How to Buy a House home

Learn the basics

1.

The Basics

2.

How much home can you afford?

3.

The Down Payment

4.

The Loan

-

Assuming a Loan

-

Owner Financing

5.

Qualifying for a loan

6.

Understand Closing Costs

Do the groundwork

7.

Get your finances in order

8.

Clean Up Your Credit Record

9.

Establish Credit if you don't have any

The Process

10.

Find a Lender

11.

Evaluate the bank's offer

12.

Start looking at houses

13.

Get the Disclosure

14.

Make an offer / Sign a Contract

15.

Have the House Inspected

16.

Problems on the Inspection?

17.

Renegotiate the terms

18.

Appraisal, Survey, & Insurance

19.

Appraisal went through?

20.

Closing!

After the purchase
Avoding scams
More about Mortgages
How much loan can you get?
Figuring your monthly pmt.
15- vs. 30-year loans
Prepaying your mortgage
Understand Compound Interest
Private Mortgage Insurance
If you won't live long enough to pay off the mortgage
Other Topics
Renting vs. Buying: Which is better?
Paying cash vs. getting a loan
The Debt Ratio
Tax breaks are actually welfare for the rich
Other
Links to helpful sites
Fan Mail
Michael Bluejay's home page
Email Me

How to Buy a House

 

Easy-Qualify loan in Austin

0% down

Michael Bluejay (the author of the website) is offering loans to homebuyers in Austin, Texas. Here are the terms:

  • Your credit does not matter, but your ability to pay does.
  • No down payment is required, though you can make a down payment if you like, in order to lower your monthly payments.
  • Your monthly payment will be about 1.15% of the purchase price, including closing costs, taxes, insurance. (e.g., on a $100,000 home, the payments would be about $100,000 x 0.0115 = $1150/mo.).
  • The interest rate is 10%, and I do not require private mortgage insurance. We'll roll most of the closing costs into the mortgage, so they'll be part of your monthly payment, and you won't have to come up with a bunch of closing cost money at the time of the sale.
  • If you already have a high-interest mortgage and would like to refinance at 10% for 30 years, I can do that too.
  • These loans are available for homes in Austin, Texas only.

If you're able to get a bank loan you should do so, because the interest rate will be lower. My program is intended for people who cannot get a loan from a bank.

Note that you're not married to the higher interest rate forever. If you start fixing your credit with my credit repair instructions, you should have good enough credit to move your loan to a bank in two years -- and get a lower interest rate.

Contact me at
(512) 322-0638

or use the form below.

 

Rebuild your credit, if necessary

« Back: Get your finances in order «

» Next: Establish credit if you don't have any »

Problems caused by bad credit

1. Inability to get a loan
2. Higher interest rate if you do get the loan
3. Larger down payment required if you do get the loan

Lenders will check your credit record to see whether they're willing to loan you money, AND to see what interest rate to charge you. Bad credit doesn't necessarily mean that you can't get a loan, but it does mean that you'll pay a higher interest rate, and you may have to have a larger down payment than otherwise. This bears repeating: Bad credit doesn't just mean you might not get the loan in the first place, it means that if you do get the loan, you'll have to pay more interest, and you'll be required to make a larger down payment.

Here's an example from MyFico.com in August 2006 about how credit scores might affect the interest rate -- and therefore the cost of the loan -- on a 30-year, $216,000, fixed-rate mortgage.

Ways to GET your FICO credit score

#1: See if your credit card company offers it for free.

For example, Providian gives cardholders their FICO score based on their TransUnion or Experian report every month.

 

#2: Buy your FICO score based on Equifax.

Equifax is the only CRA that will sell you your FICO score based on their report. (TransUnion and Experian won't.) Get your FICO score from Equifax for $16.

 

#3: Buy all three FICO scores.

The only place to buy your FICO score based on all three CRA reports is MyFico.com, for $48.

