So, you applied for a credit card and you were approved. You’ve been granted a maximum limit of $2,000 – Perfect! There’s a pair of shoes you’ve had your sights set on for months. After all, isn’t that why you need a credit card? You swipe your shiny new card and are beyond ecstatic with your killer new shoes. Virtually overnight, you’ve maxed out your credit card. You’re completely baffled. How did this happen? You’re now responsible for paying off borrowed funds and available funds in your checking account won’t be enough to cover the balance.
Like many people, you decide to apply for another credit card, so you can pay your bills and keep your head above water. This is certainly no way to live.
What do you do? This feeling can be overwhelming and believe me, there are tons of people who have encountered the same problem. You will need to repair your credit score and get your credit cards bills down, but when you have obligations every month that conflict with your minimum payments, it may seem harder than you realized to accomplish these goals. Facing this challenge will require you to start planning.
I’m sure that plenty of people throughout your adulthood have offered advice surrounding the importance of budgeting your income. And like most people, you immediately assumed that these individuals had no clue what your situation entailed. Everything is easier said than done, right? While creating a budget and sticking to it is undoubtedly difficult, getting into a healthy financial routine will help you successfully manage your credit card spend.
Create a Budget
First, it’s important to acknowledge and firmly understand what you can and cannot afford. Take some time to examine your monthly income against your expenses and purchases to determine if you are spending more than what you’re bringing in. By doing this, you’re just setting yourself up for disaster. And it’s certainly not good if you are only paying the minimum on your credit cards or even less, only because you cannot afford the monthly payments. This means you need to start adequately planning for your monthly expenses so you can settle your debt and erase bad spending habits moving forward.
It’s important to prioritize. Of course, enjoying a meal at your favorite restaurant with friends or treating yourself to some new clothes is fun, but if your monthly income can’t accommodate for these additional expenses than you need to focus on covering the necessities. Don’t let yourself dive into a black hole of lousy credit just for a few nights of cocktails. Once you come up with a budgeting plan and eradicate your debt, you’ll be able to set aside funds as needed for these special occasions.
Create a Spreadsheet
Staying organized is a crucial factor in tackling what you owe on credit cards and how you should be managing your monthly income. A great way to do so is to create a spreadsheet. While this may seem like a tedious task at first, you will find that when you clean up the clutter, you will be able to become more successful at managing your bills.
A spreadsheet will help you put everything into perspective, essentially laying out all the numbers in one place. If you have three credit cards, a student loan, utility bills, and monthly rent payments, that’s a lot of moving parts to be responsible for. And you could find yourself panicking over attempting to shuffle it all together in your mind. By putting it all in front of you, you will have gained a more realistic perception of your financial situation, and you will finally be able to break away from shouldering the weight of your debt.
Look For Good Benefits
Another tip with credit cards is being sure to get a credit card that has benefits. There are plenty of credit cards in the marketplace that you can choose from, and you should select one that best fits your needs. Many credit companies provide cash back incentive or sign-on bonuses that you should undoubtedly research and take advantage of. You can either use the money that you earn back to help pay off your credit card or use it to pay off other bills.
If you have a credit card that comes with a high interest rate or an annual fee, there is often the option to transfer your balance over to a credit card with a lower interest rate and no annual fee. The problem with interest rates is that a lot of times if you are paying the minimum per month then you could be mostly spending your hard-earned pay on interest and be forced to prolong your payments when you could have been finished paying off a credit card at an earlier time.
Set Payment Reminders
Also, make sure you set alarms for yourself. When I say this, I am talking about when to pay your bills every month. We are all human with busy schedules, and sometimes we forget deadlines. The problem with that is that you could run the risk of a bill stacking up and penalties caking on. Also, not paying your credit card bills on time could negatively impact your credit score, which will only make things harder for you moving forward.
It can certainly be a little overwhelming when you think about trying to tackle a battle such as getting your credit card spending in check. You may feel that it is impossible, but understand it is a journey that will take time. By being dedicated and disciplined to staying organized and being financially responsible, you’ll find yourself having a much easier time covering your expenses. Once you get to that comfortable playing field, it will no longer feel like budgeting and instead, feel natural.
Credit repair companies say, if you’re thinking of buying a home, the general rule of thumb is that you must have at least a 20 percent down payment before you even think about getting a loan. However, with home prices being what they are today, many people can’t afford even that.
According to a recent survey of 10,000 American adults, two out of three people said that getting the money for a down payment was the biggest hurdle they faced when buying a home.
