Preparing for Homeownership - Step Three

Research What It Takes To Be A Homeowner

You may have decided that you would like to own a home, but are you really prepared to be a homeowner? If your answers to the questions presented in Steps One and Two have convinced you that you are ready to purchase a home, you must now begin the most intensive phase of preparation: researching what you will need to be eligible for homeownership. This section addresses what you should know about homeownership in advance.

DETERMINING MORTGAGE ELIGIBILITY

In order to be able to buy a home, you must either have money saved, or you must be able to borrow money to purchase your house. It is much easier to get a loan for 95 to 97 percent of the value of your house than it was ten years ago. In order to do this, however, you must be “mortgage eligible.” Being “mortgage eligible” means that you qualify to borrow money to purchase a house. How you answer the following questions will help you determine whether or not you are mortgage eligible:

DO YOU HAVE A STEADY INCOME?
“Steady income” means that you can reasonably count on a source of documented money. These include items such as:

• Salary or wage from a job
• Social security benefits
• Survivor benefits for children under 18
• Money from a trust account
• Documented child support
• Net profits from a business, self-employment

Income does not include reimbursable items such as:

• Food stamps
• AFDC
• Unemployment benefits
• Mileage checks
• Cash labor (undocumented)

Following are additional questions to consider in determining if you have a steady income:

• Do you receive permanent benefits from social security or disability?
• What income did you make in the past?
• Has your income changed significantly over the last two years?
• Will your income change significantly over the next two years?
• Is your income documented, or in cash?

DO YOU HAVE STABLE EMPLOYMENT?

• How long have you been employed at your job?
• Do you have a history of changing jobs frequently?

HOW LONG DO YOU PLAN TO REMAIN IN THE AREA?

• Do you plan to be in the area for at least three years?

DO YOU HAVE A GOOD CREDIT HISTORY?

• Have you had a bankruptcy within the last two years?
• Do you have any unpaid collections?
• Do you have a credit history, or do you pay for everything with cash?
• Do you pay bills before or after their due date?
• Do you have unpaid judgments or liens?
• Do you have any alternative credit references in case they’re required? (e.g., rent, auto insurance payments, storage unit payments, utility payments, etc.) Sometimes, for those who have limited established credit, these alternative sources can be used, depending upon lender requirements.

DO YOU HAVE SAVINGS FOR A DOWN PAYMENT AND CLOSING COSTS?

• Do you have a checking or savings account? • If you do, do you make deposits to it on a regular basis?
• If you don’ t, why not? When would you be able to begin making regular deposits?

It is important to understand that while you can get financial assistance from a government or housing finance agency/program, this is usually only partial assistance. Therefore, it is necessary that you have cash available for down payment and closing costs.

EXAMINING YOUR DEBT

While you may have determined that you are financially stable, you must examine your debt before you can take on the financial burden of owning a home. Can you truly afford a home, or will your debt prevent you from being able to comfortably make monthly mortgage payments? In this case, debt refers to those bills or outstanding balances that accrue interest. This includes items such as:

• Car payments
• Student loans
• Credit card bills
• Other installment loans such as a title loans
• Personal loans Debt does not include expense items such as rent, utility bills, telephone, etc.

CALCULATING DEBT

Do you regularly use your credit card to buy things? Does most of your money go towards paying credit cards or consumer bills? In other words, are you an over-spender?

The following formula will help you figure out how much debt is “reasonable” debt:

1. Take your gross monthly income and multiply by 12%
2. Does this number cover all of your credit and consumer payments?
3. If not, your debt is probably too high. This will affect the amount of mortgage loan money for which you qualify. The more debt you have, the less money you can borrow for a house.