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Financing Major Purchases
Buying a home is likely to be the largest purchase you will ever make. It can be complicated and stressful, but with careful planning, buying a home can be a more satisfying process. To help you plan for this major purchase, Experian® has put together a list of essential steps to take toward achieving your dream of homeownership.
Get Your Credit Report
Before approving your request for a home loan, mortgage lenders review your credit report. In fact, they often get your report from two or more credit reporting companies to be sure they have your complete credit history.
Tip: Review your credit report in advance to see your credit from a lender’s perspective. That can help you avoid possible loan approval delays. If you are thinking of buying a home, it’s a good idea to check your credit report in the months before you apply for home loan financing. Are there inaccuracies on your credit report? File a dispute and clear your report.
Be Prepared to Answer Questions
Here is a list of what mortgage lenders evaluate when they review your credit report:
- How much you already owe
- How much unused credit you have available
- How prompt you are in paying your debts
- Whether you have recently applied for new credit
The lender may ask you to explain:
- Any late payments
- Recent inquiries on your credit report
- New accounts
If you have no credit accounts, they may ask you to show that you pay your rent, telephone bills or utility payments on time. If your credit score is low, find ways to improve your credit score and rebuild your score.
Have You Saved Enough Money?
To make a major purchase like a house, you generally need to make a down payment. You also need money for closing costs and funds set aside for emergencies. If you spend every dime on your down payment, you’re statistically more likely to lose your new home to foreclosure sometime in the future.
Know All Your Options
Ask the lender to give you details on the cost differences among various mortgage plans. Then select the one that’s best for you. Here is a breakdown of the typical costs that may be involved in owning a home:
- Mortgage principal
- Property taxes
- Mortgage insurance
- Home insurance
- Special assessments
- Homeowners’ association fees
As a general rule, your housing costs should total no more than 29 percent of your monthly income before taxes. Add other long-term debts, such as car and student loans, and your total should take no more than 36 percent to 41 percent of your monthly income before taxes.
Make Your Payments On Time
How much you borrow, how much you owe and when you pay become a part of your credit report. When you apply for new credit purchases, other lenders will review this history. Late payments can stay on your credit report for up to seven years, can keep you from buying another house or can make it more expensive to buy a car. A good credit history proves that you manage your finances well. It lets you enjoy using credit at your convenience and at a lower cost.
Buying a Car
Reasons to buy a car:
- You have the money for the down payment that’s required for a credit purchase.
- You like the idea of owning something of value after making payments for years.
- You want to trade in an old vehicle.
- You plan to carefully maintain your car so that it runs well for many years.
- You drive tens of thousands of miles each year. If you lease, you might end up paying a relatively large amount of money at the lease’s end for exceeding the annual mileage cap, which generally is 12,000 to 15,000 miles.
Reasons to lease a car:
- You need your cash for other purposes
- You like driving a new vehicle — perhaps a luxury model — every two or three years
- You hate the hassle of selling your old car every time you want to buy a new one
- You drive 15,000 miles or less per year
- You like the idea of driving a vehicle for a few years before purchasing it
If you decide to lease, you need to learn exactly what you’re paying for in terms of the interest rate. (It should be close to the current automobile loan rate.) You should negotiate the capitalized cost (the price the financial institution pays the dealer for the leased vehicle), the acquisition fee (which the consumer is charged for initiating the lease) and the disposition fee (which the consumer is charged at the lease’s end if he or she decides not to buy the vehicle). Because of these factors, professionals advise that low monthly payments don’t necessarily translate into a beneficial transaction for the consumer.
Financing a New Business
The success of a new small business largely depends on its owner’s creditworthiness. Whether the office needs more equipment or the employees need more training, it’s the owner’s responsibility to pay the bill.
What are the options for capitalizing your new business?
- Turn to investors for capital
- Secure a loan or a line of credit from a bank
- Use your own personal credit cards
- Employ a combination of these types of credit
Savvy small-business owners will try to find lower interest rates on small-business loans so they are not subject to the increased cost of using a personal credit card.
For more tips for your small business see, small business advice and resources.
Unlike unsecured credit cards, small-business loans generally need to be secured by assets, namely property or goods. You’ll also need to calculate the actual cost of the loan and decide if you’re comfortable living with some of the imposed restrictions (such as caps on your salary).
To secure a loan, you probably will need to submit a precise business plan, tax returns, balance sheets, income statements and credit history — as well as additional documentation — to loan officials. If you consider that about 80 percent of new businesses fail within three years, it’s easy to see why lenders are reluctant to finance new businesses. If securing a bank loan isn’t a possibility for you and your business, you always can turn to your personal or business credit card to finance your entrepreneurial dreams. However, always remember the risks.