(BPT) - By now it is something of a cliche to call homeownership the American dream. But even if sitting on your own deck, looking over your picket fence and sipping lemonade doesn’t move you, homeownership is still one of the best ways to build wealth.
For many, owning a home is cheaper than renting and, in the long run, the biggest investment they will ever make. It is also a practical financial move thanks to the fact that you're likely building equity while getting a mortgage interest tax break.
So although it is perfectly fine to dream about backyard barbecues and the smell of fresh-cut grass, the path to owning your own home should also involve taking the time to do some financial sightseeing.
As a leader in creating credit scoring models, VantageScore Solutions has made it a priority to educate consumers on the important role a good credit history plays in buying a home.
Whether you’re about to set out to buy your first home or if you are getting ready to sell and buy another home, here are the basics of how credit impacts the home-buying process.
If you are like most people, you will probably need to take out a loan. If you are able to pay cash for your home instead, count yourself among the lucky few!
A huge part of taking out a loan involves your credit history and credit score. Basically, you must prove to lenders that you can be a responsible borrower and can be trusted with a mortgage of many thousands of dollars. A strong credit score may provide proof of this trustworthiness.
Different types of loans have different credit requirements. Some loans require you to have a credit score of at least 620, although it is possible (with some difficulty) to be approved for a loan with a credit score as low as 580. But getting loan approval is only part of the story.
Better credit, better rate
Home loans come in all shapes and sizes. Some are fixed interest mortgages, some have adjustable rates or longer terms and the list of variables goes on. Just like anything else, some loans are better for you than others. To get the loan that has the lowest interest rate, which right now is around 4 percent, usually requires a higher credit score. Rates can be considerably higher when you have a lower credit score, and the result is paying significantly more monthly over the life of the loan.
The reason is that a higher credit score demonstrates that you are skilled at managing debt and have a history of responsibly paying back many types of loans. Therefore, the lender is taking on less risk when lending you money. The less risk for them, the better the interest rate for you.
While there are, of course, more nuances to the process, your credit score plays an instrumental role in determining the type of loan you may qualify for. Therefore, before you go to your first open house, check your credit score to better understand the factors that typically impact your scores. Many websites provide free access to your VantageScore, which is a perfectly fine barometer to use to directionally gauge your creditworthiness. Mortgage lenders use FICO scores in their underwriting.
You can stay on top of things by subscribing to the monthly credit scoring newsletter, The Score. In The Score, you can find information on VantageScore 4.0, the fourth-generation scoring model that will be available to consumers in early 2018.
Knowing your credit history and understanding the factors that could impact your credit score will help you plan, budget and come up with a realistic wish list for your house.
(BPT) - Owning your own home comes with many advantages, including escaping rising rents and the personal and financial stability associated with homeownership. Fortunately, millions of Americans, with less than 20 percent down, have been able to buy a home sooner thanks to mortgage insurance (MI). If you don’t put down 20 percent of the mortgage cost, you will likely be required to purchase MI, which enables low-down-payment borrowers to qualify for home financing from lenders.
While homeownership has many benefits and continues to be part of the American Dream, it is not without costs. Several surveys have found that the majority of first-time homebuyers — over 80 percent according to one study — put less than 20 percent down. For these borrowers, there is usually the added expense of MI, which may give some of these borrowers pause.
But there is good news: the monthly private mortgage insurance premiums do not last forever on most conventional loans. And when private MI (PMI) cancels, homeowners will have more cash in their pockets each month — money that is available for home improvements or other goals. It is important to understand, however, that not all MI is the same, and not all MI can be canceled.
There are numerous low-down-payment mortgage options available that include MI. The two most common are: (1) home loans backed 100 percent by the government through the Federal Housing Administration (FHA) that include both an upfront and annual mortgage insurance premium (MIP); and (2) conventional loans, which are typically backed at least in part by private sources of capital, such as private MI. The key difference is that one form can be canceled (PMI) while the other (FHA) typically cannot be canceled.
An FHA loan can be obtained with a down payment as low as 3.5 percent. However, be aware that you will typically have to pay a mortgage insurance premium (MIP) of 1.75 percent of the total loan amount at closing or have it financed into the mortgage. In addition to your regular monthly mortgage payments on your FHA loan, you will also pay a fixed monthly MIP fee for the life of the loan. This means you could pay hundreds of dollars extra every month — thousands over the life of the loan — until you pay off the entirety of the loan.
If you obtain a conventional loan with PMI, you can put as little as 3 percent down. Like an FHA loan, PMI fees are generally factored into your monthly mortgage payment. However, PMI can often be canceled once you have established 20 percent equity in the home and/or the principal balance of the mortgage is scheduled to reach 78 percent of the home’s original value. This means that the rest of your mortgage payments will not include any extra fees, so that your payments go down in time, saving you money each month. What you save in the long run can then be put toward expenses like home renovations, which can further increase your home’s value.
MI is a good thing because it bridges the divide between a low down payment and mortgage approval. But not all MI is created equal. If you want to buy a home but still save in the long run, PMI might be the right option for you. Check out lowdownpaymentfacts.org to learn more.
Interested in Publishing on The Money Idea?
Send your query to the Publisher today!
Get this money content for your website with our RSS Feed below!