Buying a home is quite an investment. In fact, it could be the biggest investment of your life. Well, that and investing in a child (also very costly). For this reason, investing some time in your housing investment is, er, a good investment to make! Yes, we want a housing option without gangsters playing craps on the corner, an amazing pizzeria practically in the building, and maybe a house in a good school district, too (because ya never do know!) But what about the financial and economic aspects to your housing considerations? If you haven’t thought about this side of the die, then you are doing yourself a tremendous disservice further down the line. So, think ahead!
Up your credit score
The higher your credit score is, the better chance you have of getting a good deal, such as one with a decent mortgage that doesn’t come with sizable fees, penalties and high down payments. Barry Zigas, who is the director of housing policy for the Consumer Federation of America, recommends keeping your credit score at, or above, 700. But a credit score of 750 or above will receive the best treatment from the housing market.
There are a number of things that you can do to fix up your credit score. First off, knowing what your credit score even is might help. You don’t want to go into a housing gun fight without knowing what kind of credit gun you’re working with, right? (That was a horrible metaphor.) You can request a free copy of your credit score here. Other than that, there are deliberate actions you can take to improve your credit score today.
What actually is in the cards?
What’s really being realistic, here? Don’t put a down-payment on a house that would cost you, in one payment, what you make in an entire year. Sit down and figure out what you can, and what you cannot, afford to buy. Actually, if you’re using an FHA loan, then you cannot exceed 31 percent of your monthly income to make a monthly payment on a house. And for regular loans, it can’t be more than 28 percent. That is the disqualifying line. So there are some barriers in place to prevent you from making silly financial blunders. However, crunching those numbers anyway might still be a good idea. Here’s a cool calculator that helps you figure out if you can afford to buy Beyonce’s beach house in the Hamptons or not (probably not)!
Down payments/ closing costs
In order to pay your down payment, you will need between 3 and 20 percent of the entire housing cost. This depends on that aforementioned credit history of yours (hopefully you’ve been building it up since we talked about it) and also the terms of your loans. Some FHA loans require down payments as low as 3.5 percent (with a credit score of 580 or higher). The VA (Department of Veteran Affairs) requires zero down payment.
If you are a first-time homebuyer, be sure to check out Freddie Mac’s HomeOne mortgage (only for first-time homebuyers). It has a down payment of 3 percent and will be available at the end of July this year. The definition for a first-time homebuyer here actually is broad enough to include those who have not bought a home for three years (for some reason…) so be sure to make a note if that includes you. Those who Freddie Mac lends to will have to conduct a “risk assessment” from the Freddie Mac Loan Product Advisor, which will examine such things as the potential recipient’s credit profile, an appraisal of the property and an estimation of their capacity to pay back the loan.
As nobody should have to tell you, saving money is very important. And that goes not just for saving for a house, but, well, everything. Most of us aren’t very good at it. But it is vital! If you don’t even know what where or how to use a savings account, then you took a wrong turn somewhere and you need to circle back and figure that one out.
Not that lenders will always check for this, but if you do happen to be able to pay five months’ worth of mortgage payments ahead of time, it is a great weight off of their minds. It shows that you aren’t just living by stealing food off of restaurant tables while patrons aren’t looking — not hand-to-mouth.
Lenders will often give you more leeway if you have some cash handy as a safety net for yourself. It is also important to have money for emergency repairs on your house, and things like that. If you buy a $250,000 home, aim to save $520 to $625 per month. It’s about 3 percent of $250,000, and a good rule of thumb.
You also can check out a few money-saving apps here.
Before you get to looking at houses, make sure all the financial difficulties are squared away. That means, mainly, a mortgage pre-approval to help with your understanding of what’s affordable for you. Again, here Bankrate comes to the rescue with their handy calculator.
Buying a house can be a stressful experience. Such a commitment! But, like most financial decisions, the more you know the less stress you have — even when it comes to knowing what you can’t afford and how much money you don’t have. Get prepared, and tackle the housing market one house (that you cannot afford) at a time. You’ll find a perfect fit eventually!
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