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For First-Time Buyers A Practical Guide for Saving to Purchase Your First Home Home
The easiest way to build assets for the purchase of a home is to own a home already appreciating in value. Anyone who has owned a home in the Northern Virginia region over the past few years has built up substantial equity, giving them a nice "savings pool" as a down payment for the purchase of the next home. If you are a potential homebuyer with considerable equity in your current residence, you can fast forward to Visualizing Your New Home. If you are a first-time buyer with minimal assets and various debts, however, read on.
Often, first-time buyers face the challenge of accumulating assets and minimizing their liabilities as they strive to get into the home market. While your current financial situation is central to your plan for purchasing a home, you should not become overly concerned. You may be earning an excellent income, but feel it´s not enough to save for a down payment. Or you may be struggling to get by and don´t know where to start. Regardless of your circumstances, you can start the process of saving for a home. You don´t need to save 20 percent or even 10 percent of the purchase price before you start thinking about buying a home. Today, first-time buyers are able to buy homes (at reasonable interest rates) with as little as 3 to 5 percent down. In some cases, no down payment is required. You may only need the closing costs of the loan to purchase your first home. But you will need some cash.
Where do you start if you have no assets and, indeed, you are in debt? It´s simple. You create a practical, step-by-step approach based on your financial history and stay with your plan until you realize your goal. As with all things in life, perseverance will pay off.
The key to setting financial goals is to be specific. Effective goals need to be SMART: Specific, Measurable, Action-oriented, Realistic and Time-limited.
Be Specific: Set a specific goal. You can say, "I don´t want to live in my apartment anymore." But what does that really mean? Do you want to buy a house? How much do you want to spend? Will a condo or townhouse fit your needs?
Make it Measurable: Simply saying that you don´t want to live in your apartment -- or move to another apartment -- is not good enough. If you say, "I will find a home in a price range I can afford within six months," then you will have something by which to measure your success. You have to start by creating the measurement.
Be Action-oriented: The goal is not static: it involves doing something. Do not use the words "going to," as in "I´m going to be rich." Without taking action, you are always "going" somewhere -- but you never arrive.
Be Realistic: Talk to a Realtor or a loan officer to determine what your near-term financial goals will have to be in order to qualify for a home loan.
Be Time-limited: A goal is nothing more than a dream with a deadline attached.
Once you have set your goal, you´ll need to start outlining how you will achieve it. But before you do, two other important lessons will help you along the way. First, in order to reach a goal, it´s best to have other people involved. Share with other people. Do not work on it alone; have other people value your goal, too. The people you work with, or your spouse and friends, can help you focus on making your goal specific and measurable. They can question you about being realistic and having a deadline, and they will support you in getting what you want. You can also use the experience of others. You may save yourself some painful lumps if you learn what worked, or didn´t work, for others. (Try to determine how similar your situation is to the frame of reference you´re using.)
Second, track your results. Take the time to write down the small steps taken toward your goal in a calendar or appointment book. If you set a realistic goal and track your progress, you can modify or evaluate your progress continually until you eventually meet your goal!
Tips on Meeting Your Goals
Know where your money is going, and address this honestly and meticulously. You cannot realize any goal without first finding out your starting point. You may not know all the numbers, so "ballpark" them and go to the next step to find out how to get more concrete answers.
Types of Monthly Expenses: Learn to understand the categories of your various types of monthly expenses -- discretionary, variable and fixed. Discretionary expenses are the ones over which you have complete control. They may include going to the movies, meals out, personal trainers, vacations, clothing or lottery tickets, for example. Variable expenses show up every month. The only difference is the amount of the expense. As an example, you´ll have a food bill every month, but it could be higher or lower from one month to the next based on what you buy. Your utility bills, such as telephone, gas and electric, will come in month after month, but they may be higher or lower depending on your usage or the season. Finally, fixed expenses come in every month and do not change. Rent or mortgage payments, car payments, and insurance premiums fall into this category. (It could also include the minimum payment on credit cards, but even these can be changed.) Note, too, that while rent is a fixed expense, you could consider getting a roommate for a period of time as a means of building up your savings and cutting your expenses.
Getting Out of Debt: If reorganizing or consolidating your debts or selling assets isn´t enough to get your financial house in order, you may need to consult a financial planner or a creditassistance organization such as the Consumer Credit Counseling Service.
Millions of Americans have too much credit card debt, which limits their buying power and their ability to save for a down payment. If you fall into this category, let me assure you that saving is possible. Let´s start by looking at the different levels of credit card debt.
Level one credit card debt is debt that you pay off monthly. This would include any credit card account that carries no balance into the next month. Level twocredit card debt occurs when you carry debt from month to month, but you regularly make payments above the minimum. At level threecredit card debt, you are only able to make minimum payments on your credit cards. And at level four, you cannot make those minimum payments.
