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When should you go for a mortgage? Check out yourself

Posted on: 02nd Apr, 2008 04:35 am
Getting a home loan/mortgage isn't always tough; what matters is how well you can manage it. There are people who have somehow qualified for a mortgage but sooner or later they have found themselves in a mess! So, first and foremost, you need to check your home loan affordability and then look out for programs on offer.

No doubt markets keep changing, but your personal finance and credit has a big role to play here. There are 3 things lenders will watch out for:
  • Your credit score
  • Your income and liabilities
  • Your down payment
But prior to approaching lenders, check out yourself 11 affordability factors which will help to decide whether it's time for you to take out a mortgage.

1. Are you debt-free?


Have you taken out credit cards, personal loans or an auto loan? If you have high interest credit cards, consider paying them down and avoid using more than 10% of your cards' limit at any given time. However, if you are debt-free, you can possibly go for a bigger mortgage depending upon other factors.

2. Do you save for retirement/children's education?


You may be saving for your retirement by investing into employer sponsored plans like 401k/403b as well as the IRAs. You may like to save for your child's education (Coverdell education Savings and 529 Plan) as well. So, decide whether you're comfortable with managing a mortgage as well as savings plan.

However, if you have too much of credit card debt, pay it off and then start saving for future. Otherwise, managing credit cards, savings and then a mortgage may be quite difficult!

3. How's your credit?


If you're looking for mortgage in a market where borrowing is costly and difficult, then having poor credit will cost you a lot. In such markets, a borrower with a score of 620 is no longer considered creditworthy! At least you should have a score of 680 to qualify for better rates and terms.

Although there are FHA and VA programs for those having poor credit, yet, if you want to get the best program and avoid mortgage problems in future, then wait till you repair your credit and then apply for a loan.

Often lenders take the initiative and work with borrowers in improving their credit scores prior to offering the loan. However, if your score is between 640 and 680, consider putting down 10-15% of purchase price so that some of the best programs are available to you.

As for the credit history, most lenders look for 3-5 tradelines (mortgage, second mortgage, credit cards, auto loan, student loan, store card, gas card, secured/unsecured installment loan etc) in good standing for the past 2 years.

4. Are there enough of cash reserves?


Most lenders will require you to have cash reserves/savings equal to at least 6 months of mortgage payments (PITI) apart from what you'll pay for closing costs and down payment.

However, not all programs (such as the FHA loans) require this but it's better to have some cash reserves so that in case there's an emergency you don't miss a payment and bring down your credit score.

5. Do you expect a raise in your income?


Are you new in the job market or have you been employed/self-employed for 2 years or so? Do you think your income will increase in a few months or so? Check out how much you can borrow at your current income. If you need more, wait till your income gets higher.

6. How much of your income goes into paying off debts?


In order to take on additional debt, you'd have to calculate how much of your income (include all sources of income) is being spent on current debts such as credit cards, personal loan, auto loan etc. This is given by the debt-to-income ratio or DTI.

The DTI = (total monthly debt payment/gross monthly income)
So, the % of income put into paying off debts = DTI * 100

Check out yourself the DTI using Debt-to-income Ratio calculator.

The higher the DTI, the lower are your chances of getting a mortgage because you pose a higher risk to lenders if you're already having a lot of debts to pay for.

7. Do you have an insurance policy?


Are you paying premiums for automobile, health or life insurance policies? Decide whether you can manage a mortgage while paying the premiums. Buying a home is no doubt an important step in your life but having a proper insurance coverage is also worth considering!

8. Are you investing in stocks?


You may like to invest in stocks, bonds, and mix and match options to build up a strong portfolio. However, investment options are subjected to market risks, so it's worth consulting an investment expert in order to get maximum returns. An estimate of such returns will help you decide whether it's worth investing or getting a mortgage.

9. What about home prices?


If it's a declining market with home prices going down, you may like to wait till prices get better. This is because lenders may reduce the loan amount as investors won't provide enough funds.

Moreover, if you cannot pay off the mortgage and decide to sell the home, you won't get enough proceeds because the home value will turn out to be lower than what you owe. Thus, in a declining market, you can't rely on home sales to pay down your mortgage. Rather you'd have to choose options which will have a negative impact on your credit.

However, if you're planning to occupy the house for a long time and your finances are in good shape, you may go for a home that's losing value now as you have the time to wait till prices get higher.


10. Concerned over inflation and Fed rate changes?


Rising inflation and changes in market rates may be some of your major concerns. The Fed often cuts down the rates thereby preventing the economy from recession. But lower rates often reduce the value of dollar thereby raising inflation. So, you need to think whether you can manage a mortgage besides maintaining your lifestyle in the midst of rising prices. If you compare inflation rate over the past few years, you'll get an idea of how much high or low prices will be in the next 5-10 years. This will help you decide whether you can afford to take out a home loan.


11. How does the industry affect you?


The lending industry has been changing with time to keep pace with inflation and economy. With market changes and scenarios like the credit crunch (due to sub-prime mortgage crisis in 2007), lenders have come up with stricter lending guidelines in order to reduce the rising rate of foreclosures.

Due to market changes, certain programs are simply not available. For example, due to the rising concern over foreclosures (in 2007-2008 beginning) and borrowers' inability to pay off loans, lenders have almost stopped offering 100% financing or 80/20 loans.

