1st Steps to Homeownership in Today’s Environment
Welcome to 1st Steps to Homeownership in today’s environment. As COVID 19 has impacted the way we conduct business in nearly every sector, Today we will discuss how to make the dream of homeownership a reality.
My name is Doris Baker and I am the Financial Educator at Consolidated Credit.
Are you ready for home ownership?
Ask yourself this question…Am I ready for Home Ownership? Then ask:
What are some of the…..
Disadvantages of homeownership:
- Tax advantages
Steps to homeownership
In this webinar we will discuss the necessary steps to become a successful homeowner.
- Attending a HUD approved FTHB class. Our classes are offered online through EhomeAmerica due to the restrictions associated with COVID-19.
- Meeting with a HUD approved housing counselor and determining Housing Affordability
- Addressing credit issues
- Developing and maintaining a budget
- Setting goals…..which in this case would purchasing a home
It takes time
The home buying process will take time! The time it takes is generally based upon the mortgage readiness of the potential borrower. Does the borrower have stable income? Is the borrower credit worthy or are there issues to resolve? Does the borrower have funds saved towards the purchase of a home? Your housing counselor is the ideal individual and trusted professional to assist you in beginning the process.
Step to your new home
- Home Buyer Education – FTHBW
- Pre-approval before you look
- Your Team: Your Hire & Fire
- Triangle of Protection
How much house can I afford
Before the price of a property is considered it is best to know how much of a payment you can safely afford. When calculating an affordable monthly payment there are four components which must be considered. We will discuss Mortgage types a little later, First, the total gross monthly income has to be calculated. This is more than just adding up your paychecks for a month’s period. Your housing counselor will use a special method in order to properly calculate your income. Second, the counselor will calculate your housing or front end ratio which gives the affordable payment that your gross monthly income could support. Last, is the computation of your debt to income ratio (DTI) or back end ration as it is sometimes referred to.
Calculation of ratios
Housing ratio or front end ratio
30% rental; 28% conventional mortgage and 31% FHA Mortgage
Housing ratios determine affordability based on GROSS monthly income and debt load, expressed as a percentage. The qualifying ratios differ based upon loan type. For example conventional mortgages have a 28% housing or front end ratio . FHA mortgages have a 31% ratio. VA mortgages front end ratio is 41%. As an example, if a borrower has a housing payment of $1650 and gross monthly income of $6283 by dividing the housing payment by the gross monthly income it would produce a housing ratio of 26%; which qualifies for any of the loan types mentioned earlier.
Debt to income ratio or back end ratio
36% rental; 36 – 45% conventional mortgage and 46-45% FHA Mortgage; VA 41%
With the previous slide we provided detail on the housing ratio and how to calculate that percentage. Now we will take a look at the back end ratio or debt to income ratio (DTI) as it is commonly known. When a potential borrower exceeds the qualifying DTI ratio it can cause a delay towards homeownership. The DTI ratio determines if the borrower’s debt load is manageable. Every loan type has it’s own qualifying ratio for debt to income, just as with the housing ration, for example, conventional mortgages have a debt to income ratio of 36 to 45% . FHA mortgages have a 43 – 45% back end ratio or debt to income ratio. VA mortgages back end ratio is 41% which is the same as that product’s housing ratio. To compute a DTI ratio for a borrower applying for a conventional mortgage. Let’s use a gross monthly income of $5100., housing payment of $1428., plus the total of other bills from credit report which total $700.00. We would then add the $1428.00 + 700.00= $2278; then $2278/$5100.00= 45%. Thankfully this is within the guidelines of the qualifying DTI ratio for a conventional loan. If the DTI was just 1% higher this could end this borrowers application process. That is why it is advisable to visit with the housing counselor prior to running to the bank or credit union for a pre-qualification or pre-approval and avoiding a hard hit on your credit.
At this juncture you may have to start a serious debt reducing plan of action. Here is where the assistance of your housing counselor will prove to be instrumental. The counselor will be your trusted advisor to assist you in reaching your homeownership goals and provide an action plan to offer guidance as to navigate through your plan of successful budgeting and savings, along with debt reduction if applicable.
