I can’t forget the day that Susan and I bought our dream home. We’d been living in a tiny apartment for so long that at times we thought that’s where we’d always be. Yet, through hard work and persistence we paid off our debts, all of them, and finally saved enough for a deposit to take a mortgage.
Buying your own place is the American dream. Sadly, it’s not as affordable as it once was but the truth is that anyone can still own their own home. They might need to make a few sacrifices, but they will be worth it in the long run.
We’ve worked out that there are basically only a few steps required to own your dream home and while the steps we took might not be exactly the same as yours; they weren’t that different either.
Step 1: Assess Your Income
Remember the housing crash of 2008? Do you know what happened? People borrowed too much money to buy their homes. Criminally, the banks helped them out.
There was a point that you could just walk into the bank, tell them a made-up figure for your earnings and they’d lend you some obscene multiple of that number.
It was easy. After all, interest rates were low. People could afford a mortgage that stretched them.
Then mortgage rates weren’t cheap anymore and the house of cards blew over in a heartbeat.
It is better to buy somewhere smaller, just like Susan and I did, and cheaper in the beginning. Get a feel for the way your repayments rise and fall with interest rates. Even a few percentage points can really hurt.
Work out how exactly much you earn and you should aim to borrow no more than 3.5 times that amount as a mortgage. Trust us, this will help you avoid any painful hurdles in the future.
Step 2: Time To Check Your Credit Score
Look, there’s no need to be afraid of this step. Many people are, though. Checking your credit score lets you face the reality early in the process and take steps to either address your credit or seek a lender with a sympathetic ear if necessary.
If you’ve never done this before, this is how it works. The most common credit scoring system in the United States is the FICO system.
Your credit score is generated based on reports of your financial activity by both lenders and anyone else that you pay on a regular basis (for example the electricity or cable company). They will file reports if you have missed a payment or if you are in arrears. They may also, though rarely, leave a note when you have shown yourself to be an excellent credit user (all payments made on time, etc.)
The FICO system uses a scoring range from between 300 and 850. The higher your score is, the more creditworthy you are judged to be.
You can also work out your “Credit Quality” from this score. That is the likelihood that you will get finance from the easiest sources.
Credit Quality Levels
- <630 is a “poor credit” rating
- 630-690 is an “average-fair” rating
- 690-720 is a “good” rating
- >720 is an “excellent” rating
It’s worth noting that because a mortgage is secured on a property, you do not need an “excellent” score to find a lender. In fact, it’s even possible to get a mortgage with “poor” credit quality.
What Goes Into A FICO Score?
You can influence a FICO score and though it may take a little time, it might be worth it if your score lays on a border between credit grades.
- Payment History is worth 35% of your score. If you make your payments on time, every time, you will ace this section. Conversely each time you are late with a payment, you will reduce this score.
- Debt burden is worth another 30% of your score. This is basically a measure of how much debt you have already compared to your income. Obviously, if you have very little debt, the banks are going to want to lend to you. On the other hand, if you are already spending 80% of your salary on loan repayments, they’re going to be more reluctant.
- Length of credit history is worth 15% of the score. The longer your record, the more accurate is say the banks. So, a 20-year clean record is worth more than 2-years. No surprises there.
- Types of credit is worth only 10% of the score. This helps lenders assess some of the risks associated with your debt. Credit card debt, for example, is much more expensive to service than a personal loan. Therefore, you will spend more each month paying off a credit card and they will lend you less additional cash because of it.
- Recent credit searches make up the final 10% of the score. If other lenders have searched your credit score, your credit record will reflect that. The more searches, the lower the score. Why? Because it looks like you’ve been rejected for credit, even if you haven’t. Thus, it’s better to apply at only 1 or 2 mortgage lenders than many lenders.
How To Find Out Your Credit Score
There is some good news here. You don’t have to go to a bank and let them look at your credit score without any information yourself.
You can get a free credit score report from our partner Credit Sesame. This will let you know the quality level of your credit. For those in the good and excellent categories – you can then go straight to the part where you choose your home and try to arrange a mortgage. For those in the average or poor categories. You need to take some additional actions first.
