Things to consider when financing your home improvement project
Credit scores. Loan types. Interest rates. There’s so much to think about when financing your building project! Let us help you simplify and demystify some of the decisions you’ll make about financing your home.
How Credit Ratings Can Affect Your Financing
Although credit scores aren’t the only factor lenders take into consideration when approving financing, they can affect not only your ability to get financing but also your interest rate. Applicants with higher credit scores – also called your “FICO” score – can sometimes get lower interest rates.
Your FICO score is developed from the credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Most lenders use FICO to determine both the types of loans you qualify for and the interest rates you’ll pay on those loans. Your FICO is based on:
What Is Right For Your Budget?
You’ve decided between building and buying. Now you’re ready to get started with the purchase or construction of your dream home. There are still many decisions left to make, and an important first step is considering what your budget will allow.
The Easy Way to Start
1.
Housing Expense Ratio
As a general guideline, most financial professionals advise that no more than 28% of a homebuyer’s gross (pre-tax) monthly income should be spent on housing expenses: rent or mortgage principal and interest; property taxes; and homeowner’s insurance. In other words, your maximum housing expense ratio should be no more than your annual salary x 0.28 / 12 months.
2.
Debt-to-Income Ratio
Another important consideration is your debt-to-income ratio. This calculation considers all your debt obligations: mortgage, vehicle loans, credit cards, student loans, and any child support or alimony. In this case, most financial experts agree your debt should not exceed 36% of your monthly gross income: your annual salary x 0.36 / 12 months.
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