Budgeting for homeownership
Because people who can account for their money are in control of it. You can’t run a business successfully without a business plan, and you can’t successfully run your household without a budget.
Start this process by writing down your fixed monthly expenses like rent, car payments, and insurance. Then make a list of your flexible expenses like groceries, utilities, gasoline, and medical expenses. Finally, list discretionary expenses such as clothes, entertainment, etc.
Keys to successful budgeting
- Include the whole family
- Pay yourself first
- Decide what your goals are
- Pay down debt
- Include savings reserves
- Keep good records
- It’s a long term process
Plan for saving to use in emergency
Instead of using a credit card, shop with cash, debit card or check as often as possible
Pay cash for items under $10 and for eating out
Have only one credit card and plan to pay it in full each month
If you cannot control credit card spending, STOP using credit cards!
How do I create a successful budget?
- Establish your savings goals.
- Know your net monthly family income (what you take home after taxes) and base your budget on this income amount.
- Know what your expenses are by tracking fixed and changing expenses.
- Make a one-month budget (include savings remember to pay yourself first!)
- Track your expenses and income for one month to see if the amount you budgeted equals what you actually spent.
- Evaluate your spending choices and decide whether you need to increase or decrease your budget in particular areas.
- Continue to refine your budget so that the budgeted amounts and the money actually spent are more consistent over time, and you are more in control of your spending and savings.
- Develop a yearly budget customized to your family’s needs to meet your savings goals.
Create a successful budget
Budgeting is comprised of 4 simple steps: 1. So add up all your income – which is more than just your paycheck. It includes money from any part-time or freelance work, child support you receive, rent you charge, and Social Security and other income from benefits. Once you add all that up, you have your net income.:
Many of us suffer from hidden expenses. To keep track, think of your expenses in three buckets.
Fixed expenses are those you can’t easily change. If you pay rent or a mortgage, those amounts are the very definition of “fixed.” But so are car payments and insurance.
Flexible expenses are those you need but can do something about. So for instance, you need to go grocery shopping, but you can look for BOGOs, clip coupons, and use strategies for getting more food for less money. Same thing with gasoline for your car and your utility bills.
Discretionary expenses are those you can live without if you really had to. We’re talking about a movie matinee, a nice dinner out, or that fancy hair salon you like.
The total of these categories is your net expenses.
Get down to business. If you have $2,000 a month in expenses and $2,500 a month in income, then you’re “in the black” by $500. If those numbers are reversed, then you “in the red” by $500.
Do the work
If your income is greater than your expenses, congratulations! You now have the pleasant task of deciding how to best use your savings. But if your expenses outstrip your income, time to set some priorities.
You need to decide what steps you can take to either reduce your monthly expenses or increase your monthly income – or both, if you can. Let’s break that down
Manage your budget
You just learned how to start your budget, now let’s talk about maintaining it. It may help to keep a spending diary for a month or two. This means saving your receipts and writing down the items and amounts for everything you spend.
If that sounds like a chore, there are free, secure online tools to help you monitor your spending. One of the most popular is called Mint, but there are many others, sometimes offered through your bank. Check them out.
Stop spending on autopilot
Every time you put gas in the car, pay the lawn or pool service, rent a movie, or grab a soda or coffee; Make sure you don’t leave anything out; don’t forget your morning cup of coffee or your newspaper! The key is to include everything you spend money on. Look back over your check stubs or bank statement to see where you’ve been spending money.
Where does your money go?
Check out your bank’s online banking platform. Some banks have good tools to help you track where you are spending your money.
So… What’s next?
Forgo instant gratification for Your Long Term GOALS!
- Pay Yourself First!
- Strive to put at least 10% of your weekly, biweekly or monthly paycheck in the BANK!
You Can Do It!
Needs versus want
The next time you’re tempted to buy something, stop and think about the following:
- Do I really need this item?
- Is it worth all the time I spent making the money to pay for it?
- Can I use my money in a better way right now?
- Do I really need to buy the priciest item or will a lower-cost item serve me just as well?
