Research and Planning are Keys That Open the Door to Homeownership
Purchasing a first home can be one of the most exciting experiences in life. But, if you’re not familiar with the home buying process, the experience can be akin to doing a belly flop into the middle of the ocean. So, whether you’re considering a modest starter home or a five-bedroom house in a posh neighborhood, you’ll do well to familiarize yourself with the ins and outs of buying a home.
Ask plenty of questions. Begin by quizzing your friends and family who have recently bought a home. Did they do something they shouldn’t have; should they have done something they didn’t? Besides offering some good general information, they can provide you with real estate agent and lender referrals.
Call your financial institution to learn of possible home buying seminars, or look in your local newspaper for sessions hosted by community groups. These educational sessions are usually offered for free or for a nominal cost. And they often feature a speaker with a financial background who can, in addition to explaining the home buying process, offer strategies for budgeting and improving credit scores.
Your local book bookstore is always a good resource. If you’d rather learn about the process from your desk, consider online sources such as the U.S. Department of Housing and Urban Development’s Web site, which offers information geared toward the first time homebuyer.
Understand your finances. So the handsome colonial you’ve been admiring for the last year has been put on the market. Before you put your big toe over the threshold, calculate how much you can spend on a home. Shopping for unaffordable homes is an exercise in futility and a real spirit dampener. By learning how much house you can realistically afford, you can pour your time and energy into finding the ideal home in your price range.
The rule of thumb says your house payment shouldn’t exceed 28 percent of your income. In other words, if your annual household income is $70,000, your monthly house payment shouldn’t be any more than $1,633. This amount should not only include your mortgage, but your property taxes, homeowner’s insurance and private mortgage insurance (providing you have less than a 20 percent down payment), and any association fees. You’ll also want to figure in the cost of yearly maintenance, which is about 3 percent of the home’s total value.
Phone your local property appraiser’s office for an estimate on property taxes on the homes in your price range. When you phone an insurance company to inquire how much it will cost to insure the home, have details ready such as the address, square footage, and the distance to the nearest fire department.Even though your yearly income will grow over time, you may wish allot a smaller percentage of your income to your housing expenses, if, for instance, you plan to have children, or you’re late on paying into your retirement fund and want to increase your contributions to make up for lost time. You can reduce your monthly mortgage payments by putting a substantial down payment on your house, or by buying a more modest house until you’re financially ready to shoulder a large mortgage.
Order your credit reports. About the same time you figure out how much you can spend on a house, you’ll want to order copies of your credit report from each of the three credit reporting bureaus (Equifax, TransUnion, and Experian). Examine your report for things like accounts that belong to someone else and closed lines of credit that are still being reported as open.
If your credit has some blemishes, you may want to put off purchasing a home until you clean up your credit rating. Making your car payments on time for at least three consecutive months and paying down credit card debt will help demonstrate to creditors that you’re responsible enough to take on the responsibility of a mortgage. With an improved credit standing, you’ll have a better chance of qualifying for a reasonable interest rate.
Lenders like to see a debt-to-income ratio of less than 36 percent, depending on the lender. That means that no more than 36 percent of your pretax income should go to paying your mortgage, credit cards, alimony, student loans, and auto loans.(You still may qualify at a higher debit to income ratio, but you’ll likely feel financially squeezed.)