Before You Begin Your Home Search
Whether you are a first-time homebuyer or an experienced homebuyer, people are often confused about buying a home, and for good reason. Laws governing the purchase and sale of real estate are constantly changing. Real estate is also a topic you hear about every day. We are bombarded every day by “now is the time to sell,” “now is the time to buy,” “interest rates are going up,” “interest rates are going down” and on and on and on. This constant stream of banter from everyone to the neighbor next door to the news caster on the television screen can leave potential home buyers confused, frustrated, and not sure where to turn for advice. This blog is the first of a series about buying a home.
Strengthen Your Credit Score
A higher credit score, seems to result in the lower down payment and monthly payments.
Vicki Bott, deputy assistant secretary for single-family housing at the Department of Housing and Urban Development, says that her office has noticed much the same thing. "While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum," Bott says.
Improve your chances by: pulling your credit reports and ensuring you're not being unfairly penalized for old, paid or settled debts. Also, stop applying for new credit a year before you apply for financing and keep that moratorium in place until after you close on your home.
Figure Out How Much House You Can Afford
You will want to get a home that is financially comfortable. There are various rules of thumb that will help you get an idea of how much home you can afford
*FHA financing, as almost one-fifth of buyers get FHA-insured loans, your home payment can't exceed 31 percent of your monthly income. But, with some mitigating factors, FHA will let you go higher. *Conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, director of consumer periodicals for the Credit Union National Association.
Save For Down Payment and Closing Costs
Depending on your credit and financing, you'll typically need to save enough money to put anywhere from 5 percent to 20 percent down.
If you're using FHA financing, then you need a score of 500 or higher. And in the 500 to 579 range, if you can find a lender, you'll have to put 10 percent down instead of 5 percent.
One exception: Veterans Affairs loans, which require no down payment.
Another cash expense: closing costs. Whatever your loan source, you'll also need money to pay closing costs, which run (depending on where you live), from $2,300 to $4,000.
Build Up a Savings Account
This is over and above your money for the down payment and closing. Your lender wants to see that you're not living paycheck to paycheck. If you have three to five months' worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you save a cash cushion.
That money will also help you with maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.
Get Preapproved for a Mortgage
For serious home shoppers, "the No. 1 thing is they better have everything in order," says Dick Gaylord, past president of the National Association of Realtors. That means that, before the real home shopping begins, you want to get financing in place, he says.
And the preapproval process is "much more extensive" than it was a few years ago, he says.