Ready to make the move from Renterdom to Home-ownership? Buying a home is one of the most important and expensive decisions you're likely to make. A little preparation can go long way to making the process run smoothly and minimize surprises that could undermine the transaction. Read on for our tips.
- Calculate Your Housing Budget: Use a free, online mortgage calculator to determine how much of a mortgage payment you can afford based on the amount of money you have for a down payment. Be realistic about what you can afford.
- Check Your Credit Reports:Experian, Transunion and Equifax are the three primary credit reporting agencies. It's important to check all three because different lenders use different credit bureaus both to report bad credit or to check a prospective client's credit. You can obtain a free credit report from all three agencies on an annual basis from annualcreditreport.com.
- Clean Up Your Credit Report: Look for errors on the report such as items that might actually belong to someone with the same or a similar name or erroneously reported items. If items on the report are correct, work with the lender who filed the report to clear up the problem. Your credit report should be as clean as possible when you apply for the mortgage.
- Show Employment Longevity: Many lenders require that applicants have been with an employer for a year or more. It shows dependability and improves your standing.
- Review Your Debt-to-Income Ratio: Conventional lenders require a ratio of 28/36. Yearly gross income is divided by 12 to determine the monthly income. Housing costs should not exceed 28% of that number. Housing costs combined with other recurring debt such as personal loans, car loans and credit cards should not exceed 36% of that monthly gross income number. If your ratios are not in line, you may need to pay down some debt before applying for a mortgage.
- Don't Take Out New Loans: New debt or credit cards make lenders nervous. You have new debt with payments that you haven't had long enough to demonstrate the ability to pay. If your debt-to-income ratios are okay, it may not be a factor but if they're close, it could tip the balance against you.
- Get Preapproved: Many lenders will perform a "preapproval" for potential buyers. Credit scores, employment verifications and financial stability are checked allowing the lender to determine what amount of loan they would agree to grant you. This gives you increased bargaining power with sellers as a result. Wells Fargo Home Mortgage provides an on-line preapproval calculator to get you started.
- Save Your Money: The rule of thumb is 20% of the purchase price of the house is required as a down payment. Some programs such as those for first-time buyers may allow for smaller down payments but the more you have at your disposal, the better.
- Determine Your Housing Requirements: Just because the mortgage lender approves you for a large dollar amount doesn't mean you have to use the full amount. Determine what you really need from your house. How many bedrooms, bathrooms and garage spaces will you really need? Do you have to have acreage or will a regular lot provide for your needs? Overextending yourself on the house of your dreams may prove a financial strain down the road even if the lender says you're qualified. Here's a checklist you can use to help determine your housing needs.
- Know the Area: Investigate the neighborhood before making an offer, particularly if you are unfamiliar with the area. Find out about crime rates, school districts, and the local traffic patterns at different times of day that might impact you. Talk to neighbors. Read the local newspaper. Be sure this is the community you want to live in.
- Take Advantage of Perks: Okay, make it 11 tips! Our last piece of advice is that it pays to investigate available incentives, such as the government's First-time Home Buyer's tax credit set to expire in the spring of 2010, that you may qualify for and that may affect the timing of your decision.
Spend some time preparing for the big step of buying a home. Knowing what to expect and anticipating the steps of the process will make it flow more smoothly. You could be spending years living with your decision, so it's important to make the right one. Being prepared can help insure you don't make a move you will regret.