Buying a home is a huge investment. Before you jump into the wonderful world of homeownership make sure you are prepared with these six steps. Learn about credit score requirements, mortgage options and other must-do’s.
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,” says Barry Zigas, housing policy director for the Consumer Federation of America. And that’s pretty much the cutoff score for getting a mortgage.
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. Get your credit report and score today, free and with no obligation, at myBankrate.
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.
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Figure out what 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, 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 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.
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. Get the average closing costs in your state at Bankrate’s closing costs map.
Improve your chances by: banking your own money and seeking down payment assistance. Often, it’s location-based or tagged to a certain type of buyer, like first-timers. 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.
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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. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you have a cash cushion.
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. If you’re buying a $250,000 home, aim to save $520 to $625 per month.
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, California, 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?”
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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.
You can’t always count on a quick sale. And depending on how much you put down, and how much you have to shell out to sell and relocate, short-term ownership can be a pretty expensive proposition.
Improve your chances by: stepping back and making certain you like the house.