Home buying can be complicated and stressful, but if you plan carefully, buying your dream home can become more fun and less work for the entire family. Following these steps can help make your dream a reality.
Get your credit report
Before approving your request for a home loan, mortgage lenders review your credit report. In fact, they often get your report from two or more credit reporting companies to be sure they have your complete credit history.
If you review your credit report in advance, you'll see yourself from a lender's perspective. That can help you avoid possible loan approval delays.
Be prepared
When mortgage lenders review your credit report, they evaluate how much you already owe, how much unused credit you have available, how prompt you are in paying your debts and whether you've recently applied for new credit. They may ask you to explain any late payments, recent inquiries on your credit report or new accounts. If you have no credit accounts, they may ask you to show that you pay your rent, telephone bills or utility payments on time.
Count your savings
Have you saved enough money? You generally need a down payment of at least five percent of your new home's purchase price. You also need money for closing costs.
But that's not all. Be sure to set aside extra funds for emergencies. If you spend every dime on your down payment, you're statistically more likely to lose your new home to foreclosure some time in the future.
Seek preapproval
Touring homes you can't afford makes homes in your price range pale in comparison. Asking a mortgage lender to prequalify (or preapprove) you for a specific loan amount narrows your search, helps you avoid disappointment, improves your bargaining power and speeds the sales process.
Know your options
Ask the lender to give you details on the cost differences of various mortgage plans. Then select the one that's best for you. Options include:
- Fixed-rate mortgages for 15, 20 or 30 years
- Adjustable-rate mortgages
- Balloon mortgages
- Government-insured loans or special loan programs.
Remember, besides your mortgage payment and property taxes, your monthly housing costs can include mortgage insurance, home insurance, special assessments and homeowners fees.
As a general rule, your housing costs should total no more than 28-32 percent of your monthly income before taxes. Add other long-term debts such as car and student loans, and your total should take no more than 36-41 percent of your monthly income before taxes.
Narrow your choices
This is not just a house, it's your home. It's where you live. More than that, your home gives you pride of ownership, freedom from landlords and a sense of security. That's why it's a good idea to consider more than finances before buying. Think, too, about your needs and preferences for:
- Schools and transportation
- Healthcare
- Recreational opportunities
- Commute to work
- Housing styles and lot sizes
Make your payments
How much you borrow, how much you owe and when you pay become a part of your credit history. When you apply for new loans or credit cards, other lenders will review this history.
Late payments can stay on your credit report for up to seven years, can keep you from buying another house or can make it more expensive to buy a car. A good credit history proves you manage your finances well. It lets you enjoy using credit at your convenience and at a lower cost.
Buying a car
No one wants to drive away in a dream car only to find he's heading toward unwanted sacrifices. More than one consumer has bought an expensive automobile or truck and then found that he couldn't afford to put gas in its tank.
The prudent consumer can avoid this situation by reading and understanding the fine print of automobile purchases, and weighing the benefits and drawbacks of both purchasing and leasing a vehicle. Here are some identifiers in support of buying a car:
- You have the money for the down payment that's required for your purchase
- You like the idea of owning something of value after making payments for years
- You want to trade in an old vehicle
- You like the idea of carefully maintaining your car, so that it runs perfectly for years and years
- You drive tens of thousands of miles each year (if you lease, you might end up paying a relatively large amount of money at the lease's end for exceeding the annual mileage cap, which is generally 12,000 to 15,000 miles).
- You generally prefer lower monthly payments
- You like driving a new vehicle - particularly a luxury model - every two or three years
- You hate the hassle of selling your old car every time you want to buy a new one
- You put "hard" miles on your vehicle
- You like the idea of driving a vehicle for a few years before purchasing it
If you decide to lease, you need to learn exactly what you're paying for in terms of interest rate (it should be close to the current automobile loan rate). You should negotiate the capitalized cost (the price the financial institution pays the dealer for the leased vehicle), the acquisition fee (which the consumer is charged for initiating the lease) and the disposition fee (which the consumer is charged at lease's end if he decides not to buy the vehicle.). Because of all of these factors, professionals advise that low monthly payments don't necessarily translate into a beneficial transaction for the consumer.
Financing a new business
The success of a new small business largely depends on the creditworthiness of its owner. Whether the office needs more equipment or the employees need more training, it's the owner's responsibility to foot the bill.
Some owners turn to investors for the capital, but many others will secure a loan or a line of credit from a bank. Others simply use their own personal credit cards or a combination of these types of credit. Savvy small business owners will try to find lower interest rates on small business loans rather than the increased cost of using a personal credit card.
Unlike the unsecured credit cards, small business loans generally need to be secured by assets, namely property or goods. You'll also need to calculate the actual cost of the loan, and decide if you're comfortable living with some of the imposed restrictions (such as caps on your salary). To secure a loan, you will probably need to submit a precise business plan, tax returns, balance sheets, income statements and credit history - as well as additional documentation - to the loan officials. Considering about 80 percent of new businesses collapse within three years, it's easy to see why lenders are reluctant to finance new businesses. If securing a bank loan is indeed not a possibility for you and your business, you can always turn to your personal or business credit card to finance your entrepreneurial dreams. But always keep sight of the risks.
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