The Buying Process
Job History, Credit, and Savings
Buying a home is an exciting process. But it is also a serious commitment, both in terms of cost and maintenance, and it requires a lot of thought. There are some important factors you should consider before you embark on the path to becoming a homeowner that will help you to determine if now is the right time to buy.
Four factors to consider when thinking about buying a home:
- How steady is your job history?
When you buy a house you will probably need to get a mortgage loan. Having a steady job history will help to convince a lender that you will be able to pay back the loan. Generally, if you have held each of the jobs you've had for two years or more, the mortgage lender will consider your job history steady.
If you have changed jobs frequently in the last two years or have unexplained gaps in your work history that you cannot explain, then you probably want to wait to buy a home until you can present a more stable employment pattern. Job changes for a better salary, to attend school or to take care of children are examples of acceptable explanations for an unsteady job history.
- How is your credit rating?
Another measure of your readiness to buy a home is how reliable you are in paying your bills each month. Because you will have to make mortgage payments every month, lenders judge your ability to pay back their loans by examining how you have paid your bills in the past. In order to gauge your consistency in paying bills, a lender will order a credit report from an independent credit reporting company that will show the history of any debts you have accumulated over the years and how well you have managed them.
Credit reports show a great deal of information, and you should be prepared to explain any type of problems with your history. Problematic issues you may need to explain include unpaid credit card balances, a mortgage that has been foreclosed upon, a bankruptcy or late payments on bills.
If you would like to see your credit history before you talk to a lender, you can order a personal credit report online, generally for a fee of $10 or less, from a number of different websites. Among them are Equifax, TransUnion and Experian. The Fair Credit Reporting Act entitles you to a free credit report once per year if you meet certain requirements. If you have missed or have had a few late payments in the past that you can explain, you should still be able to get a mortgage. However, if your report shows numerous outstanding debts now or in the past, you should probably consider waiting to buy a home until you have had a chance to improve your credit.
If you have a poor credit history and would like counseling about how to improve your rating, a good place to start is the National Foundation for Credit Counseling at (800) 284-1722. This organization can provide you with contacts to local credit counselors who can give you online counseling, though there is usually a fee associated with such services. Throughout this section and others you will also find information about non-profit housing agencies, which specialize in helping prospective homebuyers through the homebuying process and also offer credit counseling. Contact Neighborhood Housing Services (NHS) or the New York City Partnership for help.
- Do you have a credit history?
If you have never used a credit card or taken out a loan from a financial institution, a credit reporting company may not be able to issue a credit report on you. Even so, it may be possible for you to present your credit history to a lender yourself. Often, lenders will accept proof such as canceled rent checks or copies of phone bills that show you have no outstanding balance. If you have a history of paying your bills on time, you should still be able to qualify for a mortgage. If you do not usually pay your bills on time and cannot obtain a credit report, you should work with a credit counseling agency to help you improve your payment record and establish a good credit history.
- Have you saved any money for a down payment and closing costs?
One important part of being approved for a mortgage is having cash available for a down payment and closing costs. These costs will vary according to the type of home you wish to purchase and the particular mortgage you obtain. Generally, a down payment is 10 to 20 percent of the purchase price of the home, though some programs allow for down payments as low as 5 percent or even no down payment. Closing costs, such as your attorney's fee, loan processing fees, mortgage points and engineering report fees, can add up to about 5 percent of the cost of your mortgage. Even though there are programs available that can help first-time buyers cover these costs, it is important that you have some money saved for a down payment and closing costs before you get a mortgage. This will show the lender that you are serious about the purchase, and it will help to bring down the costs of financing the purchase.
Often, there are a variety of sources homebuyers can use to use to for a down payment. Though savings are the most common source, some buyers use money they have received in the form of a gift from a relative or friend. Others are able to use money saved through savings bonds or individual retirement accounts (from IRAs, up to $10,000). When using sources other than your own personal savings, be sure to check with an accountant about the possible tax implications of doing so. A First Home Club is also a great way to save for a down payment-read more in the Understanding Mortgages section.
If you do not have any money saved that can be used for a down payment or closing costs, you should probably wait to buy a home until you have been able to save some money. It may be a good time to open a savings account that you contribute to regularly.
HPD's Guide to Homeownership