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Credit Counseling and Buying a Home - The Bills.com Blog
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Credit Counseling and Buying a Home
Question: I am 26 years old, and currently in a credit counseling program. I desperately want to purchase a home. I currently pay $657/month in rent. This is driving me nuts knowin I am wasting so much money. How can I prepare myself to purchase a home? My financial advisor told me I will have to wait until 5 years after my debt is paid offto get a good rate on a loan. Is that true?
Answer: Hi Amanda. First, don’t let your payment of rent drive you into being over-eager or about buying a home. In the early years of any mortgage, the vast majority of the payment goes to interest, so you waste almost as much in interest as you do to rent. Many people think that they are flushing their money paying rent, but that magically somehow when they pay their mortgage it is not going down the drain. That is a myth. The one important difference is that the mortgage interest is tax deductible... also, there is a chance that your home could create equity and value over time.
It is really the intangible aspects of home ownership that you are missing -the security and freedom that goes with owning any equity in the property-and no landlord! Still, you are correct in that you have to start sometime building that equity. To my knowledge you should not have to wait nearly so long as your advisor said to get a decent deal on a mortgage. Your credit score (usually, FICO) at the time of your mortgage application will be an important determinant of the points (up front interest payments), interest rate, rate variability, and other terms of the mortgage note. If your score is 750 or above you should get the most favorable terms available on the mortgage finance market at that time. Remember, that is a very general statement since
much depends on the market direction and other variables that lenders must consider.
I do have to give you the negative information, however, that many lenders view Consumer Credit Counseling as a negative factor... many lenders that Bill knows say that they treat consumers enrolled in Consumer Credit Counseling just as if they had filed Chapter 13 Bankruptcy, which is a consumer debt re-organization.
If you should be one of the minority of consumers placed into a DMP (debt management plan) who completes the plan, you will then be free of the debt included in the plan. Having little or no debt will allow you to begin rebuilding your credit. Consult Bills.com under “increase credit score” for instructions and ideas. After, say, 10-12 months of consistent timely payments to one or two unsecured credit cards, you should begin researching the mortgage finance market for a lender offering the best terms. You can become pre-qualified by that lender to purchase a residential property in a given appraised value range. With the hardest part done, you are in a position to bargain with confidence to buy the best property in your range. You can take your time and make that seller come down in asking price or the real estate agents’ commissions, or both.
Other experts say there is no reason to wait to apply for financing a home. Even if you present with a low credit score, the loan you get at a few
points above prime rate (again, depending on the current real estate market) could be better than paying rent, especially after you factor in the tax deduction you get on mortgage payments (100% deduction from gross income for mortgage interest paid during the tax year). You could even apply now while in your DMP to see what kind of deal you can get.
If you would like to apply with Bills.com's network of approved lender's, click here: https://www.bills.com/mortgage/purchase/
Even if your loan is somewhat high you will build your credit and be able to refinance on better terms within usually 2 years depending on market trends. Just don’t be in a big hurry since refinancing could potentially be pretty expensive in front-loaded costs (up-front) and it takes several years to recoup that money. You would resist another refi until the costs of the prior are recouped. Wait until you have a good offer on the table, and one that you can reasonably afford, before you take the dive into home ownership.
These are a few of the considerations. If you would like more information, please visit our debt relief boot-camp at: http://www.bills.com/debthelparticle2/
We hope that this helped you to Find. Learn. Save.
Best,
Bill
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