Now let´s say that you are trying to save for a home and your credit card debt is mostly at level three (that is, you can just make your minimum payments). You still have options. You may want to consider a consolidation loan, look around for a low-interest credit card, or call your current creditors and ask them to reduce your interest rates. If they agree to do so, make sure that you do not reduce your payments just because they´ve lowered the interest rates. Maintain your payment level and you´ll eliminate the debt sooner.
What if you´re at level four and you can´t even make the minimum payments? A book by Jerrold Mundis called How to Get Out of Debt, Stay Out of Debt, and Live Prosperously may be useful to you. Regardless of whether you´re at level two, three or four, do not add any new debt while paying off your current or old debt.
If you pay off your debt the "quick and easy" way, that debt invariably returns. People who borrow against the equity in their home or refinance it, receive an inheritance or tax refund, win the lottery, get a gift from parents or others, declare bankruptcy or get a consolidation loan to deal with what they owe have learned no new skills to pay off debt. Such maneuvers do not produce the necessary skills. Rather, people learn to use similar tactics to get themselves out of debt the next time! Creating financial independence comes from learning to handle money effectively.
Pay Yourself First: Pay yourself before you pay the telephone bill or pay for groceries, rent or transportation expenses. If you want to feel that you are moving toward your goal, you have to see the results in the bank -- that means paying yourself first. After you´ve paid yourself, then pay your expenses. These will include your credit card or other debts, but when they´re paid off you can dramatically increase the amount you pay yourself.
The average person spends first and then finds that about 10 to 20 percent of his or her income disappears. If you pay yourself first, all you will lose out on spending is that 10 to 20 percent that would have been lost regardless. Even if all you can start with is setting aside 10 percent of your income, then you are at least on your way to that down payment. Remember, any allocation is better than none at all.
Once you start saving -- and, more important, once you have a savings plan -- you will know how much money you can afford to put down on a house. Maybe it is more than you think. And there are loan programs out there for almost anyone. Now is the time to make the commitment to saving so that you can soon make the commitment to buying a home!
Know Your Credit Score!
Obviously, maintaining good credit is essential. You may be unaware of how many organizations access and use your credit information to make decisions that affect you. In addition to those you would expect to check on you -- such as a credit card issuer, department store, mortgage lender or car dealer -- your credit may also be checked by a new employer, life or auto insurance company, or prospective landlord. Issuers of homeowner´s insurance also check credit ratings and may refuse to issue a new policy or renew your existing policy. You can understand, then, how others see your good credit as a reflection of who you are as a person.
One of the primary methods the mortgage lending industry uses to assess your credit worthiness is your FICO score. (FICO stands for Fair Isaac Corporation, which developed and keeps a classified scoring system.) A FICO score is a numeric score that summarizes your credit history and is maintained by credit reporting companies. FICO uses different models and adjusts the score depending on a variety of factors, such as your amount of credit, any bankruptcy you have had, how many credit cards you have with no balance or how many credit cards you have with high balances. FICO is a third party that provides these scores to a potential lender. The lender does not calculate the score but uses it to establish a borrower´s creditworthiness. You can get more information from their website at www.fairisaac.com.
A score in the range of 660-700 is good and would allow the potential borrower to qualify for a loan ranked as A, which would have the lowest interest rates and most favorable terms. If a mortgage rate of 6.5 percent were the best available rate at that time, a person with an A score would qualify for that rate. If the score were around 620-650, that person would qualify for B- or a B+ loan, and the interest rate would be higher. With a score of 580-620, a borrower would fall in the C range and find that the interest rate offered would be significantly higher than the best rates. These loans are "subprime"; only certain mortgage companies specialize in them. Lower scores mean higher fees, too. Obviously, the opposite is also true -- the higher your score, the better the terms of the mortgage and the easier it will be to qualify. (The "scoring system" actually goes to 850.)
Regardless of your situation, you should get a copy of your credit report every year to make sure that all of the information is correct. It is important to note that your FICO score is affected each time there is an inquiry from a lender checking on your credit worthiness. If you get a copy of your credit report, please use that exact report as you search for a lender. Do not allow every lender to search your credit worthiness by running a credit report because if this happens, your score gets lowered. We discuss this issue in How to Find a Good Lender.
You are entitled to one free credit report a year from the three major credit bureaus -- Equifax, Experian and Trans Union:
• Equifax PO Box 105873 Atlanta, GA 30348 800-685-1111
• Experian PO Box 2104 Allen, TX 75013 888-682-7654
• Trans Union PO Box 390 Springfield, PA 19064 800-888-4213
In addition, because of a recent amendment to the federal Fair Credit Reporting Act (FCRA), you can get a free credit report annually through the Annual Credit Report Request Service. Contact the service at Central Credit Report Data Bank, www.annualcreditreport.com.