Whether you are a first-time homebuyer or an experienced owner, buying a house requires a "preflight check.” Here is a six-item checklist, including tips on two types of savings you need, plus advice about what's more important than buying a house for its resale value.
1. Strengthen your credit score:
The higher your credit score, the lower your down payment and monthly payments.
Below 660 or 680, you're either going to have to pay sizable fees or a higher down payment. While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum.
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. Stop applying for new credit a year before you apply for financing. And keep the moratorium in place until after you close on your home.
2. Figure out how much house you can afford.
The buyer's mantra: Get a home that's financially comfortable.
There are various rules of thumb that will help you get an idea of how much home you can afford. If you're using FHA financing, as almost one-fifth of buyers get FHA-insured loans, your home payment can't exceed 31% of your monthly income. But, with some mitigating factors, FHA will let you go higher.
For conventional loans, a safe formula is that home expenses should not exceed 28% of your gross monthly income.
Improve your chances by: trying on that financial obligation long before you sign the mortgage papers. Before you home shop, calculate the mortgage payment for the home in your intended price range, along with the increased expenses (such as taxes, insurance, and utilities). Then bank the difference between that and what you're paying now.
Not only does it allow you to build a nice nest egg, but "you can back away from it," or scale back, if the payments start to pinch.
3. 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 3.5% to 20% 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% down instead of 3.5 %.
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 2-5% of the sales price.
Improve your chances by: Along with banking your own money, search out down payment assistance. Often, it's location-based or tagged to a certain type of buyer, like first timers. So do an Internet search 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:
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.
Improve your chances by: setting aside money every month. A good rule of thumb: on average you'll spend 2.5 %-3% of your home's value annually on upkeep, repairs, and maintenance. If you're buying a $250,000 home, aim to bank $520 to $625 per month.
5. Get Pre-Approved for a Mortgage:
For serious home shoppers, the number one thing is that they better have everything in order! That means that, before the real home shopping begins, you want to get financing in place.
And the pre-approval process is "much more extensive" than it was a few years ago. That documentation around income and assets is very essential, more so than in the last five years. Improve your chances by: getting financing in place before you walk through the first house. Otherwise, how do you know how much you can afford?
6. Buy a House that 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.
Gone are the days when you could count on a quick sale. And depending on how much you put down, and how much you must shell out to sell and relocate, short-term ownership can be an expensive proposition. Improve your chances by: stepping back and making certain "you like the house."
If you have followed all six steps above and are ready to buy, call me, I have great Realtors on my team.