Understanding The Importance Of Good Credit When Buying A HomeFor most people, purchasing a home is the largest single investment they will ever
make. Determining the size of the home, its location and how much it will cost requires careful thought and planning prior to the purchase.
obtaining a mortgage depends on many important factors, too, one of which is your credit history. You determine your credit reputation by how you
manage your financial affairs. Therefore, if you have shown the ability to establish credit and repay in a satisfactory manner, you can usually obtain a
mortgage more easily.
A Closer Look At CreditWhen you apply for a mortgage, one of the things that lenders review is your payment record on things such as credit cards,
car loans, rent and similar obligations. A good credit rating is acquired by making regular payments, on time and in the proper amount.
also review what are referred to as Housing Ratios and Debt Ratios.
Housing RatioThe amount of money you can dedicate to housing expenses each month.
It is important to know how much of a mortgage payment
you can practically afford. Most lenders agree that no more than 28% of your gross income each month is acceptable for mortgage related expenses, including
principal, interest and taxes.
Thus, a couple with a combined gross monthly income of $2,000 a month could probably afford a maximum mortgage
payment of about $560 (which includes taxes and insurance).
The remaining 72% of your income should be available to meet other monthly
commitments, such as utility bills, food, clothing, medical care, transportation, entertainment and other household expenses.
Debt RatioThe total of your mortgage payment and long-term debt.
Long term debt typically includes credit cards, personal loans, student
loans, car loans and similar debts. (Any debt that will be paid off in less than 10 months is not included.)
Lenders look at long term debt to
see whether the borrower is overextended with debts other than a mortgage. Typically, the borrower's mortgage payment coupled with long term debt should not
exceed 36% of gross monthly income.
A couple with a $2,000 gross monthly income could typically afford up to $720 in mortgage payments and long
Beginning to Establish Good CreditBuilding a credit history takes time and patience. If you've never had credit before, you can begin to establish
credit by starting small. You may want to open a charge account at one or two local department stores to demonstrate that you can handle credit responsibly.
You may even be able to take out a small loan at a financial institution to further add to your credit history.
Another helpful step in
establishing credit is to open a checking or a savings account. While these do not give you credit, they are often viewed by lenders as evidence that you
know how to manage money wisely.
Recording Your ProgressAs you use your credit, your borrowing and repayment habits are recorded and become part of your file at the Credit Bureau.
Your credit file contains:
The Credit Bureau will provide a written report to lenders about your ability to use credit responsibly.
- Your name, address and social security number
- Details concerning your employment and income
- Specifics about your personal history, including birthdates, dependents and previous addresses and employment
- Information about your credit history, including how promptly you paid your debts and how much and how often you borrowed
- Specifics regarding any instances in which you may have been turned down for credit
- Information from public records, including bankruptcy and tax liens
We're Here To Help
Even if your credit history is less than perfect, Dollar Bank is interested in helping you qualify for a mortgage. For more details, see
"Want to Buy a Home? Dollar Bank's Credit Enhancement Program Can Help." Our Credit Counseling Program is designed to help you
repair (or establish) your credit history, and to assist you in designing a budget and savings plan that will help you get into a new home sooner. For more
information on the Credit Enhancement Program, please call 1-800-242-BANK and ask for Dollar Bank's Community Development Department.
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The information presented in this publication is general in nature; it is not our intention to provide specific
advice to individuals or a comprehensive discussion of the subject matter. We suggest that you consult with your
financial or tax advisor, accountant or attorney to obtain specific advice or comprehensive information.