Step 3: For Those With Average Or Lower Credit Ratings – Bad Credit Survival School
Bad credit sucks in America. It means that lenders are going to charge you more interest, which hardly helps your ability to pay them back, and they’re going to be reluctant to lend money to you at all in some cases.
So, if your report comes back with average or lower credit, here’s my advice. Don’t panic!
Seriously, don’t panic. You can take action to address lenders concerns, to change your credit score and even to change your category completely. The better your score, the better your mortgage deal.
That means you want to try a copy of the Bad Credit Survival Guide which can really help you cut through the haze and get clarity about what you need to do.
Step 4: Choose That Dream Home
Some sites are going to tell you that you should have a mortgage offer in hand before you go shopping for your home. To that I say, “baloney!”
Remember back in Step 2 we said that credit searches damage your credit? Well, this is even true when the lender who has approved your mortgage does another search. Why does this matter?
Imagine that your lender says, “OK, you can borrow $250,000” and then you need $260,000. This should be a fairly trivial correction but if the lender’s credit search dropped you down a credit grade? They’re going to say “no.”
It’s better to ask for your first mortgage approval when you’re ready to put in your first offer. So, go find that dream home and then get moving with the next step in our process.
Step 5: Don’t Forget Down Payment Assistance Programs
Before you stump up the down payment on your home, you want to see if you can get a little help with that. After all, wouldn’t it be better if the money you have stays in your pocket?
Also, it’s worth noting that these programs will often help people with poor credit ratings too and that can help stretch your down payment and make you a better lending risk.
More than 70% of Americans are unaware that there are down payment assistance programs. More worryingly, they’re normally the 70% who really need that money. So, please, do yourself a favor and see if you qualify.
Step 6: Go To The Bank Or If Your Credit Score Is Still Not Great Get Access To A Special Home Loan Program
If you have good or excellent credit, talk to a mortgage broker and get their advice on the best mortgage for you. They’ll give you the cheapest deals and the best terms. Don’t be afraid to talk to more than one broker before you apply for anything. They get paid on commission when a sale goes through, so compare and contrast offers.
This is better than going to your bank because your bank will usually only have access to its own financial products. That might be the best option, but you won’t know without a little comparison shopping.
Interest rates add a bunch of money to your costs – don’t commit until you have options on the table.
However, if your credit score isn’t looking great, then it’s time to talk to someone about low income and less the perfect credit home loan programs. These are designed to give you a better deal than you might typically find through a standard credit broker.
Step 7: Investigate Down Payment Grants
If you find that you can get the credit but need more of a down payment than you can raise, don’t worry too much.
You might not believe it but there are down payment grants available to some people. That is a grant not a loan or other scheme. So, once you have the money, you can use it without worrying.
Step 8: Close The Deal
Hopefully, by now, you have the down payment paid, you have a mortgage arranged and your seller has accepted your offer on your dream home. If that’s the case, it’s time to close the deal and move in!
This is your first step on the ladder to a brighter future in which you own your home and can leave your children a legacy one day. It’s a testament to your hard work and financial skill. Enjoy it.
But what happens if you can’t close the deal because you couldn’t quite get the down payment or the mortgage? Well, there is one last way to own a home and it’s one I think is brilliant!
Step 9: Consider Rent To Own
Rent to own is a relatively new form of financing. Instead of getting a mortgage from the bank, you get an agreement from the property owner to sell you the house and then to collect the cost of the property in rental payments.
It can work out a little more expensive than a mortgage and you need to be careful about making sure you can afford the repayments but it’s a great way to get your foot on the property ladder when no-one else is going to let you on.
The Simple 9-Step Process To Buying Your Own Home
You see, buying your dream home doesn’t have to be complicated. It doesn’t even matter too much what your financial situation is, this is America and there’s a solution with your name on it. It’s the American Dream for someone to own their own home and care for their family in it.
In 9 simple steps, you can join me, Susan and millions of others in owning your own home, I almost guarantee it. This is one of the biggest steps anyone can take when pursuing their own financial freedom and eventual success. I was so proud the day I got my house keys and you will be too.