower range of homes), you are paying $9,000. Again, all of that money is paying towards a property you do not own. So, if you’re making the monthly payment anyway, why not think about buying your own house?

If you are this far in the series, you should have already checked your credit score, understand your credit cards, and figured out your auto loans. Now is the last in the installments, buying a home. Purchasing your home is a leveraged transaction in which you are using collateral to secure funding for a property. Essentially, you are borrowing money from a bank to pay for a home which you don’t actually own yet. You are also using the estimated value of the home to support how much money you are going to get from the bank. 

The first task you are going to want to do when buying a home or thinking of buying a home is to talk to a banker/lender. There is an extensive pre-approval you will have to go through before begin given the okay to proceed. This process should also show you how much you are going to be able to afford when searching for a home. Keep in mind, this is the point where having fewer line items of debt will be quite beneficial. The lower your debt and higher your income, the higher your dollar approval range will be. Having a credit score 650 or above will be best. Having other delinquent or collection accounts on your bureau will also hinder your ability to get approved.

An important thing to remember at this point is that often times, the lender will quote you the maximum mortgage amount that you qualify for. Banks currently will allow you to borrow up to 43% debt-to-income. Meaning, if your gross pay is $2200 per month, you can have a maximum of $946 per month in debt, including student loans, credit card debt, and vehicle loans. As a financial counselor, however, I would recommend maintaining no more than a 36% debt to income. This is based on my experience with living on a budget – at least 60% of your budget typically comes from other expenses. Just another reason why having a working budget is so important when making any financial decisions.

Assuming everything checks out, they will provide you will an estimated range of what you are able to afford and what they are willing to lend. They are also able to provide you a range of what your monthly payments could be. This should allow you to see how your budget is going to react to having a mortgage payment everything. Tweak the numbers as needed, but once you are comfortable you can begin looking for homes in your price range. More than likely, the range you are seeing with your pre-approval is comparable to what you would have been paying in rent. Thus, the move from rent payment to mortgage should be seamless.

Once you find a house and you are confident in buying it, you will have many people helping you. There will be the real estate agents, mortgage loan officer, loan processor, and sales associates (if buying from a new building development). If you have questions, be sure to ask them. It will make getting through the buying process that much easier and faster.

Congratulations! You are now a homeowner. This is an important and impressive feat in your life, especially if you are a new homebuyer. There are many downsides of owning your home such as home repairs, yard maintenance, longer-term commitments than an apartment lease, etc. However, there are also a ton of benefits from increased privacy to bigger deductions on your taxes. Most of all, you have proven your ability to be financially capable of leveraging money to make a long-term investment in a home. Now, instead of paying $750-$2,500 a month towards rent, you are paying it towards a house of your own. Meanwhile, you are building equity in your home as you go. Plus, once you pay off your house, you have a large high-valued asset which could be sold if needed. All-in-all, it is a massive victory towards in your financial foundation for your future.