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HOW TO Prepare for House-Hunting Know that there’s no “right” time to buy. If you find the perfect home now, don’t risk losing it because you’re trying to guess where the housing market and interest rates are going. Those factors usually don’t change fast enough to make a difference in an individual home’s price. Don’t ask for too many opinions. It’s natural to want reassurance for such a big decision, but too many ideas from too many people will make it much harder to make a decision. Focus on the wants and needs of the people who will actually be living in the home. Accept that no house is ever perfect. If it’s in the right location, the yard may be a bit smaller than you had hoped. The kitchen may be perfect, but the roof needs repair. Make a list of your top priorities and focus on things that are most important to you. Let the minor ones go. Also, accept that a little buyer’s remorse is inevitable and will most likely pass. Don’t try to be a killer negotiator. Negotiation is definitely a part of the real estate process, but trying to “win” by getting an extra-low price or refusing to budge may cost you the home you love. Remember your home doesn’t exist in a vacuum. Don’t get so caught up in the physical aspects of the house itself that you forget about important issues such as noise level, access to amenities, and other aspects that also have a big impact on your quality of life. Plan ahead. Don’t wait until you’ve found a home to get approved for a mortgage, investigate insurance, or consider a moving schedule. Being prepared will make your bid more attractive to sellers. 1 Choose a home first because you love it; then think about appreciation. A home is still considered a great investment, but its most important role is as a comfortable, safe place to live. A home is not a stock.
HOW TO Prepare to Finance a Home. Develop a budget: Instead of telling yourself what you’d like to spend, use receipts to create a budget that reflects your actual habits over the last several months. This approach will better factor in unexpected expenses alongside more predictable costs such as utility bills and groceries. You’ll probably spot some ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often. Reduce debt: Lenders generally look for a debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt—car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income. Increase your income: Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want. Save for a down payment: Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with 5 percent down or less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment. Keep your job: While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate. Establish a good credit history: Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off entire balances as 1 promptly as possible. Start saving: Do you have enough money saved to qualify for a mortgage and cover your down payment? Ideally, you should have 20 percent of the purchase price saved as a down payment. Also, don’t forget to factor in closing costs, which can average between 2 and 7 percent of the home price. Obtain a copy of your credit report: Make sure it is accurate and correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments. Decide what kind of mortgage you can afford: Generally, you want to look for homes valued between two and three times your gross income, but a financing professional can help determine the size of the loan for which you’ll qualify. Find out what kind of mortgage (30-year or 15-year? Fixed or adjustable rate?) is best for you. Also, gather the documentation a lender will need to preapprove you for a loan, such as W-2s, pay stub copies, account numbers, and copies of two to four months of bank or credit union statements. Don’t forget property taxes, insurance, maintenance, utilities, and association fees, if applicable. Seek down payment help: Check with your state and local government to find out whether you qualify for special mortgage or down payment assistance programs. If you have an IRA account, you can use the money you’ve saved to buy your first home without paying a penalty for early withdrawal.
WHAT TO KNOW About Credit Scores. Credit scores range between 200 and 850, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score: Your payment history. Did you pay your credit card bills on time? Bankruptcy filing, liens, and collection activity also affect your history. How much do you owe and where? If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, spreading debt among several accounts can help you avoid approaching the maximum on any individual credit line. The length of your credit history. In general, the longer an account has been open, the better. How much new credit do you have? New credit—whether in the form of installment plans or new credit cards—is considered riskier, even if you pay down the debt promptly. The types of credit you use. Generally, it’s desirable to have more than one type of credit—such as installment loans, credit cards, and a mortgage.
HOW TO Improve Your Credit Credit scores play a big role in determining whether you’ll qualify for a loan and what your loan terms will be. So, keep your credit score high by doing the following: Check for errors in your credit report. Thanks to an act of Congress, you can download one free credit report each year at annualcreditreport.com. If you find any errors, correct them immediately. Pay down credit card bills. If possible, pay off the entire balance every month. Transferring credit card debt from one card to another could lower your score. Don’t charge your credit cards to the max. Pay down as much as you can every month. Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less severely for problems after a year. Don’t order items for your new home on credit. Wait until after your home loan is approved to charge appliances and furniture, as that will add to your debt. Don’t open new credit card accounts. If you’re applying for a mortgage, having too much available credit can lower your score. Shop for mortgage rates all at once. Having too many credit applications can lower your score. However, multiple inquiries about your credit score from the same type of lender are counted as one if submitted over a short period of time.