When I decided I was going to buy a house at the young age of 19, I didn't know anything about the home-buying process but I figured it out and purchased my first home at age 25. As a young black female, I had to overcome a lot of financial obstacles while trying to become a homeowner over those six years but those triumphs started my wealth-building journey.
To get ready for homeownership, I had to work on the 3 Cs of financial wellness:
Credit history: Your credit history shows lenders your payment history and can be measured by your credit score.
Capacity: Your capacity to borrow is measured by the debt-to-income ratio. The debt-to-income ratio is a comparison of how much you owe verse how much you earn. The debt-to-income ratio tells lenders if you can afford to make another payment.
Capital: Your capital is comprised of your savings, investments, and other assets that you can use to repay the loan if necessary.
Credit History
It was recommended that I raise my credit score to 730, pay off debt and increase my earning potential. Then I should continue to pay all credit card balances off in full and on time each month to create good payment history. My plan was not to charge more than $100 to a credit card each month because I could afford to pay this amount off in full. I monitored my credit score each week and pulled my free credit report each year. I did not sign up for any loans or new lines of credit until I purchased my home.
The credit score grade criteria are listed below:
Payment history: Do you pay your bills on time? This makes up 35% of your credit score.
Credit utilization: Do you keep your credit balances low? This makes up 30% of your credit score.
Credit age: How many years of experience you have borrowed and paid off debt? This makes up 15% of your credit score.
Types of credit: Do you have various forms of consumer credit? This makes up 10% of your credit score.
Credit Inquiries
How often do lenders check your credit?
This makes up 10% of your credit score. In summary, 65% of your credit score consists of you paying your bills on time and keeping your balances low. Paying your balances off in full each month will keep your score propelling upward. While paying off my debt, I’ve begun strategizing a way to build my credit score towards my 800 goals. Any score higher than 750 is considered excellent credit, and the highest score you can get is an 850. An 800-credit score is ideal for me. After paying all my credit card balances off in full, my credit score climbed from a score of 539 to a score of 730. I decided to keep using one credit card to continue building my credit score, but I kept the balance at zero.
How did I use a credit card and keep the balance at zero?
I paid the card balance off in full immediately after each use. This method allowed me to also avoid being charged interest.
For example, I made a purchase and my items totaled $25. I would then charge those items to my credit card creating a balance I owed of $25. After making the purchase, I immediately logged into my credit card account and made a payment of $25 which then paid the balance off in full the next day. With this method, I avoided paying interest, and I built my credit. It took a few years to give me the results that I wanted, but it worked well. I didn't charge anything to my credit card if I couldn't pay in full for one payment. I told myself if I must make payments then I can’t afford to get it.
Capacity
Lenders want to see that you have a steady income and high earning potential. Why? They want to know that you have the means to pay them back. A college degree, licensure or certification, and proof that you have been with your current employer for a minimum of two years show lenders your profitability.
Immediately after I obtained my bachelor’s degree in Business Administration, I began applying for positions that required or preferred a college degree each week until I accepted a position that paid a minimum of $40,000 per year. I remained employed with that company and accepted promotions until I purchased my house.
Debt-to-Income Ratio
Your debt-to-income ratio is the main measurement for lenders to determine borrowers’ risk. This is calculated by taking all your monthly debt payments towards debt (i.e., student loan, credit cards, payday loans, car loans) and dividing it by your gross monthly income. Lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
Debt-to-Income (DTI) = Gross Monthly Income / Total of Monthly Debt Payments
Add up your monthly debt payments including credit cards, loans, and rent.
Divide your total monthly debt payment by your monthly gross income, which is your income before taxes.
The result will yield a decimal, so multiply the result by 100 to achieve your DTI percentage. The lower the DTI; the less risky you are to lenders.
Capital
It was recommended that I have at least $3,000 in my bank savings account and start investing in retirement savings accounts. I set the goal to save $5,000 by automatically transferring $100 every two weeks on payday to a bank savings account that I couldn’t access with a bank card. I also opted out of having the statements mailed to prevent me from ever seeing the balance. I saved $200 every month for 25 months and had $5,000 saved up in a little over two years.
It took almost six years to improve my credit history, lengthen my capacity and increase my capital but I did it and I was able to close on my first home at age 25.
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