SIX Must Do’s Before Buying a Home
You may think you’re ready to be a homebuyer, but have you done your homework? Do you know about credit score requirements? Are you familiar with the different mortgage options that could be available to you? Whether you are a first-time buyer or an experienced owner, it’s always a good idea to do a quick check to make sure you are ready.
1. Improve Your Credit Score
Credit requirements for mortgages have changed significantly over the last several years, but one old rule still applies: The higher your credit score, the better your rate and the lower your monthly payments. You can obtain FHA financing with credit scores as low as 580, but you will not get the best rates and the fees for FHA financing can be excessive. You will need a score of at least 620 to qualify for conventional financing with the best pricing available to those with credit scores over 740.
Improve your chances by: pulling your credit reports annually to ensure 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 don’t apply for any new credit until after you close on your home.
2. Figure Out What You Can Afford
First and foremost – Get a home that’s financially comfortable for you.
There are various rules of thumb that will help you get an idea of how much home you can afford, but a general rule is your total housing expense should be no more than 28%-31% of your gross monthly income, but with some mitigating factors, you can often go a higher. This includes the mortgage payment, property taxes, homeowners insurance and any homeowners association fees. Also, your total monthly expenses, which includes your housing expense plus any additional monthly debts (such as car or credit card payments) should generally not exceed 45% – 50% of your gross monthly income.
3. Save For Your Down Payment and Closing Costs
Depending on your credit and financing, you’ll typically need to save enough money for a down payment — somewhere between 3 percent and 20 percent of the home’s price. If you’re using FHA financing, then you generally need a credit score of 580 or higher. However, Veterans Affairs loans and USDA Loans require no down payment.
Don’t forget loan fees
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.
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. 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.
5. Get Pre-approved for a Mortgage
For serious home shoppers the No. 1 thing is they better have everything in order. 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. 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 You Like in a Neighborhood You Love
This seems obvious, but often times buyers get caught up in making a deal and lose sight of their initial buying goals. If you’re buying today for yourself and your family, you want a home that will make you happy for the next few years and in order to do that, you will need to be patient until the right home comes along. In Orange County, housing inventory is in very short supply and you are competing with a lot of cash buyers. It frequently happens that you will need to make several offers before you are able to win a home that you really like.