Before you jump into homeownership, you need to learn about essential parts of the process.Here’s a six-item checklist, including tips on the types of savings you need plus advice about what matters beyond purchasing a home at its resale value.
Before you jump into the wonderful world of homeownership, you need to learn about essential parts of the process as a first step.
Whether you are a first-time buyer or an experienced owner, buying a house requires a “preflight check,” in the words of Barry Zigas, director of housing policy for the Consumer Federation of America.
Here’s a six-item checklist.
1. Strengthen your credit score
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“It’s a brave, new world with respect to credit requirements for mortgages,” says John Ulzheimer, president of The Ulzheimer Group and a nationally recognized credit expert.
The higher your credit score, the lower your monthly payments. “Below 660 or 680, you’re either going to have to pay sizable fees or a higher down payment,” Zigas says.
Vicki Bott, a former official at the U.S. Department of Housing and Urban Development, says that her office 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.
On the other end, a score of 700 to 720 will get you a good deal, and 750 and above will garner the best rates on the market.
Improve your chances by: pulling your credit reports and ensuring you’re not being unfairly penalized for old, paid or settled debts, Zigas says.
Stop applying for new credit a year before you apply for financing. And keep the moratorium until after you close on your home, Ulzheimer says.
2. Figure out what you can afford
If you’re using Federal Housing Administration financing, your home payment can’t exceed 31 percent of your monthly income. But with some mitigating factors, the FHA will let you go higher.
For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, retired director of personal finance publications for adults for the Credit Union National Association.
Improve your chances: by trying on that financial obligation before you sign the mortgage papers, Tiffany says. Before you home shop, calculate the mortgage payment in your intended price range, along with the increased expenses. Then bank the difference between that and what you’re paying now.
3. Save for down payment, closing costs
Depending on your credit and financing, you’ll typically need to save enough money for a down payment — somewhere between 3 and 20 percent of the home’s price.
To get an FHA loan, you need a credit score of 580 or higher. 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. For a $200,000 mortgage, closing costs run (depending on where you live) from $2,300 to $4,000.
Improve your chances: by banking your own money and seeking down-payment assistance, Tiffany says. Search online with the city name, then the county name, along with word combinations such as “down-payment assistance,” “first-time homebuyers” and “homebuyer’s assistance.”
In a buyer’s market, you can also negotiate to have the seller pay a portion of the closing costs.
4. Build a healthy savings account
Building your savings is something you should do over and above saving 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.
That money will also help cover 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.
Improve your chances by: setting aside money every month.
A good rule of thumb: On average, you’ll spend 2.5 to 3 percent of your home’s value annually on upkeep, repairs and maintenance, says Joseph Gyourko, professor of real estate at the Wharton School of the University of Pennsylvania.
5. Get preapproved for a mortgage
For serious home shoppers, “the No. 1 thing is they better have everything in order,” says Dick Gaylord, broker with Re/Max Real Estate Specialists in Long Beach, Calif., and former 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.
Improve your chances by: getting financing in place “before you walk through the first house,” Gaylord says. Otherwise, he asks, “How do you know how much you can afford?”
6. Buy a house you like
If you’re buying today for yourself and your family, you want a home that will make you happy for the next few years.
Short-term ownership can be a pretty expensive proposition.
Improve your chances by: stepping back, Gyourko says, and making certain “you like the house.”