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Evaluate
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Getting Started
The "Are You Ready To Buy A Home?" Test
What do you ask yourself when deciding if you are ready to buy
a home? The four questions that follow are among the most important
when determining if you should now consider a home purchase.
The test is self-scoring; simply indicate a
"yes" or "no" next to each of the four questions. Then, total up
your number of "yes" and "no" answers, and draw your own conclusions
as to whether or not you are now ready to buy a home.
1. Do You Have a Steady Job History?
If you have been working consistently for at least the last two
years, a lender will consider this to be steady employment. This
does not mean that to be approved for a mortgage loan, you need
to have held the same job for the last two years. In fact, job moves
are looked upon favorably if the result has been equal or more pay.
However, if you have been working continuously for less than two
years, this doesn't necessarily mean you won't be approved for a
mortgage loan. The important thing is to be able to reasonably explain
any gaps in employment. For example, if you were just discharged
from the military, recently finished school, work seasonally with
work gaps between seasons, were temporarily laid off, or had an
illness that prevented you from working, you may still be able to
qualify for a mortgage loan.
** If You Answer Yes.
This means you have been working continuously for the last two years,
or if you have not, you are able to provide a mortgage lender with
reasonable explanations for any gaps in employment. If you can demonstrate
a steady level of income and job history, the lender will have evidence
of your capacity to pay back a mortgage loan.
** If You Answer No.
Saying "no" to a stable work history means you have not been consistently
employed over the past two years and have not kept up a regular
and even income level. You may have been fired for cause. You might
have big gaps in your employment record. Or there may have been
dips in your income level that you cannot satisfactorily explain.
If this is the case, you may have to delay borrowing money for a
home until you can show that you have a steady income and stable
work history.
2. Do You Have an Established and Favorable Credit Profile?
Before lending you money, lenders want to see a track record of
debts owed and duly repaid. Your lender will order a
credit
report to verify your debts, the amount of your monthly
payments, and how many months or years you have left to pay off
your debts.
Credit bureaus keep records of consumer debt
and how regularly these debts are repaid. Credit bureaus compile
these reports by obtaining information from a wide range of sources,
such as credit card companies, banks that have given you car loans,
department stores and gasoline companies that provide credit cards.
If you have never had any credit cards and have
never borrowed money from a financial institution, you can still
establish a credit history by documenting your monthly rental payments
to current or previous landlords and your monthly payments to utility
companies for electricity, gas, water, and telephone services. A
mortgage lender can probably help you put together this "nontraditional
credit history."
You can find out what information is in your
credit file by contacting a credit bureau. They will provide you
with a copy of your report for free or for a nominal fee. The major
companies are Experian
-- (888) 397-3742 -- (formerly TRW., Inc.),
Equifax, Inc. -- (800) 685-1111 -- and Trans
Union (800) 888-4213. Contact each company for a copy of
your credit report. See if any information is missing or inaccurate,
so you can take steps to have the report corrected if necessary.
** If You Answer Yes.
Saying "yes" to a good credit record means you have a history of
paying your rent and other bills on time, and that you will be able
to prove this through a favorable credit report or by compiling
a nontraditional credit history. Although lender credit standards
vary, being late on a payment or having gone over your credit limit
once or twice doesn't necessarily mean you don't have good credit,
particularly if you can reasonably explain why. But if you show
a repeated pattern of not paying accounts as agreed, it will negatively
affect your credit history. A good credit history tells the lender
that you pay your obligations on time and use credit wisely -- important
information for a lender to know when you want to take out a mortgage
loan.
** If You Answer No.
An unfavorable credit profile may mean you do not pay your bills
on time or you currently have more credit obligations than you have
been able to handle. Information that may be considered negative
includes late payments, repossessions, accounts turned over to a
collection agency, judgments,
liens,
and bankruptcies.
Negative information in your credit file may lead creditors, such
as mortgage lenders, to deny you credit.