- Can I really afford this right now?
- Will the item be on sale soon? Should I wait?
- Do I really need a name brand item, or will a store brand serve my purposes—and save me money?
- What do consumer magazines say about the item I’m considering?
- Do I know anyone who already owns this item? Do they think it was worthwhile to buy or do they regret their purchase?
DEFINITION OF CREDIT: The ability to borrow money. Credit is a privilege, not a right.
This is one of the most important things when it comes to buying a house. Without having your credit in order, you will not be qualified for anything at your bank. We have our wonderful lender here and they will explain what they are looking for, but before you go into the bank for your pre-approval, you will definitely need to get your credit in order. You’re here because you are thinking of buying a house…right?
So first things first….how is your credit? How many of you know what your credit score is right now? When was the last time that you have pulled your credit report? Because, believe me… your lender will be pulling that report and checking that score the minute you sit down across from them. So… that means you have to know what is on your report and where your score is at. We will discuss what factors affect your score.
Some people have excellent credit, others not so good, then bad or no credit/thin credit file. So if you are in the excellent/good credit category then you will obviously need to maintain that, if you are in the fair/poor category then you will need to take control and work on addressing your credit issues. If you have no credit or what is called a thin credit file, then you will need to start establishing some credit. Now you’re probably asking how if no one will extend credit to you, well you can start with a secured card and build from there.
What is on your report?
When you pull your credit report from annualcreditreport.com, you will get only your credit report and not the score. You can obtain your score from a number of different channels, but it’s more than likely that you will have to pay. You have to remember also that before you focus on what your score is, you are going to want to go over your report with a fine-tooth comb because the information on your report directly affects your score. There are a few credit card companies that offer you a free score with your account.
- Personal Information: This is compiled from the credit applications that you have filled out and normally includes name, current & recent addresses, Social Security number, date of birth and current and previous employers
- Credit Scoring Results & Summary: This section contains the summary of all of the factors that make up your credit score (called Reason Coded). This shows the major contributing issues that will help explain to the consumer why their score may be less than perfect.
- Trade Lines & Derogatory Accounts: The bulk of your credit report consists of details about credit accounts that were opened in your name or that list you as an authorized user. The account details, which are supplied by the creditor, include the date the account was opened, the credit limit or the amount of the loan, the payment terms, the balance and a history that show whether or not you’ve paid the account on time. Closed or inactive accounts, depending on the manner in which they were paid , stay on the report for 7 to 10 years from the date of their last activity and sometimes indefinitely.
- Inquiries: The three credit bureaus record an inquiry whenever your credit report is generated for another party, such as a lender, service provider etc. Inquiries remain on your report for up to 2 years, but only impact your score for 1 year.
- Public Records: In this section you will find public records obtained from a government source, such as a court of law and these would include liens, bankruptcies and overdue child support. Most public records stay on the credit report for 7 years, except bankruptcies, which stay on for up to 10 years from the date of dismissal/discharge.
As I stated a couple of minutes ago, you can and should dispute items that are not yours or that are inaccurate. You can either write to them or you can do the dispute online. If you are going to send a letter, you need to make sure that you mail them certified return receipt. We are in the technology age and doing everything online is easier and more convenient. Each credit bureau has their own website and on each site has the option for you to dispute. As you can see on the picture on the screen, it says get started in 3 easy steps and they are easy. Once you have your report and you have the accounts you want to dispute, the system will walk you through it.
Basically, a credit score is a number that summarizes a consumer’s credit risk and can change due to factors. Those factors are based on the things you do and your behaviors.
Now the whole point of this webinar is ‘how to increase your credit score.’ The first and most obvious thing to do is CHANGE. I just told all of you that your credit score is a 3 digit number that changes due to certain factors and that those factors are based on the things that you do and your behavior. So with that being said, the first thing to do would be to change those behaviors.
