By Andrew Housser
Spring is the best of times and the worst of times – to buy a house, that is. The coming season is a tempting time to purchase. A spring or early summer move works well with most school schedules, and available home inventory increases as many families prepare to relocate. Of course, if you are thinking of purchasing a home in the next few months, you also will see a lot of competition. Be sure that you are prepared – and not overextending yourself – with these eight tips.
1. Check your debt ratio. To qualify for a home mortgage, you need to convince a lender that you can pay the mortgage and the bills that go along with home ownership. Lenders usually look for buyers whose monthly debt payments – including all housing expenses – are no more than 36-43 percent of gross (pre-tax) income. For a buyer whose monthly income is $4,000, that means payments on housing, credit cards, auto loan, and student loans should add up to $1,720 or less. Lenders like to see that the total housing payments (mortgage principal and interest, insurance and taxes) of a possible new home will add up to no more than 28 percent of monthly gross (before-tax) income. If your debt is higher, work on repaying some of it before you apply for a mortgage.
2. Check your credit score. Before you even look into buying a home, you should obtain and review your credit reports, and check your credit scores. Credit scores are calculated based on your history paying student loans, car loans, credit cards, any previous mortgages, and other obligations. These days, many banks, credit cards and other financial services make credit scores available to customers periodically. Still, it is smart to check your full credit reports. You can get a free copy each year from www.annualcreditreport.com. If you spot any inaccuracies, contact the credit bureau to have them corrected before you apply.
3. Remember that a home costs more than the mortgage. The mortgage total is just the beginning when it comes to home ownership. You should also be prepared to pay to furnish the home, and manage maintenance and upkeep. You also may take on additional services, such as utilities, internet, cable and trash collection. Be sure you completely understand the fees, benefits and rules of any applicable homeowners association (HOA) before you choose a property.
4. Look into mortgage insurance to make it work. One great thing about buying a home is that you can lock in today’s interest rates. If you are close to being able to put down 20 percent, but a too-small down payment is holding you back, ask your lender about a smaller down payment and private mortgage insurance (PMI) to protect the difference. At least through 2016, you will be able to deduct the cost of PMI on your federal income taxes.
5. Investigate FHA or VA loans. The Federal Housing Administration (FHA) and the Veterans Administration (VA) back some mortgages. These programs have slightly more flexible financial requirements to allow more people to buy a home, especially first-time buyers. FHA loans require a minimum credit score of just 580. VA loans require a minimum of 620. In contrast, many conventional lenders may require a score starting around 720. Government-backed loans permit lower down payments, too – sometimes as low as 3.5 percent down, rather than 10-20 percent.
6. Compare lenders. New FHA rules no longer penalize lenders for a few buyers who default. As a result, some lenders may become more flexible. If one lender turns you down, check with others. Be prepared to prove that you can be a good homeowner. You will want to show that you have steady employment, that you have little debt and any other information that might convince a loan officer to take a chance on you. View the loan application process as a learning experience. Use what the lender tells you to improve your credit for the future.
7. Be aware some properties will not accept an FHA buyer. Sometimes, sellers will not accept offers from buyers with an FHA or VA loan. This may happen for several reasons. FHA or VA loans have lower credit requirements, so these buyers are considered riskier. Other properties might not pass an FHA inspection. Some townhome and condo developments have had too many foreclosures to qualify as FHA properties. If an FHA loan is your only option, have patience to find the right property – and meanwhile, continue to work to improve your credit score.
8. Talk to a housing counselor. Some people associate “HUD homes” with the 1990s, but the Department of Housing and Urban Development (HUD) offers several sound housing programs today. HUD’s housing counselors can help you learn how you can buy a home. Programs such as the “Good Neighbor Next Door” offer discounted homes in certain areas to people who qualify, including teachers and some public workers, like firefighters. When considering purchasing a home, it is important to have a healthy credit score, to carry minimal debt and to maintain a steady employment history. If you are still working on these factors, try to remain patient and focused on your goals. It is possible for many people to buy a home, even in today’s tightening market.
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