The good news is that this doesn’t mean you’re out of luck. There are many down payment assistance programs that can help you so you can get the home of your dreams.
In this article, we look at how down payment programs work, how to get assistance, and who is eligible for help.
How These Down Payment Assistance Programs Work
In most cases, a down payment assistance program is funded by the government, whether it be state, local or federal. However, sometimes these programs are available from non-profit or charitable organizations as well. If you’re thinking about getting help from the government for your down payment, you’ll have to apply and see if you’re eligible.
The first things agencies look at when considering people for down payment assistance are the the potential borrower’s income and financial obligations. For example, the Texas State Affordable Housing Corporation (TSAHC) is one agency that offers down payment assistance, and they state that their income requirements vary according to your profession, the size of your family and the county you live in. Also, they will take your credit score into consideration as well. Keep in mind that every state has different rules regarding who’s eligible, but in most cases, agencies look at similar factors regarding each person’s eligibility.
Another thing to keep in mind is that each program treats the money you get different. In some cases, the money you receive could be from a grant, an interest-free loan, or another type of loan that you have to pay off. Also, in many cases, you have to agree to live in the house for a period of time if the money you received came via a grant that varies from agency to agency. And, if you received a loan and you decide to move, you’ll have to pay off that loan prior to selling and moving.
Types of Programs
As mentioned, these down payment assistance programs come from a variety of sources, including:
- Grants — The assistance you get through a grant doesn’t have to be paid back.
- Second Mortgage Programs — This type of assistance is usually available as a 0% interest second loan with repayment terms that can range from 5 to 30 years.
- Deferred Programs — With this program, the repayment is delayed until the buyer meets particular criteria, which could be when the buyer sells or moves out of the home.
- Forgivable Second Mortgages — With this program, you may be forgiven some or all the money you received for your down payment.
The good news for home buyers is that there are over 2,000 down payment assistance programs available throughout the country, so whichever state you’re in, help is available for you.
Who Is Eligible?
In most cases, down payment assistance programs are only available to first-time home-buyers. For example, My First Texas Home program is open to home buyers from virtually all professions, first-time buyers and veterans. In contrast, the TSAHC says they offer assistance to prior homeowners as well a first-time buyer. Also, the 5 Star Texas Advantage Program doesn’t have a restriction on first-time homebuyers, but those taking advantage of this program will have to complete an online course to be considered.
Also, while many of these programs are only available to first-time buyers, it’s important to keep in mind that first-time homebuyer is generally defined as someone who hasn’t owned a home in three years. So if you owned a house once, but are now renting a home or apartment, you may still qualify as a first-time buyer.
The good news is that, regardless of your situation, there’s usually a program available to you.
What About Credit?
Typically, these down payment assistance programs are geared toward people who wouldn’t otherwise be able to afford a down payment, which includes people with bad credit. However, if you do have bad credit, it’s still a good idea to start rebuilding your credit as much as you can before you apply for one of these programs. You can do that by making sure your bills are paid on time and to pay down your debts quickly.
Owning a home is part of the American dream, and down payment assistance programs are helping that dream become a reality for thousands of people every year.
You are about to embark on one of the most amazing and rewarding experiences that can ever come from spending money: buying a home. If you are buying a home in 2019, you should know that the entire process is not quick, but when all is said and done, there are few things more exhilarating than buying a house. This guide will help equip you with what you need to buy a house this year.
1. Check Your Credit Score
Before applying for a loan and certainly before ever making an offer on a house, you should know your credit score. Why is your credit score important? Well, it’s not only the difference between getting a low-interest rate on a home loan versus a high one, but it will also directly impact how much a bank or lender will actually loan you. There are several websites you can use to check your credit score, here are a few to consider: TransUnion, Equifax, Experian.
You can check your own score as much as once a day without affecting your credit, also known as a soft inquiry. Hard inquiries are when financial institutions check your credit score, typically when you’re applying for a loan or credit card. Hard inquiries lower your credit score a few points, so try to keep hard inquiries to a minimum.
2. Improve Your Credit Score
Maybe you just checked your credit score and realized it’s not as high as you had expected. Don’t worry, there are a few things you can do now that will help raise your credit score so you can capitalize on a great interest rate.