I know that that is probably easier said than done, but as important as credit is to our lives, then change is what we will have to do. So if you know that you used to use your credit cards almost to the limit, then that would have to be something that you need to change. We’re going to get into what factors into your score in more detail in the next slide and one of those things is high balances close to the limit. Going back to bad credit card spending…if you realize that you can’t handle it, freeze your cards in a block of ice in the freezer so that you won’t be tempted, and if you have a balance you can now work on paying that off.
What makes your credit score?
As you can see the largest chunk of what makes up your score is your payment history, but you also have to pay attention to the 30%, which is amounts owed and that 10% of types of credit in use. That 40% is also VERY important in impacting your credit score. That represents how a person uses their credit.
In the 30% – Amounts owed, they want to know/see how much is too much.
- How much is owed as a percentage of the total available credit limit
- On each account
- In total amount owed compared to total available credit – by type of credit
- Number of accounts with balances
Types of credit, that 10% – Is there a healthy mix of revolving and installment debt?
- # of national bank credit cards (banks)
- # of installment debts (car loans) compared to revolving debts (retail cards)
Now you have to remember that a FICO score takes all of these factors into consideration, not just one or two. The importance of any factors depends on the overall information in the consumers credit profile. The levels of importance shown in the diagram are for the general population and will have different effects on different credit profiles.
What’s not included in your credit score:
- Race, color, religion, national origin, sex, and marital status
- Salary, occupation or employer
- Where you live
Build positive new credit references
The best thing you can do to rebuild your credit is use credit carefully and always pay your bills on time. Consumers who are proactive about rebuilding their credit after problems have occurred can see significant improvement in as little as a year or two! Here are some tips:
- Lenders will want to see at least a couple of recent credit accounts paid on time. If you still have open accounts, use them periodically for things you would buy anyway, then make sure to pay the bill well before the due date.
- Carrying balances and paying interest is not necessary for rebuilding good credit.
- If you don’t currently have any credit cards, it may be a good idea to get one. Avoid “guaranteed approval credit cards” that cost a couple of hundred dollars in fees. A better bet is a legitimate “secured card” where you place a security deposit with the lender in exchange for a major credit card with a modest credit limit. Shop for one at www.bankrate.com, myfico.com or creditcards.com
- Never pay a bill late.
Secured credit cards
Now if you were to go to MyFico.com you would see that they discuss in detail how secured cards can help you to establish or re-establish good credit. So a secured credit card is a card that has it’s credit limit ‘secured’ by a deposit that you make into a special savings account. Your available limit is based on how large a deposit that you make. Anywhere from 300 up to 2000, some may be higher. You would have to find out from the lender, because if you can have a higher limit then I would hope that you are paying your other bills as well.
Remember that 35% from earlier. The money that you deposit into your ‘savings account’ for your credit limit is there just in case you happen to default on your payments. Just remember that you still have to make your payments every month when you use the card. If you are looking for a secured card, the first place to start would be your bank. Ask if they have them and also ask if they report to all three credit bureaus. And as I said before you can check online at sites like creditcards.com or even nerdwallet.com to see who else offers secured cards.
Credit builder loans
A credit builder loan is a small loan made by some credit unions and banks in order to help you build credit. You can check your local credit unions or banks to see who may offer these services. In most cases you need to have and account with them for a certain amount of time with no overdrafts etc.
Not all credit builder loans are the same……in some cases it’s not an actual loan where you get the money. It may be an account through the bank or credit union where you make monthly payments towards and at the end of your term they will issue you a unsecured credit card for the amount. It could anywhere from $300 to $600 depending on the institution. In other cases you get the money from the bank and you make the monthly payments until payed off. This is also a great way to build or rebuild by showing on time monthly payments and a mix of credit if you happen to have credit or store cards.
Altnerative credit scoring
Alternative credit scoring is a great option for those with limited/no credit or bad credit. This is a way to help build non traditional credit. This report is not associated with the three credit bureaus, but it is being used more widely now for things that your traditional credit is pulled for. Many lenders are using for deciding factors before issuing credit. What can be added to these files are:
- Car Insurance
- Cell Phone
- Gym Memberships
- Monthly Subscriptions – Netflix, Hulu etc.
PRBC is a an alternative credit score site.