Buying a new home is one of the most exciting things we’ll ever do. It’s overwhelming and times and maybe even a bit frightening, especially if it’s the first home. Credit cards might not be considered one of life’s major events, but they too can greatly affect your life.
It’s no surprise that most Americans will open new credit card accounts before buying a new home. This is why first time homebuyers are always encouraged to double check their credit reports before even beginning to search for a new house. There are many new laws applicable to both lenders and home owners – and it’s a good idea to know these new regulations beforehand.
The government has many consumer protections in place; some of which have only been passed in recent years. Everything from prohibited lending guidelines to new disclosures you must be provided. Take a look – the more knowledge you have, the more empowered you’ll feel throughout the process (which means the choices you make will be from a place of confidence and education versus blind faith in a system you’re unfamiliar with).
Lending Practices
Disclosures alone aren’t enough. The legalese in all those documents – or RESPA forms (as they’re sometimes called and mean: Real Estate Settlement Procedures Act) – are overwhelming. Now, though, these forms are overseen, administered and enforced by the Consumer Financial Protection Bureau. The reason being there has to be someone looking out for the homebuyer. The mortgage company is looking to close the loan within the bounds of the law. It has no obligation to ensure you understand the difference between a 36 month or 24 month ARM. Ideally, the company would take the ethical route, but frankly, there are no obligations it must do so.
Also, there was a time when the appraiser was on the side of the mortgage company or bank. That’s not to say that’s wrong or illegal, it’s just that most mortgage companies had a few appraisers they preferred to work with. Now, though there are new rules that are more specific than they’ve ever been when it comes to the relationship between appraisers and banks. Before you think that tighter restrictions could make it tougher on you, you should know the problem comes in when you try to refi or sell your home. You might discover you’re upside down in your mortgage – that could cause significant problems for your finances.
Subprime Loans
Yes, that became an ugly word during the housing crash, but they’re still around. Those mortgages with higher interest rates due to an applicant’s credit history now have more protections via the federal government. A lender may not make a higher priced loan (via the interest rate) until and unless he’s given consideration to the borrower’s ability to repay the loan based solely on assets and income other than the home’s value.
Credit Cards
The same rules that have always been in lace still apply: Don’t exceed your credit limit, don’t pay late, try to pay the balance in full each month: this is all important, but there’s more too. For instance, if you have three credit cards; two of which you’ve had for a couple years and a third one you’ve had since your college days, and now you’ve decided to eliminate one of the credit lines – which one do you choose? Understand this – you want to keep the older one open. This “dates” your credit report to show long term commitment. The longer you’ve managed a card with impeccable accuracy, the more complete the picture is for a mortgage lender.
Your Bank
Also, consider this: your bank might not be the strongest choice for handling your mortgage. Do your homework and shop around. Ask others who used the same bank for their mortgages. What do they say? How were they treated? Was the process moving forward at all times? Your bank bank might be fine for your checking, savings and credit cards, but it’s always wise to shop for the best interest rates. Of course, this isn’t always so, but you owe it to yourself to at least compare what rate your bank offers against other lenders.
Establish Credit Now
Finally, before you even begin to consider a new home, be sure you have strong credit already established. This could take a year or more before you start your search. Keep in mind, a new credit card account for a young person can temporarily lower his credit score, so keep that in mind too. Lenders might see this as someone who’s not quite experienced enough to make wise financial decisions. Worse, if you’re carrying a balance on those new credit cards, you really will threaten your credit scores. It could be construed as poor impulse control.
Buying a new home is very exciting – but just remember it takes a huge among of commitment and responsibility. If it goes bad, you’ll be paying – in ways other than money – for many years.
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