Credit and PITI when financing a new home
So you’re thinking it’s time move out of that cramped Highlands apartment and into a cottage in St. Matthews with a backyard? Home financing can be a confusing, occasionally overwhelming process.
One of the first steps in buying a home is figuring out what you can afford. Most people, especially first-time buyers, are not paying cash for home and will need a mortgage. According to Zillow, “One-third of Homebuyers Surveyed Are Ill-prepared to Get a Mortgage,” answering mortgage questions wrong 32.5 percent of the time. So, before you jump in, here are a couple things things to know ahead of time:
Under the Fair and Accurate Credit Transaction Act (FACTA), you’re entitled one free credit report a year. The site AnnualCreditReport.com, setup by the three major credit bureaus, is the only official place to obtain the free credit report you’re guaranteed by law. Sites advertising free reports often require you to buy other services or sign-up for a subscription you’ll have to cancel later.
With your report you can review your credit history, accounts and examine for any irregularities. Check for items you’re not aware of such as: open accounts, tax liens and accounts sent to collections.
Bare in mind your free credit report does not include a credit score (FICO score). If everything looks ok on your report, it’s time to obtain your credit score. Credit scores are based off the reports from the three bureaus. Credit Karma is a free and trusted site that will estimate your credit scores from Equifax and TransUnion.
Determine what you can afford
When budgeting, first-time home buyers commonly consider only their mortgage payment (principal plus interest) and do not account for property tax and insurance. PITI (pronounced “pity”) is an acronym used to describe the components of your monthly mortgage payment.
Principal is the total amount of money borrowed from the lender. Generally, a portion of the principal is paid with each payment, reducing the balance and increasing your equity. As the balance of decreases, a larger portion of the payment is applied towards the principal. This is explained further in the next paragraph.
Interest is money charged by the lender for loaning you the money. The amount is a percentage of principal owed. Over time, the interest payment will decrease since it’s a percentage of a declining principal balance.
Taxes are often paid to the lender directly, assuring payment. Depending where you live and the value accessed to your home, property taxes can be a considerable expense.
Insurance may also be collected by your lender, but of course must be paid regardless. Be sure to account for any supplemental coverage the property requires, such as flood insurance. Depending on how you finance your home, private mortgage insurance may be required as well.
Credit and PITI are of course not the only thing you need to learn about the buying process. They are however, critical to understand. We will cover other aspects of the buying process in future articles.