Purchasing a home is an exciting venture. At the same time, the financial stresses involved often seem overwhelming. Smart financial planning can help you get into the home of your dreams and live there at a cost that works for your budget. Improving your credit and saving for a down payment will lower the overall cost of your mortgage, including your interest rate.
A homeowner with bad credit can expect to pay an extra $50,000 to $130,000 in interest alone
Improving your credit
Your credit greatly affects the cost of your mortgage. A homeowner with bad credit can expect to pay an extra $50,000 to $130,000 in interest alone for a typical American home. That adds an additional $140-$361 to your monthly payment with a 30 year mortgage. Even more daunting, bad credit can disqualify you from purchasing a home at all. Good credit is essential for you to be approved for a low mortgage payment.
Fortunately, you can improve your credit score
. By rebuilding and repairing your credit, you can obtain a mortgage at a lower interest rate, potentially saving you thousands of dollars.
Rebuilding your credit
Preparing to buy a home is a great opportunity to rebuild your credit. Good financial management becomes key. Here are some tips to help you rebuild your credit and manage your debts:
- Find out your credit score. You will have a better gauge of the work ahead if you know your FICO score and have examined your credit report.
- Correct any mistakes on your credit report. Credit fraud, identity theft, and honest mistakes can negatively affect your credit report and score. In many cases, you should be able to correct any problems directly with the creditor.
- Pay your bills when they are due. Bill payment is both the most basic aspect of your credit and the most important: payment history makes up 35 percent of your credit score. A good payment history tells potential lenders that you are wise with your budget and prioritize your debts. In other words, it lets them know that you'll pay them back.
- Reduce your debt. Thirty percent of your credit score is determined by your outstanding debt. Lenders use this information to tell if you can pay them back and still meet your current obligations. Reducing your debt is key to acquiring a large line of credit, such as a mortgage. Pay off as much of your debt as possible and eliminate lines of credit that you don't need. Begin with those that have the highest interest rates to save as much money as possible.
- Avoid applying for more credit. In addition to the increased debt, applying for more credit allows potential lenders to run an inquiry on your credit. Recent inquiries make up 10 percent of your credit score.
- Be wise when opening new accounts. Because 10 percent of your credit score is affected by the types of credit in use, many people open new lines of credit solely to diversify their credit. In most cases, this actually works against you. Only open accounts that you plan to use. Even then, use discretion.
- Be patient. Rebuilding your credit can take time. Credit history length alone affects 15 percent of your credit score. If you haven't had credit for long, don't worry, this should not affect your ability to get a good mortgage rate if you are being responsible with the four other factors. In addition, patience will give you the perspective to hold off on unnecessary purchases, further reducing your overall debt.
Repairing your credit
While rebuilding your credit is highly effective, many potential homeowners find that their credit also needs to be repaired to substantially lower their interest rates in time. The process of rebuilding credit can take up to seven years or longer, depending upon the lasting consequences of bad credit. Often, system errors cause inaccurate blemishes on credit. For the individual who would like to buy a home soon, credit repair
can sometimes remove those questionable items quicker than other methods.
A credit repair company represents you by assisting you to exercise your rights that are protected by the Fair Credit Reporting Act. Depending on your needs, credit repair companies can help you in these complex situations:
- Credit report repair. When unverifiable or incorrect information harms someone's credit rating, credit report repair can assist you in removing this information.
- Debt validation services. In many cases of credit repair, harmful credit information may seem questionable. Credit repair companies can work to validate the clients' claims and restore the integrity of their credit reports.
- Creditor interventions. Some creditors continue to report questionable information even after credit report repair has been instituted. In these cases, many credit repair companies represent their clients to intervene with such reporting.
If you find that credit repair is a good option in helping you to lower your interest rates, especially when looking to buy a home, research the companies
to find the one that will work with you the best. Evaluate what services you need, be it credit report repair, debt validation, creditor intervention, or the entire catalog.
Saving for a down payment
As you work to improve your credit through rebuilding and repairing, you may find it beneficial to save for a down payment
. The larger your down payment, the lower your overall mortgage and monthly payments will be. At the same time, a substantial down payment will lower your interest rate, saving you additional money on your mortgage.
Most lenders want their buyers to put down at least 5 percent to 25 percent of their total mortgage. That equates to $7,500 to $37,500 for a $150,000 home. As a rule of thumb, expect to pay a higher down payment if you have a lower credit score, yet another advantage of improving your credit. Regardless of your credit, it is in your financial interest to put down as large a down payment as possible.
Sometimes setting aside the money necessary for a down payment can be a challenge, particularly while you are focusing on paying off other debts. With sufficient planning, though, saving for a substantial down payment is possible. You may find the following guidelines helpful in preparing your plan:
- Start as early as possible. The earlier you begin, the more time you have to set aside money. This is particularly useful if you will have less room in your budget for mortgage savings. Additionally, a longer planning period gives you more time to improve your credit. Doing both simultaneously will dramatically lower your interest rates and your overall mortgage.
- Research housing prices in the area in which you're planning to buy a home. This will give you a gauge as to what you can afford in a mortgage and how much you should set aside for a down payment.
- Create a savings account that is solely dedicated to your down payment. Simply adding money to an existing account often creates the temptation to spend. By placing it in a dedicated account, you will truly be setting your money aside.
- Establish a savings plan. Decide when you want to buy and how much you want to save. Many people find that this is a good step in creating a monthly budget that includes saving for a down payment while paying off debts.
- Lower your current expenses. If possible, focus especially on high-cost areas such as rent and transportation. Reduce unnecessary spending.
- Increase your income. Go for that raise or promotion. Find additional ways to bring in money. Take classes to add to your credentials. Get creative.
Again, practice patience. Saving money for a down payment while improving your credit is a process. Often, this process requires a shift in thinking when it comes to spending. When working towards such a goal, frugality and persistence in the present will create greater results in the future.