Friday, May 05, 2017 / by Cambria Henry
Buying a home is a huge investment. Before you jump into the wonderful world of home-ownership make sure you are prepared with these 6 steps. Learn about credit score requirements, mortgage options and other must-do's
6 Simple Steps to Buying a House
- Strengthen your credit score
- Figure out what you can afford
- Save for down payment, closing costs
- Build a healthy savings account
- Get pre-approved for a mortgage
- Buy a house you like
Strengthen your credit score
"It's a brave, new world with respect to credit requirements for mortgages," says John Ulzheimer, president of The Ulzheimer Group and a nationally-recognized credit expert.
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.
Improve your chances by: pulling your credit reports and ensuring you're not being unfairly penalized for old, paid or settled debts, Zigas says.
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% of your monthly income. But with some mitigating factors, the 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% of your gross monthly income, says Susan Tiffany, retired director of personal finance publications 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% and 20% of the home's price.
To get an FHA loan, you need a credit score of 580 or higher.
One exception: Veterans Affairs loans, which require no down payment.
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 3 to 5 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.
Get pre-approved 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 pre-approval 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 5 years," she says.
If you're buying today for yourself and your family, you want a home that will make you happy for the next few years.
You can't always count on a quick sale. 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.