Updated: 8/17/2011 1:24 PM ET|
6 must-dos for homebuyers
The days when you couldn't go wrong in real estate are long gone, but that doesn't mean homeownership is a mistake. Here's how to get it right.
You might be ready to buy a home, but are you armed with the knowledge you need? Do you know about credit score requirements? Are you familiar with flexible standards on Federal Housing Administration loans?
Whether you are a first-time homebuyer or an experienced owner, buying a house requires a "preflight check," in the words of Barry Zigas, the director of housing policy for the Consumer Federation of America.
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
"It's a brave, new world with respect to credit requirements for mortgages," says John Ulzheimer, the president of consumer education at SmartCredit.com, and formerly of FICO, which pioneered credit scoring.
One old rule still applies: 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," Zigas says. And that's pretty much the cutoff range for getting a mortgage, he says.
Vicki Bott, the 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.
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, Ulzheimer says. (Get an estimate of your credit score range here.)
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 in place until after you close on your home, Ulzheimer says.
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 do, 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, says Susan Tiffany, director of consumer periodicals for the Credit Union National Association. (Get a closer look a the numbers with MSN Money's "How much house can I afford?" calculator.)
Improve your chances by: trying on that financial obligation long before you sign the mortgage papers, says Tiffany. 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 pay 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, she says.
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 need money to pay closing costs, which 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.
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As a 1st time homebuyer, I wish I woulda save more $$ and opened less CC's, but I had the credit so I got it.........haven't used more than 30% and I saved a good 10K, but we're doing an FHA with 3% down and the bank is paying the transfer and title tax which is great and my mortgage, sans insurance and stuff, is like half of my rent now and we're only buying for about 100K but she's in good shape, clean and only needs minor work.
4.9% fixed 30 year.............not too shabby for a rating of only 713.
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