7 signs you can't afford to buy a home

Making the leap from renting to buying is thrilling and liberating — for many, it signifies the realization of "the American Dream." 

Buying a home is also a long-term commitment, and one that requires strong financial standing. 

If any of these signs strike a chord, you may want to delay taking on a mortgage

You have a low credit score

Before considering home ownership, you'll want to check your credit score, which you can do through free sites like www.creditchecktotal.com

"The higher your score, the better the interest rate on your mortgage will be," writes personal finance expert Ramit Sethi in "I Will Teach You To Be Rich." Good credit can mean significantly lower monthly payments, so if your score is not great, consider delaying this big purchase until you've built up your credit. in the near future.

You have to direct more than 30% of your income towards monthly payments

Personal finance experts say a good rule of thumb is to make sure the total monthly payment doesn't consume more than 30% of your take-home pay.

"Any more than that, and your finances are going to be tight, leaving you financially vulnerable when something inevitably goes wrong," write Harold Pollack and Helaine Olen in their book, "The Index Card." "To be fair, this isn't always possible. In some places such as New York and San Francisco, it can be all but impossible."

While there are a few exceptions, aim to spend no more than one-third of your take-home pay on housing.

You don't have a fully funded emergency savings account

And no, your emergency fund is not your down payment.

As Pollack and Olen write,

We all receive unexpected financial setbacks. Someone gets sick. The insurance company denies a medical claim. A job is suddenly lost. However life intrudes, the bank still expects to receive our monthly mortgage payments ... Finance your emergency fund. Then think about purchasing a home. If you don't have an emergency fund and do own a house, chances are good you will someday find yourself in financial turmoil.

Certified financial planner Jonathan Meaney recommends having the equivalent of a few years' worth of living expenses set aside in case there is a job loss or other surprise. "Unlike a rental arrangement with a one or two year contract and known termination clauses, defaulting on a mortgage can do major damage to your credit report," he tells Business Insider. "In addition, a quick sale is not always possible or equitable for a seller."

You can't afford a 10% down payment

Technically, you don't always have to put any money down when financing a home today, but if you can't afford to put at least 10% down, you may want to reconsider buying, says Sethi.

Ideally, you'll be able to put 20% down — anything lower and you will have to pay for private mortgage insurance (PMI), which is a safety net for the bank in case you fail to make your payments. PMI can cost between 0.5% and 1.50% of mortgage, depending on the size of your down payment and your credit score — that's an additional $1,000 a year on a $200,000 home.

"The more money you can put down toward the initial purchase of a home, the lower your monthly mortgage payment," Pollack and Olen explain. "That's because you will need to borrow less money to finance the home. This can save you tens of thousands of dollars over the life of the loan."

To get an idea of the savings you'll have to put away, check out how much you need to save each day to put a down payment on a house in major US cities.

You plan on moving within the next five years

"Home ownership, like stock investing, works best as a long-term proposition," Pollack and Olen explain. "It takes at least five years to have a reasonable chance of breaking even on a housing purchase. For the first few years, your mortgage payments mostly pay off the interest and not the principal."

Sethi recommends staying put for at least 10 years. "The longer you stay in your house, the more you save," he writes. "If you sell through a traditional realtor, you pay that person a huge fee — usually 6% of the selling price. Divide that by just a few years, and it hits you a lot harder than if you had held the house for ten or twenty years."

Not to mention, moving costs can be insanely high.

You're deep in debt

"If your debt is high, home ownership is going to be a stretch," Pollack and Olen write.

When you apply for a mortgage, you'll be asked about everything you owe — from car and student loans to credit card debt. "If the combination of that debt with the amount you want to borrow exceeds 43% of your income, you will have a hard time getting a mortgage," they explain. "Your 'debt-to-income ratio' will be deemed too high, and mortgage issuers will consider you at high risk for a future default."

You've only considered the sticker price

You have to look at much more than just the sticker price of the home. There are a mountain of hidden costs — from closing fees to taxes — that can add up to more than $9,000 each year, real estate marketplace Zillow estimates. And that number will only jump if you live in a major US city.

You'll have to consider things such as property tax, insurance, utilities, moving costs, renovations, and perhaps the most overlooked expense: maintenance.

"The actual purchase price is not the most important cost," says Alison Bernstein, founder and president of Suburban Jungle Realty Group, an agency that assists suburb-bound movers. "What's important is how much it's going to cost to maintain that house," she tells Business Insider.

Read up on all of the hidden costs that come with buying a home before making the leap.