Though you can easily implement steps to help your credit score, fixing or raising a credit score doesn’t happen overnight. It’s imperative to start now so when you go to apply for a home loan your credit score will (hopefully) be where you want it. Here are a few tips from The Phenix Group to help improve your credit score:
- Get Your Free Credit Report: Knowing what’s on your credit report is the first step in moving your score upward. When you obtain your report, review each section of your credit history for accuracy. Any credit-related mistakes you find and resolve should help boost your score, at least to some degree. Even the smallest bump to your credit score is movement in the right direction.
- Establish a Solid Payment History: If you want to improve your credit score, one of the easiest things you can do is start making all of your required payments on time. Even if you’ve had a history of making late payments, by making 100% of all your payments on time going forward, you’ll see your credit score rise.
- Improve Your Debt to Credit Ratio: Whether it takes days or years, paying off debt will help you improve your ratio as well as your financial future. Which in turn means a big jump in your credit score. Try focusing on paying down high-interest debt first, like credit cards. If you have a credit card nearing its limit, then targeting that one would be a good strategy to start with.
3. Know What You Can Afford
The best way to determine how much house you can afford is to simply use an affordability calculator. Though calculators such as these do not necessarily account for all of your monthly expenditures, they certainly are a great tool for understanding your larger financial situation.
After you figure out what you can comfortably afford, you can then start online window shopping for houses and really begin to narrow down what you want in a house versus what you can afford. Are you looking at specific neighborhoods? How many bedrooms do you want? Do you need a large yard, big deck, swimming pool, man cave, she shed, etc?
Understanding what you can afford in the area you want to buy will help keep you grounded and focused on what you actually want in a house versus what might be nice to have.
4. Save Up For a Down Payment
Unless you want to pay Private Mortgage Insurance (PMI), you really want to save up for a sizable down payment. PMI is an added insurance charged by mortgage lenders in order to protect themselves in case you default on your loan payments. The biggest problem with PMIs for homeowners is that they usually cost you hundreds of dollars each month. Money that is not going against the principal of your mortgage.
How much should you save for a house? Twenty percent down is typical with most mortgage lenders in order to avoid paying for PMI. However, there are other types of home loans, such as a VA loan if you have served in the military and qualify, that may allow you to put down less than twenty percent while avoiding PMIs altogether.
As an added benefit to having a sizable down payment, you may also receive a lower interest rate that will save you tens of thousands of dollars in interest over time. So start saving now!
5. Build Up Your Savings
Lenders like to see a healthy savings account and other investments or assets (i.e. 401k, CDs, after-tax investments) that you can tap into during hard times. What they really want to see is that you are not living paycheck to paycheck. A healthy savings account and other investments are a good idea in general as it will help you establish your future financial independence, but it is also a necessary item on your checklist of what you need to buy a house in 2019.
6. Have a Healthy Debt-to-Income Ratio (DTI)
Another key component banks and other lenders consider when issuing loans, and at what interest rate, is your debt-to-income ratio. The debt-to-income ratio is a lender’s way of comparing your monthly housing expenses and other debts with how much you earn.
So what is a healthy debt-to-income ratio when applying for a home loan? The short answer is the lower the better, but definitely, no more than 43% or you may not even qualify for a loan at all. There are two DTIs to consider as well.
The Front-End DTI: This DTI typically includes housing-related expenses such as mortgage payments and insurance. You want to shoot for a front-end DTI of 28%.
The Back-End DTI: This DTI includes all other debts you may have, such as credit cards or car loans. You want a back-end DTI of 36% or less. A simple way to improve this DTI is to pay down your debts to creditors.
How do you calculate your DTI ratio? You can use this equation for both front-end and back-end DTIs:
DTI = total debt / gross income
7. Budget for Extra Costs
There are a lot of little costs that go into buying a house that are overlooked by new home buyers all the time. Though there are some things, such as sales tax and home insurance, that can be wrapped into a home loan and monthly mortgage, there are several little things that cannot be included into the home-buying package and need to be paid for out of pocket.
Though these items can range in price depending on the area, size and cost of the house your buying, here is a list of extra costs you should consider (not all inclusive):
- Home Appraisal Fee
- Home Inspection Fee
- Geological study
- Closing costs*
- Property taxes**
- Home insurance**
- Utility hookup/start fees
- HOA fees
- Home remodeling/updating
- Existing propane gas
*Closing costs can sometimes be wrapped into the home loan, depending on the agreement with your lender.
**Property taxes and home insurance can be paid separately or your lender could include it into your monthly mortgage payment.
