By Dana Dratch for Bankrate.com
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?
Have a checklist
Whether you are a first-time buyer or an experienced owner, buying a house requires a “preflight check,” in the words of Barry Zigas, director of housing policy for the Consumer Federation of America.
Read on for Bankrate’s six-item checklist, including tips on the types of savings you need, plus advice about what matters beyond purchasing a home at its resale value.
Strengthen your credit score
“It’s a brave, new world with respect to credit requirements for mortgages,” says John Ulzheimer, president of consumer education at CreditSesame.
One old rule still applies: 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,” Zigas says. And that’s pretty much the cutoff score for getting a mortgage, he says.
Higher scores wanted
Vicki Bott, a former official at the U.S. Department of Housing and Urban Development, says that her office 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.
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.
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, as almost one-fifth of buyers get FHA-insured loans, your home payment can’t exceed 31 percent of your monthly income. But with some mitigating factors, FHA will let you go higher.
Realistic debt-to-income ratio
For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, director of personal finance information for adults for the Credit Union National Association.
For a rough assessment of how much house you can afford, check out Bankrate’s new house 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’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, she says.
Save for down payment, 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 need a credit score of 500 or higher. And in the 500 to 579 range, if you can find a lender, you’ll have to put 10 percent down instead of 3.5 percent.
One exception: Veterans Affairs loans, which 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, 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 and seeking down payment assistance, Tiffany says. Often it’s location-based or tagged to a certain type of buyer, like first-timers, she says. 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.
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 percent to 3 percent of your home’s value annually on upkeep, repairs and maintenance, says Joseph Gyourko, professor of real estate at the Wharton School of the University of Pennsylvania. If you’re buying a $250,000 home, aim to save $520 to $625 per month.
Get preapproved for a mortgage
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.
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 asks, “How do you know how much you can afford?”
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.”
