Friday, May 01, 2015
The National Foundation for Credit Counseling® (NFCC®) has released the results of their most recent financial literacy online poll. Among the four categories, 41 percent of the survey respondents revealed that they were least prepared for the purchase of a home.
“Buying a home is the most significant financial commitment one may make in their entire lifetime,” says NFCC vice president of public relations and external affairs Bruce McClary. “Being prepared and making the right choices can lead to a more satisfying purchase and a stable financial future.”
Spring is the time when many to begin the search for a new home, often for the first time. To be prepared for those first steps, the NFCC offers the following advice:
Make a financial plan – Knowing where to start means conducting a complete review of how the household budget is managed. Comparing income and expenses, reviewing debt, and tracking savings are just a few of the ways to measure readiness for home ownership.
Review your credit report and score – Because a mortgage is the largest debt a person is likely to carry in their entire life, credit history can be a deal breaker or a dream maker. A credit report may be obtained without a score for free once every 12 months from each of the three bureaus by visiting www.AnnualCreditReport.com. Once a copy is obtained, review it for discrepancies and dispute any differences. Do this at least six months in advance of applying for the loan, allowing time for inaccuracies to be corrected. Along with the free credit report, a score can be purchased for a small fee. Because the score is critical to mortgage approval and competitive interest rates, it is worth taking a look before submitting the loan application. Lender guidelines vary, but a FICO score of 760 is typically the threshold for the most favorable interest rates.
Start saving – A downpayment is typically no less than 20 percent of the purchase price of a home, and coming up with the money may be a significant pain point. A downpayment is essential to limit the amount borrowed, as well as increasing the chance of having more favorable mortgage terms.
Select a lender – There are many options for financing the purchase of a home, and the choices may be overwhelming at first. Working with a local financial institution, an online lender, or a mortgage broker are some of the possibilities. A good way to simplify things is to start with the local bank or credit union currently where a relationship already exists.
Decide the type of loan – Fixed-rate or adjustable-rate loans are the most common of the many different types of financing available. For those planning to remain in the home for a long time, a fixed rate mortgage helps add stability by keeping the payment the same for the life of the loan. Those expecting their stay in the home to be no longer than five to seven years may be better served by an adjustable-rate loan, where they could benefit from lower rates in the short term. Working with a trusted lender while understanding the best loan for the circumstances is crucial to maintaining home ownership.
Pre-qualify for a loan – It is important to know the limits of what is affordable before beginning to shop for a house. A good place to start is by becoming pre-qualified with a lender. This free service can typically be done in-person, online or by phone. The lender will need to gather some financial information and will offer a general idea of the amount of mortgage loan available based on the information provided. This non-binding estimate is the best way to know how much house would be affordable.
Become pre-approved for a loan – Applying for a mortgage usually involves a cost and is done by supplying detailed financial documentation to the lender. The lender will use this information in conjunction with information obtained by pulling a credit report to determine the amount and terms for the loan. This is not a final approval for a loan, but is a significant step toward that outcome.
Lock the rate – If you like the interest rate being offered when pre-approved, lock it in by getting the commitment in writing. It can take time to find a home, negotiate a price, and secure funding. Locking a rate for a reasonable period of time helps make room to complete the process without risking a less-favorable interest rate.
“Using these steps will help determine if the time is right for home ownership,” continues McClary. “Even if now is not the right time, it may still be possible to work toward reaching that goal in the future.”
The NFCC March poll question and results are as follows:
Which of the following life events do you feel least financially prepared for?
A. Raising a child: 12 percent
B. Financing a college education: 12 percent
C. Purchasing a home: 41 percent
D. Retirement: 35 percent
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