Credit Score
Interest
Rate
Monthly
Payment
760 - 850
6.33%
$1,342
700 - 759
6.56%
$1,373
680 - 699
6.73%
$1,398
660 - 679
6.95%
$1,429
640 - 659
7.38%
$1,492
620 - 639
7.92%
$1,573

Consumer Reports in June 2005 came up with similar figures. They also said, "Over the life of [a $150,000] loan, the people with the best credit scores may pay roughly $138,000 less than those with the worst."

The median U.S. score is 723. Here's how the American population's credit scores stack up.

Credit Score
Percentage of population
with this score
800+
13%
750 - 799
27%
700 - 749
18%
650 - 699
15%
600 - 649
12%
550 - 599
8%
500 - 549
5%
less than 500
2%

From MyFico.com, Aug. 2006

 

Credit Report vs. Credit Score

Your credit report and your credit score are two different things. Your credit report is a list of things like your credit card and bank accounts, outstanding loans, and your payment history. Your credit score is a rating of how good your credit is, based on your report. In other words, your credit report is a bunch of pages, and your credit score is a number from 300 to 850. We'll cover the score later on. Right now, let's focus on the report.

The main things on your credit report that hurt your credit score are:

  • Bankruptcy
  • Outstanding (unpaid) debts
  • Late payments
  • Credit card balances near the credit limit on those cards
  • Liens (both outstanding and paid)

You increase your credit score by fixing these problems. If there are troubling items on your credit report you should try clear them up, before you apply for a loan. That's what the rest of this page is about.

You actually have three credit reports

The companies that keep track of your credit report are called credit reporting agencies (CRA's). There are three of them: Trans Union, Equifax, and Experian. So you actually have three credit reports, since there are three CRA's that track your credit, and your report can differ from one CRA to the next. If you were late making some payment, your creditor might report that payment to one company but not the other two.

This means that if you need to clean up your credit report, you probably have to clean up three different credit reports. You never know which CRA your lender is going to consult about your credit (although some lenders will tell you if you ask). Many lenders consult all three CRA's, too.

Kinds of credit scores

The most common kind of credit score is the FICO score, which is calculated by a company called Fair Isaac. Fair Isaac makes its money by selling the FICO scores on individual consumers to banks. When your bank buys a credit report from a CRA like TransUnion, it also buys the FICO score calculated from the TransUnion report. Since you have three different credit reports, you also have three different FICO scores. In fact, your bank might order all three scores.

While the FICO score is the most common, the three CRA's each have their own scores that they try to sell to the banks. TransUnion sells a "TransRisk" score and Experian sells a "ScoreX" score. Banks generally use the FICO score because it's the industry standard, but some banks might go with the CRA brand because it's cheaper.

Many banks have also devised their own system to calculate credit scores from credit reports. That way they don't have to pay anyone for the credit score.

So there are potentially seven different scores your lender might see:

  • The FICO score from the three CRA's
  • The proprietary score from the three CRA's
  • The lender's own internal score

So what does this mean to you? It means that if you're checking your credit score, you need to know what kind of scores exist so you know which ones to check. Of course, you might not need to check your credit score at all, if you're already sure your credit is good. That's our next topic.

Do I need to find out my credit scores?

Here's the catch: You want your credit score to be high so you can get a loan at a good interest rate. Unfortunately, you probably can't find out your credit score without paying for it ($16-$48). So here are your options. We'll assume your lender is using FICO scores.
  • You can just buy them. $16 or $48 is a minor cost in the scheme of a $150,000 house. You can just pay to get your credit score(s) and get it over with. You can get your FICO score based on your Equifax report for $16, or you can all three FICO credit scores from MyFico.com for $48.
  • See if your credit card company will give you your score. Providian gives cardholders their FICO score from TransUnion once a month. This doesn't tell you the FICO scores from the other two CRA's, but they're usually pretty similar.
  • Verify that your credit reports are clean, because in that case you know your score must be good. Get your three credit reports for free from AnnualCreditReport.com. By law, each CRA has to give you a free copy of your credit report once a year if you ask for it. If there are no items marked "Derogatory" or "Negative", then your score is probably pretty good and you can proceed to apply for a loan. Even if you know that you have negative items on your reports, order them anyway so you know exactly what's being reported.
  • Ask your lender once they've run your credit. Getting your credit scores after you've applied for a loan is kind of like putting your seatbelt on after you've already had a wreck, but if you've already applied for a loan and are curious to know your scores, your lender may tell you.

