News for Today's Homeowner

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The Three P’s of a Great First Mortgage

By Michael G. MacKenzie, January 14, 2008
Executive Analyst, Community Acceptance Mortgage

There are some important things to be aware of in advance of obtaining a mortgage. And since it is probably the largest financial transaction of your life, it requires planning, patience, and perseverance. Here are a few guidelines to follow.

Planning: Go into it in Great Financial Shape.

People are all-too-often unaware of the fact that your credit score has a significant effect on the rate lenders will offer you. Getting and maintaining a good credit score is simple, but too many people seem to experience brain cramps when it comes to their credit behavior. Here are a few simple rules to follow to get and maintain an excellent credit score.

• Obtain only a limited number (i.e.4 to 6) of trade lines. Trade lines include loans, leases, contracts with utility providers and credit cards.
  
• Pay all trade lines on time. Never be late. It inflicts severe and lasting injury to your credit score.
  
• Keep credit card balances below 40% of the available credit limit.
  
• Stay informed of your credit score. Correct any inaccuracies that appear on your credit profile.

Patience: Save, Save, And Then Save Some More.

Although theoretically still doable, it is virtually impossible to get a mortgage these days unless you have at least 20% of the value of your desired home set aside for a down payment. In fact the more you pay down, the better the rate offered by the lender.

Ideally you should have access to additional savings worth at least 6 months’ mortgage payments. In other words, if your mortgage payment is $1,000 per month, you should have cash reserves of at least $6,000 in some form of (easy-to-get-your-hands-on) investment.

Perseverance: Stay within Your Means.

Here is the tricky part. Don’t fall in love with a home you really can’t afford. These days, what with it being a buyers market and all, you should be able to get a lot of house within your budget. The old rule of thumb was that principle interest and taxes should not eat up more than 25% of your net monthly income. So your $1,000 a month mortgage payment ought to come out of a monthly income of at least $4,000. And working backwards, assuming a 20% down payment, a $1,000 per month budget should get you a home worth about $200,000

Do all of the above and you will be on your way to realizing the Great American Dream.

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