8. Don’t Close Old Credit Card Accounts Or Apply for New Ones
Closing a credit card account will not raise your credit score. In fact, in some cases, it may actually lower it. Instead, try to pay down the balance as much as you can, while continuing to make your monthly payments on time. If you have an old credit card you never use anymore, just ignore it, or at least don’t close it until after you have purchased your new home.
Opening new credit cards before buying a home is also not a good idea. You don’t want creditors checking your credit or opening new cards under your name, as you may lose some points on your credit score.
The absolute worst thing you can do is max out one of your credit cards, even if the limit on the card is low. If you do, your credit score may plummet. Try tackling your credit cards with the highest interest rate first, then as one gets paid off, focus on the next card until you’re free and clear.
9. A Solid Employment History
If you haven’t gotten the picture yet, lenders like consistency, including your employment history. Lenders like to see a borrower with the same employer for about two years.
What if you have a job with an irregular or inconsistent pay schedule? People with jobs such as contract positions, who are self-employed, or have irregular work schedules can still qualify for a home loan. A mortgage known as a ‘Bank Statement’ mortgage is becoming rapidly popular with lenders as more self-employed or what has been referred to as the ‘gig economy’ has taken off.
10. Know the Difference Between a Fixed Rate and an Adjustable Rate Mortgage
The difference between these two types of mortgage rates really lies within their names. A fixed rate loan is exactly that, an interest rate that will never change the moment it’s locked in. You will pay the same amount the very first month you pay your home loan and will continue to pay that same exact amount over the course of thirty years (or however long the loan term is).
An adjustable-rate mortgage (ARM) is typically a mortgage that starts out as a lower rate than fixed interest rates but then is adjusted each year typically resulting in a rate higher than a fixed rate. A 5-1 ARM is a popular mortgage offered by lenders, which is a hybrid between fixed and adjustable rate mortgages. Your mortgage would start out at a lower fixed rate for the first five years, then after that time period has elapsed, the rate would then be adjusted on an annual basis for the remainder of the loan term.
11. Follow Interest Rates
It is important to know what interests rates are doing. The big question is are they on the rise or are they falling?
When the economy is good the Federal Reserve typically raises the interest rate in an effort to slow down economic growth in order to control inflation and rising costs. When the economy is in the dumps the Fed does the exact opposite. They lower the interest rate in order to entice more people to make larger purchases that require loans (i.e. land, cars, and houses) to help stimulate the economy.
As new soon-to-be homeowners, it’s a good idea to know how the overall economy is doing, and more importantly, how it’s impacting the interest rates you’ll soon be applying for. In 2018, after years of bottom of the barrel interest rates, the Fed raised interest rates three times and is projecting to raise it three more times in 2019.
Why are small hikes in interest rates so important to you? To put it into perspective, even a one percent increase in your interest rate on a home loan is the difference of paying or saving tens of thousands of dollars in interest payments on your home loan over time.
12. Know How Much Time it Takes to Buy a House
The home buying process from start to finish is time-consuming and very relative to individual circumstances and the housing market in your area. However, there are some general universal constants that you can expect, such as a cash offer on a house is usually much quicker than a traditional loan, and if there is a perfect house in a good neighborhood and at a great price, you better expect competition and added time for a seller to review offers.
Depending on the housing market in your area and possibly which season you’re buying in, it can take you a couple of weeks to find a home or more than a year. But after you find your home you can typically expect the entire process from making an offer on a house to walking in its front door, to be as little as a few weeks to a couple of months on average.
13. Find a Knowledgeable Real Estate Agent
There are several ways to find a knowledgeable real estate agent. Many people rely on recommendations from friends and family, while others look to online reviews. While both of these scenarios work really well and can land you a great real estate agent, the reason these agents rise above the others as the best of the best or the crème de la crème is because of their intentions.
A good real estate agent isn’t trying to get you into a house as quickly as possible so they can earn a commission. Instead, you want an agent that will act as your guide through the home buying process, while having your best interests in mind. A good agent will be able to tell you straight if they think a house is a good fit for you, or if you should keep looking. They should also be expert negotiators so that you get the best deal possible.
14. Find a Mortgage Lender
There are a few things to keep in mind when researching a mortgage lender. The first thing that comes to most people’s’ minds is what mortgage rate can they get. You may have to shop around to find the best rate because lower the rate the more money you save.
Secondly, how does that mortgage lender rate compared to other lenders? By looking at positive and negative online reviews you can usually establish a theme pretty quickly of the strengths and weaknesses of the lender, and what you can possibly expect for a level of service down the road.
