Can you even afford a house right now?

Assuming you can afford a house, how much can you afford? These are important questions that many people don't research, focusing on what their mortgage payments will be, ignoring other monthly payments. This oversight puts many people down the wrong path to bad debt. For example, your monthly expenditures will be more than just the home loan, there will also be homeowners insurance, flood insurance, mortgage insurance, utilities, garbage, cable TV, groceries, unexpected auto repairs, lunch money, and many other obligations. They must all be accounted for in your budget spreadsheet. What's that? You don't have one? Are you nuts?

Start planning 6 Months before you apply for a home mortgage

You should start planning 6 months before you expect to buy. You need this time to clean up your credit report, and get funds that are contributed by family into your account long before the lenders go looking for it. Most lenders do not allow money given to you by family members to count toward a down payment, so you have to bury it early in your account. You can get your credit report from sites like Experian, True Credit or Equifax. If you plan on buying in June and July like many families, you need to start planning your finances in January. You should get your credit report at least once every year to verify it for accuracy, and make certain your credit score is up to par. If your credit is clean and you have your down payment ready to go, you won't need as much time to plan. Buying a home is a very serious investment that must work right on the first try with no mistakes. Patience and planning wins this game, do not be impulsive. Make sure your credit is clean, and then apply for a home mortgage on the web at online mortgage sites like Quicken Loans. Be sure to read our chapter All About Mortgages, Home Loans & Avoiding Scams.

Why is your credit score so important?

Everyone has a credit score calculated at the time your credit report is requested. It's based on over 100 different proprietary variables and algorithms developed by Fair Isaac (FICO). The range is 300 to 850. You can get your credit score from Experian, True Credit or Equifax. Most lenders consider people above 650 to be prime borrowers, meaning they will most likely be approved at favorable rates. According to my credit report from Equifax, 71% of the people with a credit score from 500-550 will default on their credit. Another 51% of buyers with a credit score from 550-600 will default on their credit. That's pretty scary. This is why lenders run your credit report and head straight for your FICO Beacon score.

What A Low Credit Score Means To You

Your credit score is the single most important factor determining whether you'll get approved for a mortgage, car loan, refinance loan, or credit cards, and what your APR will be. If your score is low, you'll pay very high interest rates, up to 23%. Most people are also unaware that their credit score also affects how much you'll pay for car insurance rates too. Many insurance companies run a credit check on you before selling you insurance.

The most important factors affecting your credit score

The most important factor affecting your score is the length of your credit history. This is why college students have low scores, while us 30 somethings have high scores. If you have too many accounts open, this can drag down your credit score also. Opening up all those department store credit card accounts and excessive financing accounts points you in the wrong direction, so your beacon score takes a hit. My credit score would have been higher if I did not have the excess luggage of a department store credit card, an appliance store credit card, and 2 different computer store finance cards that I no longer used. What's worse, one computer store is defunct, yet my account still appeared on my credit report as open. I called all 4 sources and closed these accounts since I never use them. It takes about 30 days for it to appear on your credit report. Once you successfully dispute and remove negative items from your credit report, wait 30-60 days and order another copy of your credit report to verify, and you should also see a higher score.

The house you can afford depends on your current income and debt obligations. You must be able to pay your mortgage, satisfy all your current debt, and still have money leftover each month to put in the bank. For many people this will actually put them in a lower priced house than they anticipated. Don't play the game of expecting to get raises every year, thinking that eventually you'll be able to afford the higher payments, most raises are 4% to 7%. In bad times you won't get a raise, while inflation overtakes you. What can happen is you'll get laid off and you won't be able to afford your monthly bills. If you don't have a budget worked out on a spreadsheet, you have a serious debt problem waiting to happen. If you cannot recite from memory all the creditors you owe and how much you owe them, you have a credit problem.

When you get your credit report, look it over good for errors, and incorrect previous addresses, as well as old revolving credit accounts that you no longer use or have gone out of business. The beauty of your instant online sites like Experian, True Credit or Equifax is, with your credit score you have the ability to dispute it online after your credit report appears. You can check off the accounts that should be closed and dispute any item on there, then submit, and they report back to you within 30 days per federal law.

Tips for obtaining a high credit score

I'm not just blowing steam, I'm living proof of what works. Don't open a lot of credit accounts. All you really need is a couple of credit cards and nothing else. Stay away from department store cards almost all of which are 21% APR, you already have other lower APR credit cards. The stores entice you with free gifts or 10-20% off your purchase if you sign up, but don't fall for that trick. Once you sign up they have you and you'll be paying 21% APR, because few people pay their department store bills in full. Don't sign up thinking "I'll just get the free gifts or discounts then close the card." Most people don't end up closing it.

If you finance a car, a computer, or furniture, make sure the account is marked CLOSED on your credit report when it's paid off. You don't want any excess luggage lingering around on your report. Pay all your bills on time, and always pay more than the minimum or it will take you up to 10 years to pay it off. Try to keep your balances low, especially when you are applying new for credit. Don't apply for new credit within 6 months after you move to a new address or accept a new job, as you may be rejected. Many creditors will turn you down if they can't verify your address in the phone book or if you have not been at the same job for 6 months. Also, don't apply for new credit if you have recently been approved for credit somewhere else. Stick with no more than two credit cards that you opened in college, and don't open new credit cards for no reason. Pay them on time, and keep them in good standing. Accounts that have been in good standing for your entire credit history help bring your beacon score up.

What if you find an error or a black mark on your credit report?

Why is my bankruptcy from 5 years ago still on my credit report?
If you have a bankruptcy, it stays on your credit report for 10 years. Other bad marks like credit card defaults will remain on your report for 7 years. If these are legitimate, then neither you, nor me, or even God can have them removed. But if you find mistakes you can contest them, and most people are unaware that federal law requires credit bureaus to give you 100 words of your choosing to appear on your credit report, for example, to refute any bad marks on your credit report. Also, you can contest any black mark on your credit report, and by law, the credit bureaus have 30 days to respond or they must remove the bad mark. This is covered in much better detail on our other site DebtWizards.com.