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Day 1: Homebuying Goals
This Week’s Goal: To learn homebuying basics including the various methods of purchasing a home and, if you choose a mortgage, how lenders review your income to determine how much you can afford.
Day 2: Purchasing Methods
Today’s Easy Financial Task: Learn home purchasing methods.
How to rock this task:
- Learn the various ways to purchase a home.
- Learn the 5 C’s of Credit used by lenders to qualify you for a home.
- Choose the method(s) you are considering for your home purchase.
Welcome to the second day of the challenge!
Yesterday you wrote down a few goals. Now, we’re ready to dig into some of the basics of homebuying. Woot! Woot!
Methods of Buying a Home
There are several ways you can purchase a home besides the traditional mortgage. Before we get into the nitty-gritty of mortgages, let’s discuss the alternatives.
Cash - Yes, some people do purchase houses in cash. In fact, I purchased my home last year in cash. What’s so great about cash? If you have the cash on hand, a cash offer can help you win a bidding war in a hot market, and you don’t have to worry about a monthly payment.
A drawback of buying with cash is that you aren’t able to use that money for other reasons. For instance, you could invest that money instead of using it for a home purchase. If you have a stockpile of cash, you should speak with a financial advisor first to see if it’s a smart choice.
Seller financing/land contract - Seller financing and a land contract is a unique type of financing where the seller lends money to the borrower. You set up a payment agreement that includes interest and the terms. Often, these types of financing are short-term and have a balloon payment at the end.
The seller financing or land contract may be worthwhile if you’re having trouble qualifying for a mortgage from a lender. It can also be faster than going through the entire application process with a lender who checks your credit and does the whole underwriting thing.
A drawback of borrowing from the seller: the interest rate may be high. A short-term loan with a balloon payment can be difficult to manage. Balloon payments may be several times your monthly payment or the entire balance of your loan.
Rent to own or Rent with option - This type of purchasing method works exactly like the name. You enter an agreement with the seller to “rent to buy” or “rent with the option of buying.” A portion of the rent you’re paying before buying may be applied to your down payment. At the end of the agreement, you make the purchase. Depending on the agreement, you may have an option to change your mind.
Mortgage financing - We’ve arrived at the most popular method of purchasing a home — the mortgage! A mortgage is a home loan where a lender or bank lends you money to buy. You make a down payment, which is typically cash is exchanged from the buyer to the seller. The seller gets the rest of the money from the mortgage and you pay the mortgage back to the lender, with interest.
In order to obtain a loan, lenders do a review of your income, employment and credit to decide if they want to lend to you. Lenders use the 5 C’s of Credit to decide whether they want to lend you the money you need for a house.
For the rest of this challenge, we’ll be reviewing the 5 C’s in detail, but here’s a brief overview:
The 5 C’s of Credit — Factors Lenders Review to Approve You
Character - Character is your trustworthiness. Lenders want to lend money to people who are responsible and will pay their money back. Your character and credit play a major role in purchasing a home.
Capacity and Cash Flow - Capacity is your financial ability to pay the loan back. Lenders are checking on your income and employment.
Capital - Capital is the moolah. Do you have money to put down for a house? If you do, how much money will you have left after the purchase? Lenders want to make sure you have some assets to spare even after the purchase.
Conditions - Conditions in the 5 C’s stands for market conditions, including interest rates and other factors going on in the housing market that could impact your lender’s decision.
Collateral - Collateral is an asset that backs a loan. In this case, your home backs the loan. If you default, the bank or lender can take it. Lenders want to know the value before lending money to ensure they’re making a good investment, so an appraisal is done to determine the home’s worth.
On to Your Task
Today’s task: Write down the purchasing methods you’re considering.
Financing with a mortgage is undoubtedly the most popular method of buying a home. If you’re considering other options, write them down too!
Once you’re done with that task, you’re done for the day!
Want to work on your credit for extra credit? See what I did there? 😉
SUPER IMPORTANT NOTE: If you're NOT buying a home this year, here's a great tool you can use to help raise your credit score. Read more HERE. If you are planning on buying soon, hold off on this tool until you close.
Lastly, I created a whole Credit Edition to the Live Richer Challenge. You can find it here:
Any questions? Remember to reach out to your partners to encourage each other throughout the challenge.
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If you haven't already... Get your Challenge Freebies from our Live Richer Challenge: Homebuying Edition coauthor, Netiva Heard.
You can reach out to me here:
Facebook: The Budgetnista
Private Forum: Dream Catchers : LIVE RICHER
Want the LIVE RICHER Challenge: Homebuying Edition in book form? You can find it here: LIVE RICHER Challenge: Homebuying Edition.
P.S. Have you saved, printed & posted the LRC: Homebuying Edition Calendar yet? It makes for an awesome checklist. Click on the picture, save & print it today.
P.P.S. Don’t forget to get your free Live Richer Challenge: Homebuying Edition Starter Kit. Download it HERE.