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Welcome back, future homeowners!
Today we're talking about being financially ready to purchase a home during your move to Topeka, or your relocation to Topeka, and that includes a couple of very important steps on your journey to buying your next home.
First and foremost we're going to talk about credit score and how that plays a factor in what you're capable of buying. Your credit score allows the banks to see your credit history, how ready you are, how responsible you are to make a purchase that requires a loan
This score dives into a bunch of facets: late payments, missed payments, open lines of credit, closed lines of credit. All of those factors reflect and create a number called your credit score. And how do the banks use that credit score? Well, very simply they use it with a mathematical equation to determine how much you're allowed - per the bank - to buy.
If you have a really high credit score, they're going to say that you're going to get a better interest rate. But it doesn't determine what that total amount is by itself. They also have to look at a couple of other things such as your debt to income ratio.
That's the number of how much money you make every month versus how much money you spend on your active debts every month. That, along with your bank history, your tax returns, and your pay stubs goes into this equation.
After that you can get what's called a pre-approval. We've all heard the term, but not everybody knows how you get to it, and that's the process the bank takes to look at all that information and say, "Hey, based on your bank statements, your pay stubs, your tax returns, your debt to income ratio, and your credit score, we now feel that this is how much money we can safely loan you."
Alternatively, you can tell the bank, "Hey, I make x amount of money month, and I pay roughly x amount a month in debts." The bank will then use that information as well, but what they're going to give you is called a pre-qualification. That pre-qualification is just an estimation based on what the client has provided which the bank feels they may be able to safely lend you. However, with a pre-qualification, the bank still needs you - before an offer should be accepted - need you to provide those other documents for your pre-approval.
Now, you may never get an actual pre-approval at that point; you may just have that pre-qualification and a loan approval, but that all depends on how close your guesses were to how much money you make and how much debt you have. If you don't know what's on your credit report, you may not know what that debt actually is, so I recommend everybody every year go out and look at their credit reports from companies like Experian, Transunion, or Equifax.
You can go straight to their websites to get that information that way you can dispute any irresponsible marks that may be on there from a third party or something that went to collections that's been paid off.
If you can successfully dispute those things, this should help raise your credit score so that you may be able to buy more. Saying that you CAN buy more doesn't mean that you SHOULD. It is always my recommendation that you should never buy at the very top end of what your pre-approval allows you.
Let's say for instance the bank will allow you to borrow $250,000. If you do that, you may very well find yourself in a situation called "House Poor" which means you can afford your house, but you can't afford Cheerios, you can't afford milk, because you can't afford anything other than your house and that's not a good place to be.
I always recommend taking your budget into consideration and figuring out what would be comfortable for you to purchase. You may find that $180,000 is your desired top end, even though the bank will lend you up to $250,000. We probably want to rule out anything 225 or above because that's going to be way more than what you want to spend.
Yes you can absolutely do a couple of different things to change that, but that's for another entry.
See you then!
- Daniel Byard