Beware of websites offering to sell you "your credit score" (or give it to you free if you buy some other service). Most times this is a proprietary CRA score, not the genuine FICO score.

Equifax is the only CRA that will sell you your genuine FICO score based on their report ($16) TransUnion and Experian won't sell you a real FICO score, they only sell their own proprietary scores. If you want FICO scores based on all three CRA reports, the only place to get them is MyFico.com, for $48.

Do I need to improve my credit score?

That depends on how good your credit is, of course.
Excellent credit. If you know that each of your credit scores is 760 or higher, your credit is excellent and there's no need to try to improve your score.

Good credit. If your scores are between 700 and 759, then you have a choice: cleaning up you reports and getting your scores about 760 will get you a slightly higher interest rate, but not much. (See the table above.) So it's up to you whether it's worth your time in trying to improve your credit rating.

Fair to Bad credit. If your scores are less than 700, or if you don't know your scores but you have your credit reports and can see that they list negative items, then it's time to start rebuilding your credit. That's our next time.

Should I wait for an item to expire off my report before I apply for a loan?

Late payments are removed from your credit report once they're over 7 years old. Bankruptcies are removed after ten. If it's only going to take a few months for a negative item to expire off your report, and you don't have a specific dream house in mind that you want to buy right now, then sure, go ahead and wait for the bad item to expire before applying for a loan, so you'll have a higher credit score and get a better interest rate.

But what if you have found your dream house that's on the market right now? If you don't buy it now, someone else will probably buy it while you're waiting for your credit report to improve. In this case, figure out how much extra you'll pay because of the higher interest rate, and see if you're willing to pay that premium in order to get your dream house. And remember that once your score improves, you can always refinance at a better rate later on.

If it's going to take a couple of years for your credit score to improve, and you're able to get a loan now, you should probably do so rather than wait. Yes, you'll pay more interest, but you'll start your investment in your house that much sooner, which will balance out the extra interest you'll pay. And once your credit score improves, you can always refinance at a lower rate.

 

Credit scoring myths

Myth: Checking my credit score or getting my credit report hurts my credit score.

FACT: No, it doesn't. Inquiries about your report for the purpose of establishing new credit can decrease your score, but inquiries to just get your score or a copy of your report never hurt your score. And even though inquiries for the purpose of establishing new credit reduce your score, they don't reduce it by very much.

Myth: Closing credit card or merchant accounts will help my credit score.

FACT: Closing accounts generally won't raise your score. People have heard, quite correctly, that sometimes having too many open accounts can hurt your score. That's true, but once you already have the open accounts it's too late. If you close accounts now then your ratio of outstanding debt to credit available will rise, which will probably negatively impact your score.

Now, if your lender asks you to close an account or two as a condition of getting the loan, then go ahead and do so. You're not doing so to raise your score, because it doesn't, you're doing so because your lender says that what it takes for you to get the loan. The reason they might do this is because they're afraid if you max out all your various cards you'll be spread too thin and won't be able to pay back the mortgage. So they may want you to close an account or two to reduce your ability to rack up more debt. But you should close accounts only if your lender says you need to do so in order to get the loan. If a mortgage broker suggests you do so, ignore them.

Ways to IMPROVE your FICO credit score

#1: Start paying all bills on time, from here on out.

#2: Pay off any outstanding amounts you owe.

#3: Correct any mistakes on your report.

#4: Ensure negative items older than 7 years aren't reported.

#5: Add your side of the story.

#6: Pay down debts.

#7: Don't apply for new credit unless you really need it.

#8: Get and use a credit card if you don't have one. (Buy only things you would have bought anyway, like groceries.)

See more details about the above items.
Clean up your credit reports

These are the tried-and-true ways to improve your credit rating.