No doubt, inflation, home prices, fluctuating rates and industry changes have a big impact on your decision to take out a mortgage. But these are external factors on which you don't have much control. So, instead of taking decisions with respect to the external changes, it's better to improve factors that you can control - your personal finance, credit record, debt-to-income ratio and down payment.

If you still cannot decide whether to go for mortgage, Ask Me here.
It is wise to take a personal loan for $5000 to pay off credit card debt, six months prior to applying for a mortgage loan ?
Posted on: 05th Jun, 2009 02:42 pm
Hi

You can take a personal loan to pay off your credit card debts. Since the amount of the loan is just $5000, it's not going to affect your debt ratio to a great extent. So, it'll not be a problem for you to apply for a mortgage six months later. What is the actual amount of your credit card debt? Is it worth just $5000? If it's so, you can negotiate with your credit card company to settle the debt or can work out a repayment plan and pay off the debt over the next few months.
Posted on: 06th Jun, 2009 05:23 am
i think i would have to agree with savior here. paying off your credit card debt is always a good idea, and if this is your preferred method, it would work. giving yourself 6 months would also not cause damage to your credit scores. i suggest you not necessarily close out your credit card accuonts - at least not all of them - but that you keep the lines open and simply avoid usage.
Posted on: 06th Jun, 2009 09:28 am
will this work if one just keep the lines open for credit and do not use it at all,whether it will improve the score and if by how much points???
Posted on: 04th Jul, 2009 05:03 am
Hi warghader,

Just keeping the credit lines open will not be useful. You need to use them. What you can do is you can use your credit lines to make payments for the utility and other bills and then, pay off the debts. This will keep the lines open and active and help you improve your credit.
Posted on: 06th Jul, 2009 01:37 am
closing yoru accoutn will have negative impact on yoru debt to incoem ratio

It will show that you have less availabe credit and more utialization
Posted on: 26th Sep, 2009 08:58 pm
retaining the account with an open credit limit and zero balance will be highly favorable for credit scoring.
Posted on: 26th Oct, 2009 07:17 pm
im applying for a home loan and there was a recent collection that appeared on my report...it shows paid in full how will this affect me
Posted on: 20th Feb, 2010 12:42 pm
karen it already affected you with your credit score. at this point, however, that it is paid is favorable for you. nost everyone wants such accounts paid off prior to closing on a mortgage these days anyway, so you've saved yourself that one step in qualifying. your credit score has already taken that collection into account, so you ought to see increases in your scores as time goes by.
Posted on: 21st Feb, 2010 07:59 pm
i was confused, so with karen's situation the report increased her credit score? the full paid is not an error?
Posted on: 04th Mar, 2010 06:33 pm
that's not what i said...i noted that the collection had already had an impact on her score, and that now she's paid it off, she will begin to see an improvement in the score because it's paid.
Posted on: 05th Mar, 2010 08:04 am
hi, to make a very long story short, i have a mortgage that is 9.9%. the home was 199,900 and the payoff is 156,000. i have lived here for three years now and my concern is, only 90.00 is going towards toward the principal out of the mortgage payment of 1,391.44. i have sat down today with a friend of mine and she figured up that i have paid my mortgage broker 50,000 in the 3 years of living here. i am sick to death after learning this today. i also have my home for sale for 215,000. i got an offer for 190,000. the payoff is 157,000 should i go ahead and take the offer or stay put until my credit gets better to refinance with a regular bank or get out now? the loan i have now is more less an under the table loan, meaning small bank/broker/robber. please try to help me make the right decision. i have 47,000 in this house. that is what i put down at closing. thank you so much. cindy.
Posted on: 17th Apr, 2010 11:20 pm
you most likely wouldn't be happy to learn about how much you'd paid out if the rate was 6%, either, cindy, but that's a different point altogether.

to try to advise you on whether to accept the offer you received or to stand still "until my credit gets better" is almost impossible. your credit situation depends greatly on where you are at this moment, and just what is needed to get you to where you might need to be so a refinance would work.

do you know your current credit score? that's the first place to start, but the analysis might take long enough that your potential buyer's offer might be off the table before you can make what you think is the right decision.

if you're close to 620, then you stand a reasonably decent chance of obtaining a loan to refinance soon...if not, you've got to see what you need to do to get to that level or higher. even at that level, you'll save substantially; rates are far better than 9+%.
Posted on: 19th Apr, 2010 11:59 am
Jessica,
Together, my husband and I have about $10,000 in medical collections. We are about to get in paid down to half that amount by the end of 2010. Both our credit scores are around 575. We were hoping to qualify for an FHA loan purchasing a modular home by the summer of 2011.

Can you tell me how Medical Collections will effect our interest rate and chances of getting a loan? Also, if we cut our debt in half, do you how it could effect our scores?
Posted on: 17th Jun, 2010 08:22 am
Hi Heather,

As the medical bills are assigned to a collection agency by your creditor, it will be considered as a negative item on your credit report. While you apply for a loan with a FHA insured lender, he may want you to pay off the collections first. You can negotiate with your collection agency and try to get a payment plan in order to pay off the dues.

FHA insured lenders would require you to have a credit score of 620. Unless you have a score of 620, the lenders may not be ready to give you a loan. If you pay off your debts, it will definitely have a positive impact on your credit score. You can check out the given page in order to know some steps to improve your credit score:
http://www.mortgagefit.com/credit-rating/credit-repair.html

Take care.
Posted on: 18th Jun, 2010 02:22 am
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