Are you ready to buy a home? Director Barry Zigas of housing policy for Consumer Federation of America suggests that if you’re a first time home buyer or an experienced owner, buying a house requires a “preflight check”, here is the list:
1. Strengthen you credit score. There is one rule that applies, the higher your credit score, the lower your down payment and monthly payments. The minimum FICO that lenders are looking at is a range of at least 640 to 680. Very few lenders will lend in the 580 to 640 range unless you are a first time home buyer and meet very ridged underwriting requirements. If you have a score of 700 to 720 you will get a good deal. 760 and above is where the best deals are. Improve your chances by pulling your credit at www.frecreditreport.com to see what is on your credit report. Do not open any new credit one year before you apply for financing and make sure your credit cards are near zero balance (not paid completely will give you a better score.)
2. Figure Home much house you can afford. I believe you should buy a home that you feel comfortable with the payment. There are various rules of thumb like your payment should be 31% of your gross income but with some mitigating factors you can go higher. FHA is the most lenient in this area and 1/5 of the buyers use this great program. For conventional loans it’s safe to use 28%. It’s a good idea to “try on your payment” by taking the old payment amount and putting the difference from the new payment in the bank. This also allows you to save some money but also allows you to “back away from it” or scale back your payments if it feels to high.
3. Save for a down payment and closing costs. Depending on your credit and financing you will have to save between 3.5% down to 20% down. If you are a Veteran you do not need a down payment and there are some other programs for first time home buyers. Generally these are specific but if you Google city name, county along with “down-payment assistance”, “first time home buyers”, you can find available funds for the down payment. Another expense is the closing costs which can range from 3% to 4% depending on your loan amount. Today sellers are willing to pay these costs but if you can pay costs yourself you can typically negotiate a lower overall price on the home.
4. Build a healthy savings account. This is over and above the money you will use to purchase your home. You can use money that is in a retirement account for this additional cushion. This will assist you in getting a higher loan amount and take care of unforeseen repairs that may catch you by surprise. It’s a good idea to plan on setting aside money for repairs and general maintenance of around 2%. So on a $200,000 loan, setting aside $400 will generally take care of most costs.
5. Get preapproved for a mortgage. This is a must for home buyers. The best thing you can do is sit down with your mortgage advisor and get your financing in place. The approval process is much more intensive that it has been over the last 10 years but don’t be frightened, it’s not much different than it was 20 to 30 years ago. You will need to have documentation such as 2 months bank and savings account statements, 401k or retirement and investment statements, 2 years of tax returns and W2’s (if you’re self-employed or own a business there is more documentations you will need) and the last 30 60 days of current paystubs. If you have properly documented your loan from the beginning, you will find the approval process very easy.
6. Buy a house you like. It used to be you could buy a home and in 5 years sell it if your circumstances changed or your family grew or you just got tired of the neighborhood. As we have seen over the last 5 years, home prices have made it difficult to quickly sell your home. Make sure you really like the home you are buying!
For more information, please don’t hesitate to contact me.