By Brian Short, CMC, CRMS, GMA
What else can you do to help you prepare for home ownership in the next 12 or 24 months? Work on these things:
1. Pay your bills on time. Utilities, cell phone, car insurance, student loans or other debt your are paying off quickly – make you payments on time and in full. Put them on an auto pay through your bank if you have your paycheck on an auto deposit. It all goes in and out every month – on time and in full – even if you are out of town, covered up at work or just distracted for some reason.
2. Keep your check book reconciled and up-to-date. This may seem unnecessary in the age of “online banking” but even the “best of us” forget to enter a debit card payment once in a while and it comes back to bite us where it hurts. Overdraft charges of $35-50 each will add up quickly and cause a blemish on your banking history when applying for a new mortgage in the months to come. Mortgage underwriters like to see very clean banking history and prefer to loan to those who demonstrate the ability to manage their money – no matter how much or how little they make.
3. Save some money for a down-payment and for your closing costs. Depending on the loan program you desire, you will need to save 3%, 5% or 20% of the sales price of the home you desire to buy. Any loan for which you qualify for more than 80% of the sales price will require a monthly mortgage insurance premium which will cost you $50-$250 per month depending on the size of the loan in addition to your monthly property taxes and home owners insurance payments.
FHA loans will let you buy a house with only a 3% down payment but you will have an up-front and monthly mortgage insurance premium figured into this loan. If you bring a 20% down payment, you will avoid this mortgage insurance premium. In addition, your closing costs and pre-paids will average about 3% of the sales price with most loan programs. Therefore, if you desire to buy a $150,000 house in 2 years and you want to use an FHA loan you should need $4,500 for your down payment and about $4,500 for your closing costs or a total of $9,000 to close the sale. That should give you a good goal to shoot for!
a. Pay stubs – Keep in order for 1 year until you successfully file your tax return for that year.
b. Sales Receipts and Debit Card transaction receipts– Keep in an envelope or file folder for each month for the year until you have filed your tax return for that year. You may decide to keep them for as long a five years for warranty purposes for items you have purchased.
c. Bank Statements (Print off hard copies every month) – Keep in file folders in order for 5 years. The IRS can audit you for any year for the past 5 years.
d. W-2’s and Tax Returns– Keep until you die. (Let your kids or grand kids throw these away.) Do not throw away you tax returns – always keep a copy of the exact return you filed with the IRS. I keep an electronic (pdf) copy and a hard copy.
e. Insurance documents – Keep your most recent copy of your health insurance, auto insurance and renter’s insurance in their own file folder in your file cabinet for easy reference.
f. Auto service receipts– Keep all of you oil change, tire purchase and auto repair receipts in the glove box of your car along with your insurance card and annual registration if there is room. It your glove box becomes too full, start a separate file for this information. You will need this information for warranty purposes and for documenting the service on your car if you ever sell it someone who wants to know how well you have taken care of it.
These simple habits, developed early in your adult life, will help you be a stellar mortgage applicant and allow you to qualify very soon for the best possible mortgage loan programs available.