If your credit report shows that you do not
have a good credit history, and the report is accurate, now may
not be the best time to apply for a mortgage loan. Instead, you
should try to improve your credit profile. Bring your payments up
to date; pay off some of your debts; and work on paying your bills
on time. Over time, you can build a profile that shows you are a
good candidate for a loan, even if you have had serious credit problems
in the past. For example, a
foreclosure on an earlier mortgage does not mean you
can never get a mortgage for another home. But most lenders prefer
that three years go by before they will consider you for a new mortgage,
and will want to know why there was a foreclosure. Similarly, if
you have declared bankruptcy, most lenders won't let you assume
a mortgage debt until at least two years after discharge of the
bankruptcy.
3. Have You Saved the Money for a Down Payment
and Closing Costs?
Nearly all home buyers require a mortgage loan from a financial
institution. However, few loans are for the full purchase price
of a house. Instead, a lender will insist you contribute some portion
of your own funds (the down
payment) as part of the agreement. There are a number of government-sponsored
loan programs, including Federal
Housing Administration (FHA), Veterans
Administration (VA), and Rural
Housing Service (RHS) loans, that require little or no down
payment for qualified borrowers.
Typically, however, most lenders require some form of down payment.
For a $100,000 home, a 5 percent down payment requirement would
be $5,000.
You also will need to pay a number of additional
costs, called closing
costs, that cover the legal transference of a property to
your name and other costs associated with your taking out a mortgage.
Closing costs generally range from 3 percent to 6 percent of the
sales price of the home. So, if you were to buy a $100,000 house
with a 5 percent ($5,000) down payment, you could expect to pay
between $3,000 and $6,000 in closing costs.
Think about how much houses cost in your area
and the type of mortgage down payment your loan will require. Then
calculate the funds you have available to you for a down payment
and closing costs.
** If You Answer Yes.
Congratulations! Saving sufficient funds for closing costs and a
down payment is an accomplishment to be proud of. If you believe
you have sufficient funds, you are in a good position to shop for
a mortgage and get pre-qualified
by a lender, so that you know how much you can borrow based on your
income and existing debt. When you do apply for a loan, your lender
will verify that you have the funds you say you do, so be sure to
be truthful about the amount you really do have available.
** If You Answer No.
If you don't currently have at least part of the necessary money
saved, you may be able to enlist the aid of a relative or a government
or nonprofit agency that might give or loan you the money. Local
housing agencies often offer loan terms that include no down payments.
(Check with your state or local housing authority in the government
"blue pages" of the phone book.)
However, if this type of down payment and closing
cost assistance is not available and you have not already saved
the money for at least part of these expenses, this probably isn't
the right time for you to buy a house. Instead, you should begin
to budget some money from every pay check that you can put into
a savings account. The more consistently you save money, the better
your chances to qualify for a mortgage in the future.
4. Can You Afford Monthly Mortgage Payments
for the House You Want?
Generally,
the amount of your monthly mortgage payment is limited to 28 percent
of your gross monthly income. The amount of your total monthly debt
is limited to 36 percent of your gross monthly income. These ratios
are explained in detail in the How
Much House Can You Afford? section of this site.
Staying within these lender guidelines will give you a certain
range of monthly mortgage payments you can afford. The amount of
these payments will depend on current interest rates.
** If You Answer Yes.
If you calculate that your income and your current debts are sufficient
to allow you to afford monthly mortgage payments for a home at a
certain sales and at a certain interest rate, then your next step
may be to get to know what types of homes are available to you in
the price range you can afford. You may wish to visit open houses
advertised in the real estate section of your local newspaper, or
contact a Realtor® who can show you homes in your
price range. You may also want to get
pre-qualified
by a mortgage lender, who can help verify that your calculations
of your buying power are accurate.
** If You Answer No.
If after investigating various types of mortgages, and you are not
happy with the mortgage amount you will qualify for, you may need
to lower your sights and simply recognize that you'll have to buy
a less expensive "starter home" or continue to rent. You may decide
to wait to apply for a mortgage until your income increases. For
example, is it possible for you to put in extra hours on the job
to build up your income? Or do you or your co-borrower, if there
is one, expect a raise in the near future? If so, you may wait a
bit to buy a house so that you can qualify for a higher mortgage
amount. In addition, if your existing debt is too high in relation
to your income, you may be able to qualify for a larger mortgage
by paying off some of this debt.
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