Don't make any more late payments. Make sure you pay every bill on time from here on out. Taking steps to bring your score up does you no good if you do things that send it right back down. Also, the older a late payment is on your credit report, the less it hurts you. So a late payment you made last month hurts a lot right now, but in two years that same late payment won't hurt your score as much.

Pay outstanding debts. If you have a delinquent account, pay it. That won't remove it from your credit report, but it will still help your score, because a late payment is not nearly as bad as an unpaid debt.

Correct errors. If there are any errors on your report (such as late payments when you weren't late), write a letter to the CRA in question and ask that the error(s) be removed. The CRA has 30 days to investigate; they'll write to the creditor and ask them to verify the payment info. If they don't, the CRA will remove the negative info from your file.

Make sure negative info older than 7 years isn't reported. By law, negative information in your credit report must be deleted after seven years (10 years for bankruptcy). If your report contains negative info that's more than seven years old, write the CRA and ask them to remove it. Also note that if you missed a payment 8 years ago, but it took the creditor 2 years to report it to a collection agency, it will show up on your report as a 6-year-old debt. In that case, write to the CRA and explain that the debt is really 8 years old and should be removed.

Add your side of the story. If there is negative info in your report (such as non-payment of a debt), but you have a good reason for not paying the debt (merchandise not received, legitimate dispute with the merchant who would not negotiate in good faith, etc.), write to the CRA and ask them to add your short explanation about the matter to your file. If the lender pulls your credit report they might see the statement you added. They might not see it, because some lenders just look at the credit score and don't scrutinize the report itself too closely, but it couldn't hurt.

Pay down loans. The more debt you're carrying, the lower your score. Your debt is evaluated in comparison to the total credit available to you. So $1000 of total debt with a $1500 total credit limit (1000/1500 = 67%) is probably worse than $3000 of debt with a $10,000 limit (3000/10,000 = 30%). So pay down your debt to increase your score.

Don't apply for new credit gratuitously. Applying for new credit, whether approved or not, lowers your score. And new approved accounts lower the average age of your accounts. (Older accounts score higher.) During your credit-rebuilding period, don't apply for new credit cards or any other kind of new loan or credit. Wait until after your lender has approved you for a mortgage. The exception to this is if you don't have much credit history to speak of. In that case you want to get a credit card to start building credit.

Get and use a credit card if you don't have one. If you don't have a credit card, get one. It will help you build credit. Just use it to buy your groceries, and pay it off in full every month. Here's more on getting a credit card.

Ignore most other advice you hear. Myths about what actually helps or hurts your credit score would fill a book Some of them are listed at right. Some of them are even espoused by people whom you'd think would know better, like mortgage brokers. But the red items above are all you really need to focus on. Be skeptical of any other advice you may hear about how to improve your score. If it sounds legitimate and you want to believe it then try to verify it first somehow, don't just accept it on faith. Because taking bad advice might not just fail to improve your score, it could actually hurt it. Really, just correct errors, get old negative items off your report, and maintain a good payment history, and that's pretty much all you need to do.

Don't pay for credit-rebuilding services. The tips in this section are everything you need to know about rebuilding your credit. There isn't anything else. Nobody can do anything more for you than what I've listed above. Don't throw your money away on credit repair services.

 

Further reading

If this page was so fascinating you could just pee yourself, here are some other resources you might like.

The Federal Trade Commission covers your rights regarding your credit report,

Good guides to credit scoring are available from My FICO and Mortgage-X. MyFico also has some interesting credit statistics.

Speaking about the amount of personal information that CRA's have about you, Ralph Nader was the only presidential candidate in the top three in the 2000 or 2004 elections who pledged to address this issue. Bush, Kerry, and Gore don't really care.

Remember, if you take one thing with you from this page, it's that you need to get all three of your FICO credit scores before applying for a loan, and the only place to get them is MyFico.com.

.

« Back: Get your finances in order «

» Next: Establish credit if you don't have any »

This page last updated in April 2008.

 

If you liked this site then you might like some of my other sites:

How to Find Cheap Airfare     How to Save Electricity     How to get listed & ranked well in Google

Entire site ©2006 Michael Bluejay Inc. • All information is "use at your own risk"   Email me