Combine low interest rates and improving household finances, and you get a housing market as hot as it ever was, especially in high-priced markets like the San Francisco Bay Area. There, it's not uncommon for a seller to receive 20 or more offers and for sale prices to end up 25 percent over asking prices.
However, since the credit crisis of 2007-09, getting home financing has become more difficult. So it pays to fully understand home financing so you can present your best offer and make sure that the loan process goes smoothly. It's also critical to find mortgage loan officers, real estate agents and financial planners you can trust.
Income, then savings. Banks qualify borrowers on income first, not savings. The general rule is that not more than 40 percent of your pretax income can go to principal, interest, taxes and insurance -- plus any monthly debt obligations such as a car loan, student loans or credit card debt. Lenders will also document that you have enough savings for the down payment, closing costs and at least two to three months of cash reserves covering your PITI plus debt obligations.
Preapproval. This process involves working with your loan officer to document your income, assets and other pertinent issues so that you don't spend time looking at houses that are out of your reach.
Credit score. As early as you can in the home-buying process, check your credit score. The general rule is that a score of 720 and over is golden. A low credit score can increase the interest rate on your loan or prevent you from getting a loan altogether. There are ways to improve your credit score such as paying down balances and checking your credit report for mistakes. Federal law gives you the right to get a free copy of your credit reports from the three major credit reporting companies by going to www.annualcreditreport.com or calling 877-322-8228. You can also pay to get your credit scores.
Gifts. If a generous relative is willing to give you cash to help fund the down payment or closing costs, you can accept it without having to worry about anyone paying taxes now or later. Each American, as of today, has a lifetime gift tax exclusion of $5.34 million, and very few will come close to maxing out. The amount over the annual exclusion ($14,000 a person, $28,000 for couples in 2014) is reported to the Internal Revenue Service on Form 709 the year the gift is given. In addition, lenders require a gift letter from the donor.
%VIRTUAL-article-sponsoredlinks%Verifying income. Self-employment income equals net-pretax income, while income for employees is gross wages, as documented on the W-2. In both cases, lenders want to see at least two years of stable income history. If you are self-employed, be ready to produce a profit & loss statement for all quarters not covered by you last filed tax return. Employees may need to supply tax returns as well if there is large variable income such as bonuses.
Documentation of deposits. Low-document or no-document loans are a thing of the past. Lenders need documentation of your income (wages, Social Security, pension). Also be ready to give an explanation and paper trail for any non-recurring deposits over $1,000 that show up in your two most recent monthly bank statements.
Down payment requirements. Most lenders would like to see a 20 percent down payment. You can put less than 20 percent down but will pay private mortgage insurance. Veterans can qualify for a zero percent down Veterans Affairs loan. Anyone can get a Federal Housing Administration loan and put as little as 3½ percent down, but fees are higher, and there is a mortgage insurance premium.
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"Your daily habits and routines are the reason you got into this mess," writes Trent Hamm, founder of TheSimpleDollar.com. "Spend some time thinking about how you spend money each day, each week and each month." Do you really need your daily latte? Can you bring your lunch to work instead of buying it four times a week? Ask yourself: What can I change without sacrificing my lifestyle too much?
Remove all credit cards from your wallet and leave them at home when you go shopping, advises WiseBread contributor Sabah Karimi. “Even if you earn cash back or other rewards with credit card purchases, stop spending with your credit cards until you have your finances under control,” she writes.
If you do a lot of online shopping at one retailer, you may have stored your credit card information on the site to make the checkout process easier. But that also makes it easier to charge items you don't need. So clear that information. "If you’re paying for a recurring service, use a debit card issued from a major credit card service linked to your checking account," Hamm writes.
Reward yourself when you reach debt payoff goals. "The only way to completely pay off your credit card debt is to keep at it, and to do that, you must keep yourself motivated," Bakke writes. Just make sure to reward yourself within reason. For example, instead of a weeklong vacation, plan a weekend camping trip. "If you aim to reduce your credit card debt from $10,000 to $5,000 in two months," Bakke writes, "give yourself more than a pat on the back."
“Establish a budget,” writes Money Crashers contributor David Bakke. “If you don't scale back your spending, you'll dig yourself into a deeper hole." You can use personal finance tools like Mint.com, or make your own Excel spreadsheet that includes your monthly income and expenses. Then scrutinize those budget categories to see where you can cut costs.
Sort your credit card interest rates from highest to lowest, then tackle the card with the highest rate first. "By paying off the balance with the highest interest first, you increase your payment on the credit card with the highest annual percentage rate while continuing to make the minimum payment on the rest of your credit cards," writes Mint.com spokeswoman Hitha Prabhakar.
To make a dent in your debt, you need to pay more than the minimum balance on your credit card statements each month. "Paying the minimum -– usually 2 to 3 percent of the outstanding balance -– only prolongs a debt payoff strategy," Prabhakar writes. "Strengthen your commitment to pay everything off by making weekly, instead of monthly, payments." Or if your minimum payment is $100, try doubling it and paying off $200 or more.
If you have a high-interest card with a balance that you’re confident you can pay off in a few months, Hamm recommends moving the debt to a card that offers a zero-interest balance transfer. "You’ll need to pay off the debt before the balance transfer expires, or else you’re often hit with a much higher interest rate," he warns. "If you do it carefully, you can save hundreds on interest this way."
Have any birthday gifts or old wedding presents collecting dust in your closet? Look for items you can sell on eBay or Craigslist. "Do some research to make sure you list these items at a fair and reasonable price," Karimi writes. “Take quality photos, and write an attention-grabbing headline and description to sell the item as quickly as possible." Any profits from sales should go toward your debt.
If you receive a job bonus around the holidays or during the year, allocate that money toward your debt payoff plan. "Avoid the temptation to spend that bonus on a vacation or other luxury purchase," Karimi writes. It’s more important to fix your financial situation than own the latest designer bag.