Last fall, a Mom made an appointment with me to meet with her children about buying a home. It was so cool. First off, she was very proud of her 18 and 20 year olds. Both were hard working individuals…being responsible young adults. Mom thought they should look at buying a house together instead of renting. It was a very interesting consultatation. I was happy to meet with this family to help make sure her young adults are on the right track of becoming home owners and mortgage payers.
Her kids are definately on the right track. However, they were missing a few components that are needed if you’re wanting the best rate and program available. Being young (I can call them that now that I’m 40–TWICE their age), they were shy on credit history and employment history…and a down payment! Since we were really working on “preparing to become homeowners”, I suggested they do the following:
- Establish or maintain 3 credit card/installment accounts with small limits never using no more than 20% of the available balance. Better yet, just use the cards to pay for a tank of gas, then pay it off. Alternative credit (rent, utilities, cell phones) may work, depending on the loan, too. A 24 month history is ideal.
- If you all ready have more than 3 accounts, if any are above 50% of their available credit line, pay them down to at least 50% and then, shoot for 30%. You can check out your credit for free on line. (You just need to do one bureau…save the other two reports for four and then eight months from now).
- Practice making a mortgage payment. Once I reviewed what their mortgage payment could be, I recommended they “practice” paying the difference between the mortgage payment and their rent into a savings account they don’t touch. How comfortable is that payment? What are you having to sacrafice to make it and is it worth it to you?
- Save enough money (from your “practice mortgage payments) until you have enough for 3% down payment/closing costs (if you’re going FHA or using a program like the Fannie Mae Flex) and have 3 months of mortgage payments left over in the bank after closing for your reserves…even if the lender does not require it.
- Think twice before jumping around with your employment. Lenders like to see a minimum two year employment history without major gaps of employment. College, if it applies towards your current employment, can count towards your employment history. Salaried (W2) employment is much easier to document than commissioned, bonuses…etc. if you’re newly employed. If you’re self employed and you want the best rate, lenders will require 2 years complete tax returns and will average your income for the past two years. So if you’re starting off, those first few years can be tough on the income department.
- Don’t buy that hot car! Not only does having a new debt at 100% of the loan limit drastically ding your credit score–the payments just might disqualify you for any home you would consider buying.
- Don’t use your good credit to co-sign for a car or anything. It’s great being a good buddy to your friends. However, this goes on YOUR credit and you are responsible if they flake out. The payment is counted against you unless you can show 12 months cancelled checks from your friend you co-signed for and there may not be any late payments on the account.
- Be prepared to buy a “starter home” and not your “dream home“. The great thing about starter homes is that as long as you take care of it, there will always be someone else who needs to buy one!
I really look forward to meeting with these siblings again. I sure, from what I watched with that family, they’ll be ready to buy a home and in a much better position as “prepared home buyers”. At that meeting, they did have options:
- Subprime financing
- FHA with parents co-signing (Mom was not for that, and I don’t blame her).
- Wait and work on improving their finances, credit, and employment.
Personally, I’m glad they selected waiting and preparing to buy a home when they have their “house in order”. It all ready shows their disipline and responsibility. Mom, you did