Buying
a Home
Step 2: Prepare to Qualify
If you think owning a home is for you, start
planning for it right now. You need to get your
finances in order, save for a down payment and
mentally prepare for the responsibility of owning
a home.
Down payment
The down payment is usually
expressed as a percentage
of the price of the house. A $10,000 down payment
on a $100,000
house would be a 10% down
payment.
How much do you need to save for a
down payment? It depends
on a lot of variables.
Different
banks require different amounts,
between 3% and 10% depending
on the
program, and often give
better interest rates for down
payments larger than 10%.
Some programs even will let
you put 0% down.
Check with your local
city or county government
for special programs that
may offer down payment assistance
or reduced down payment requirements.
To qualify, your household
income will need
to be lower than the
program's income requirements,
or you'll need to buy
a home in an area targeted
for redevelopment.
No matter how much you
need for a down payment,
save more. There are
a lot of fees included with
buying a house and you'll be
in much better financial
shape when you move in
if you've given yourself
a little padding.
Unless
you're some kind of a financial
magician, don't try to pull
this down payment out
of your finances all at once.
Decide how much you want
to spend on a house and
how much you will
need to save for a down
payment. Saving a
reasonable amount every month,
you can compute a target
date when you will
have your down payment
and start
your house shopping.
If you're going to be saving money,
you might as well
have it work for you.
Check into short
term Certificates
of Deposit (CDs) and Money
Market
Accounts to earn
some interest while
you're adding more
to savings.
It won't be a lot
of interest but
every little bit helps.
PMI - Private Mortgage Insurance
If you put less than 20% down
on your home, you'll be charged
PMI, Private Mortgage Insurance, as part of
your monthly
house payment. This insurance
protects the lender from loss if you default
on your loan
and the lender has to sell
your home to recover its money.
Once your loan
principal drops
to 80% of the total value
of your home, either through
paying loan principal or increasing the
value of your home, you will
no longer have to pay PMI.
PMI can be a very substantial cost, as much
as 20% of your
monthly payment, so get
rid of it as soon as you
can.
Check your credit report
Becoming familiar with your
credit report is an important
part of financial fitness at all stages in
life. But it's especially
important when you're ready
to buy a house. The better your credit rating,
the better interest
rate you're likely to get.
So while you're taking the time to save money
for a down payment,
take some time to get your
credit report in order.
Your first step is
to get a
copy of your credit report
as soon as possible. Contact
one of the three major credit
bureaus:
For
more information on what
is contained in your credit
report, see our credit cards section.
If there
are any errors
on your credit
report, contact the credit
agency immediately.
For other problems, earned
problems we'll
call them, there are ways
to fix them, but it will
take some time and effort.
Don't trust anyone who
claims to be able to fix
your credit instantly or
erase your credit
history. It is illegal
to falsify your credit rating.
Here are ways to
legally fix your credit.
If you have poor debt ratios, meaning
too much debt compared
to your income,
start paying down your
debt. That's not an easy
thing to do.
But it's crucial
in repairing
your credit and getting
favorable interest rates.
If you have insufficient credit history,
you're in a
good position to build good
credit. If you can, get
a credit card
and be sure not to
carry a
balance
on it. If you
don't qualify for a
credit card, apply for
a department
store charge card.
Be sure to pay it off every
month because those
cards can have extraordinarily
high interest rates.
Whenever you apply for credit,
the inquiry by the
potential
creditor shows up on your
credit history.
If you have
too many inquiries
on your credit
history,
you need to play
the waiting game.
Stop applying for credit.
These inquiries
will become
less relevant as
time passes and, as long
as you don't
continue to apply
for more credit, this
will cease
to be a problem
fairly quickly.
If you just can't wait
to fix
your credit and you need
to move
forward with buying a house,
you
don't have
to live
with your mistakes
for the next 30 years.
Three things
determine mortgage interest
rates:
your
credit
history, the amount
of your
down payment and
your current income.
If
your credit
rating
isn't as positive
as you'd like it to be
(or as
the banks would like it to
be, really)
try to
increase your down
payment
and income to make up
for it.
Sure, easier said than done.
If worst comes to
worst, you may have
to accept
a higher interest rate
to start
with.
If you
continue to improve
your
credit rating
(which you will do, right?),
you may
qualify for a lower interest
rate in a few
years
and then
you can
refinance your mortgage.
Document soup
When it's time to qualify for
a mortgage, you'll need to
document a lot of your financial life. That
means digging through
your files to retrieve documents
you probably thought you'd never need again.
Your document
soup ingredients will probably
include the following:
- The past two or three
years
of tax returns
- Paychecks
or pay stubs for the
past month that include your social
security number
- W-2 forms for the past
two to three years
- Recent
credit card statements
- Payment
records for all other
loans
- Bank account statements for the past three
months
- Brokerage
account statements for
the past
three months
- Retirement account
statement
- Your
car title(s)
- Business
tax
filings if you are self-employed
- If you're selling
a house, the sales
contract
- Any bankruptcy documents
- Life
insurance policies
- Documentation of any
other sources of
income, including a second
job, anticipated
overtime, sales
commissions, bonuses,
interest and
dividend income,
Social Security payments,
alimony, child
support, etc.
- If your employer
is offering relocation
assistance,
a documented agreement
- A complete
list
of
creditors, including minimum
monthly payments
and
balances
- Cancelled checks
from recent rent payment
Get pre-qualified
Negotiating for a house is a
lot easier when you have a
check for the full amount in your back pocket.
That's about what
you have when you pre-qualify
for a mortgage. Based on your financial strength,
a lender
will give you a firm commitment
on a loan for a certain amount even though
you haven't yet
identified a specific property.
You can shop around for houses with confidence,
knowing that if you find
one within the amount of your pre-approval,
you will get financing if
you decide to buy it. And when
it comes time for negotiations,
you're in a much better position
because the seller knows you
can get the financing. |
