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.
Improve your chances by: banking your own money while you search out down-payment assistance. Often it's location-based or tagged to a certain type of buyer, like first-timers, Tiffany says. 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 have 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, the bill for a new roof, water heater or other big-ticket item can hit suddenly and hard.
Improve your chances by: setting aside money every month. Plan to spend 2.5% to 3% of your home's value annually on upkeep, repairs and maintenance, says Joseph Gyourko, the chairman of the real-estate department at the Wharton School of the University of Pennsylvania. If you're buying a $250,000 home, aim to bank $520 to $625 per month.
5. Get preapproved for a mortgage
For serious home shoppers, "the No. 1 thing is they better have everything in order," says Dick Gaylord, a past 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.
And the preapproval process is "much more extensive" than it was a few years ago, he says.
Bott agrees. "That documentation around income and assets is very essential, more so than in the last five years," she says.
Improve your chances by: getting financing in place "before you walk through the first house," Gaylord says. Otherwise, he says, "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.
Gone are the days when you could count on a quick sale, Tiffany says. 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, Gyourko says, and making certain "you like the house."
This article was reported by Dana Dratch for Bankrate.com.
VIDEO ON MSN MONEY
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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MSN REAL ESTATE
One online calculator tells a reader he's on track, and another tells him he'll need to save half his salary from now until he retires. Which one are you supposed to believe?