BILL'S ANSWER
Do not let your payment of rent drive you into being over-eager 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 an oversimplification. The one important difference is that the mortgage interest is tax deductible. Also, there is a chance your home could create equity and grow in value over time, but as has happened over the past few years, your home could drop in value, potentially owing more than your home is worth.
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 equity. Just remember, property is not the only form of building equity. Saving for retirement and investing your money can also build equity. It is also a good idea to save up for a down payment on a home, as there are more loan programs available if you make 20% down payment.
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. Keep in mind that FHA loans are a good option, if your credit is not good enough to qualify for a prime loan.
Many lenders view Consumer Credit Counseling as a negative factor. Many lenders I know say they treat consumers enrolled in Consumer Credit Counseling just as if they had filed Chapter 13 Bankruptcy, which is a consumer debt re-organization, because, in both instances, the consumer needed the help of a third-party to manage his debt. It is my opinion that you're better served by completing your credit counseling program before applying for a mortgage loan.
If you should be one of the minority of consumers placed into a DMP (debt management plan) who completes the plan, then you will then be free of the debt included in the plan upon completion. Having little or no debt will allow you to begin rebuilding your credit rapidly. Read about how to improve your credit score and other similar articles at Bills.com 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 are turned down, you will at least know what barriers are present to successfully applying.
If you would like to apply with Bills.com's network of approved lenders, visit the Mortgage Savings Center.
Even if your loan rate is somewhat high you will build your credit and be able to refinance on better terms within usually two 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.
We hope that this helped you to Find. Learn. Save.
Best,
Bill
San Francisco, CA | January 24, 2012
January 24, 2012
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