The 9 steps I took to Get My Finances Back on Track

1.Know your number
2.Get your credit score every year
3.Clean up your accounts
4.See that savings account? Use it
5.Use that dirty B-word  BUDGET
6.Adjust your expectations
7.Don't let terms like 401(k) scare you
8.Face it: Eventually you'll need to retire
9.Find a mentor

Raise your credit score with this knowledge

If you're suffering from poor credit, there are several surefire ways to get your credit healthy again. Follow these tips and you'll be well on your way:

• Always pay your bills on time and pay down the total amount you owe. 
  (accounts for 35 percent of your score)
  If you forget all else after reading this, remember this one! This is the single most important rule for having a good credit score.
•  Keep a low credit utilization rate. 
  (accounts for 30 percent of your score)
  Let's say you have a credit card with a $10,000 limit. If you're carrying a balance month-to-month of $3,000, you're only using 30 percent of the total limit. But if your credit limit is suddenly dropped to $3,000, then suddenly you're using 100 percent of what's available to you. That's yet another reason to always pay down credit card debt as quickly as possible. You always want to stay at credit utilization of 30 percent or less.
• When you pay off a credit card, don't close the account. 
  (accounts for 15 percent of your score)
  Doing so only reduces your available credit and drives your score down. You want to have between four to six lines of credit. Be sure to use them twice a year -- even if it's just for a dollar store purchase -- and pay them off right away. That will keep them active in your credit mix.

If you're facing a huge new annual fee on a card that has a zero balance, try "leapfrogging." That's my term for using the 45-day window you have before any new terms of service go into effect to shop around. So once you get notice about a new annual fee, start looking around for other no-fee credit cards. Submit your application and once you get your new no-fee card, then go ahead and shut down the original one that wanted to spring a fee on you.

The remaining 20% of your credit score is comprised of what types of credit make up your credit mix (10%) and how much new credit you have in your life and how quickly you took it on (10%).

Building credit after paying off old debts

You have already done exactly the right thing in paying off your debt. Now you need to demonstrate that you have learned from your mistakes and can manage new debt.

Getting a pre-paid card will not help rebuild credit because pre-paid cards are not reported to credit reporting companies and, therefore, are not part of your credit report. If you can’t qualify for a standard credit card, you should consider a secured card where you deposit funds in a savings account to guarantee that your charges on the card will be paid if you fail to pay as agreed.

Apply with your bank or credit union for a secured card with a small credit limit that is reported to the national credit reporting companies. Use the card sparingly and pay off the balance each month. Over time you will build a history of positive credit management.

Eventually, the negative account information will be deleted, leaving only the positive account details.

Remember, you didn’t get into credit trouble overnight, and you can’t restore a great credit history overnight either. But you are definitely headed in the right direction. Time and patience are now your best allies.

Credit Advice

Reducing high credit card balances should help increase your credit scores because it shows you have better control of your debt and that you aren’t buying beyond your income.

Low balances mean lower payments. That reduces the likelihood that you will miss payments or get into trouble.

Low balances as compared to your credit limits also results in a low debt-to-limit ratio, which I have discussed in previous columns. A low debt-to-limit ratio is an indicator of low lending risk, which will be reflected positively in credit scores.

When you can pay in full each month, you also eliminate those expensive interest costs, enhancing your financial well-being.

The other important fact about reducing your balances is that you will almost certainly improve your physical well-being, too. As your balances go down, so does the pressure to meet the payment requirements, which results in reduced stress and even better physical health.

Participating in a quality credit counseling program is a very good step to take. During the program you should learn how to better manage your debt, establish and live within a budget, and take control of your finances.

In the long term, your credit history will improve and you will be a much happier, healthier individual.

SEPTEMBER 29TH, 2015

How Did That Get On My Credit Report?

One of the first questions that your new client might ask is “Where does the information on my credit report come from?” Credit reports are such a common part of the credit report business that many people often do not give them a second thought.

When starting a credit repair company, being an expert on this type of information will build trust with clients and help grow your business.

First, there are three basic categories of information included on a credit report. These are:

1. Basic Personal Information: This is pretty self-explanatory. Included on your credit report is your full name, date of birth, current address, social security number, and employment information.
2. Collection and Accounts: This is the information most people think of when discussing a credit report. This is usually separated into two buckets of information: All open lines of credit and all accounts that may be delinquent or in collections.
3. Public Financial Records: This can include bankruptcy filings, tax liens, or any judgments that affect your credit status.

All three categories of information are collected and applied to credit reports by different methods.

• Basic personal information is originally reported by the individual borrower when opening his/her first line of credit. This is updated throughout the borrower’s lifetime as new lines of credit are opened.

• Collections and account information is updated most frequently and proactively – usually monthly – by collections agencies and lenders directly to the credit bureaus.

• Finally, public records are the only pieces of information that are proactively collected by the credit reporting agencies solely for the purpose of reporting.

Credit reporting can be a complicated and confusing topic for those who are not experts in credit repair. As a credit repair professional, you have an opportunity to position yourself as a trusted advisor in all things credit repair. How credit reports are made and updated is a crucial component that your clients will surely benefit from learning.  

Additionally, you will want to educate your clients on the entire process, on how to change their habits  and things they can today to speed up the process. Help put them on the path to maintain their awesome credit long after your work is done.