Ask the lender what their average length of time is to close on a house after the offer has been accepted? A good lender versus a bad one can be the difference of moving into your new home two to four weeks earlier. You want to find out how streamlined their processes are.
15. Get Pre-approved
When being approved by a mortgage lender, you should be aware that there is a small but relevant difference between the typical fast preapproval for a home loan versus an underwritten pre-approval.
The fast pre-approval usually encompasses a credit report and a loan officer review and can be done in less than a couple of hours. This basic pre-approval allows you to quickly know how much you can afford and then make an offer on a house that may have just come on the market.
The underwritten pre-approval usually takes about twenty-four hours and includes a credit report, loan officer review, underwriter review, and a compliance/fraud review. Though this process takes longer, your offer on a house is actually stronger. Eventually, if you’re planning on buying a house, you will have to go through the underwritten pre-approval process anyway, so it’s better to jump on it from the start.
16. Research Neighborhoods or Areas You Want to Live
There are many variables to think about when researching your future residents. The key to beginning your research is to determine those variables most important to you. Are you looking for a good school district, a large house, convenience to commuter options, or a specific neighborhood that is extremely friendly and ranks high on Walk Score?
Your real estate agent will most likely tell you to figure out your list of the things you absolutely want in a house versus the extra features that you would like to have, but wouldn’t deter you from a house if it wasn’t there.
Your list will help your agent narrow down the number of houses they’ll show you, saving you time by only showing you houses you’d actually be interested in.
17. Shop For Your Home and Make an Offer
Now that you know where you want to live and you’re pre-approved, the fun begins. You get to look at houses! Once you find the house you know would be a great fit for you and your family, you’ll want to make an offer.
There are numerous variables to consider and hopefully, your knowledgeable real estate agent will help you through this process. Understanding the market conditions, how houses have been selling in the neighborhood and at what price (above or below asking), and knowing if there are other competing offers will help you assess and determine how you’d like to make an offer.
Negotiating an offer on a house can be emotionally taxing, so do your research and rely on your agent’s advice so you come to the table prepared.
18. Get a Home Inspection
Congratulations are in order! The sellers have accepted your offer. Now you want to get the home inspected to make sure there are no underlying issues that could cost you money down the road, such as a bad roof or foundation. Usually, a home inspection is a contingency built into the initial offer, and your real estate agent can help you set this up. However, it is recommended to hire an inspector that is certified by a national organization (such as ASHI or Inter-NACHI). Though you can waive this contingency if you’re trying to make your offer more competitive in a hot market. Just be aware that if you do waive a home inspection contingency, you may be taking on considerable risk.
There are several types of home inspections, but in general, a typical home inspection involves a certified inspector that will go in, around, under, and top of your house looking for anything that could be of concern, such as structural or mechanical issues. The inspector would also look for safety issues related to the property. Though they will go into crawl spaces and attics as part of their inspection, they will not open walls. They will inspect the plumbing and electrical systems and should point out any defect in the property that could cost money down the road for the homeowner.
Then they will put their findings into a nice written report for you with pictures, which then basically becomes a miniature instruction manual for your house. No house is perfect, but the report will give you a great snapshot of the property at the time of the inspection. If there are fixes that need to be addressed, this report will certainly let you know.
You should also know that the sellers are not required to make any repairs to the property. However, you can request them through your real estate agent, which will let you know what repairs are reasonable or not.
19. Have the Home Appraised
Home appraisals are an important part of the process because oftentimes house prices can quickly skyrocket when the housing market is hot, and banks do not like to loan out more money than what a home is worth. A home appraiser will not only tell you what the home is actually worth for the area and for the current housing market, but this appraisal will also directly affect the size of loan the bank will give you.
If the home appraisal comes back and states that the house is worth $300,000, but you made an offer of $310,000, the bank will most likely only lend you $300k. You will then either be stuck with paying the additional $10k out of pocket, or you may try to renegotiate the price with the sellers to see if they would be willing to come down. Or you may lose the house altogether.
Also, the mortgage lender will usually set up the home appraisal so you can take this time to focus on other home-buying tasks that need to be finished up.
20. Close the Sale and Sign the Papers
Congratulations, you’re a homeowner! Your real estate agent should help you map out the last details, such as when and where you should sign all the papers to take ownership of the house and, of course, the handing over of the keys. Welcome to your new home.
This article was contributed by Redfin for The Phenix Group blog.