NewBuyer Weblog

Credit Score: A Primer for the First Time Home Buyer

Posted by Elizabeth Dennis on July 12, 2010 | No Comments

To get ready to buy a house one of the very first things you should do is check your credit rating and credit score.  In most cases, you will need to take out a mortgage to pay for your new home. Your credit score is the most important factor in determining what interest rate you will pay for your mortgage.

Credit Bureaus

The information in your credit report is gathered by reporting agencies called credit bureaus who then offer it to potential creditors.  The three main credit agencies are Equifax, TransUnion, and Experian.  A creditor will make a decision about you with regards to your credit risk by looking at these companies’ reports.  To better analyze your credit, you are assigned a credit score, a three-digit number that takes into account all of your credit history. The numbers range from 300-850; the higher the number indicating a better credit risk.

How is your Credit Score Determined?

Points are assigned based on items in your credit history. Your resulting score is compared to those of other consumers with similar profiles.  With this information, mortgage lenders have a pretty good idea of  how likely somebody is to repay their loan on time.  There are different scoring methods out there but the most common is known as a FICO score.  The name comes from an independent company who created it; Fair Isaac and Company.  This is how the score is broken down:

• Payment history – 35%
• Amounts owed – 30%
• Length of credit history – 15%
• New credit – 10%
• Types of credit – 10%

The number and types of inquiries also play a role in determining your score.  Public inquires, including bankruptcy filings are considered as are the number of inquiries made.  If too many new credit inquiries exist, this may indicate to the lender that you are preparing to go into additional debt by taking out new loans.  Fortunately, mortgage inquiries do not fall into this category.  All inquiries from mortgage lenders within a 30-day period count as one inquiry.

Other People’s Money

Posted by Elizabeth Dennis on June 18, 2010 | No Comments

OPM or “Other People’s Money” is a financial term describing the situation when you use other people’s money to make money.   Taking out a mortgage to invest in a home is a perfect example. When you buy a home with a mortgage it is not actually your money you are investing.  You only invest the down payment and are using a loan to invest in the rest of it.

For example, if you buy a home for $100,000 with a down payment (investment) of $20,000 and the value of the home then increases to $140,000, you can sell your home and make $40,000 from your $20,000 investment.  Although you will most likely use a chunk of that for the fees to sell your home, you can see how using other people’s money can be a great way to invest.

Budgeting for Homeownership

Posted by Elizabeth Dennis on June 14, 2010 | No Comments

As we have seen in our prior post, Are you a Responsible First Time Home Buyer?, mortgage lenders will often offer you more than you can actually afford. Here we have provided a list of common monthly budget items for you to reference when calculating your non-housing monthly expenses. Be sure to consider:

• Groceries
• Utilities
• Telephone
• Insurance (Auto and Health)
• Medical Payments
• Car Payments
• Car Maintenance and Repair
• Public Transportation
• Alimony
• Child Support
• Children’s Expenses (Clothing, Activities, School)
• Childcare
• Dining Out
• Entertainment
• Big-Ticket Items (Furniture, Electronics, etc.)
• Vacations
• Hobbies
• Memberships
• Charitable Donations
• Savings
• Gift Giving
• Miscellaneous
• Add 5% for Items Overlooked or Unexpected Expenses

For budgeting on a monthly basis, it is a good idea to break down these categories into sub-categories. But for purposes of getting an accurate home affordability picture, using the above numbers will put you on the right track toward responsible homeownership.