January 16, 2018
January 16, 2018
Congratulations! You’ve decided that you’re ready to buy a house. Here are some things you need to know before you start shopping:
How much you can put down – You probably already know you need a down payment to buy a house. Twenty percent of the sale price used to be the standard amount, and it’s a good amount to shoot for. Many loans let you put down as little as five percent of the purchase price, but you’ll need to pay for mortgage insurance if your down payment is less than 20 percent.
Keep in mind that banks won’t let you use all of your savings for your down payment. They want you to have some money left in the bank to pay for moving expenses and emergencies, so you don’t skip a mortgage payment.
What monthly payment you can afford – If you don’t have a budget or spending plan, now’s the time to make one. Factor in all of your fixed expenses, such as a monthly car payment, utilities, and insurance, as well as your discretionary expenses, such as groceries and clothing. Whatever amount you set aside for your monthly house payment will have to cover the mortgage, any private mortgage insurance, property taxes, homeowner’s insurance, and any homeowner’s association fees.
How much house you can afford – Once you know how big your down payment is, and what maximum monthly payment you can afford, you can figure out how much you can spend on a house. Mortgage calculators are very useful, especially because you can play with the numbers to see how the results differ. Don’t forget to deduct the cost of property taxes and homeowner’s insurance from your maximum monthly housing amount. You can usually find the amount of property taxes charged in your area with an online search (it will likely be expressed as a percentage of the property value), and use an insurance quote generator to get an estimate of the cost of a homeowner’s policy.
Your credit score – To qualify for a mortgage, you generally need a minimum credit score of 620, but the higher your score, the lower the interest rate on a mortgage. In fact, if your score is low, it may be worth taking extra time to improve your credit score, because a lower interest rate can save you tens of thousands of dollars over the life of a mortgage. Many credit card companies now provide your free credit score as a perk.
Your credit report – You probably know that any bankruptcies, foreclosures, and history of late payments can hinder your ability to qualify for a mortgage. However, even if you know that such blemishes are on your credit report, you should check your report anyway. Negative events like the ones listed should be removed from your credit history after 7 to 10 years.
And everyone should make sure that there aren’t any errors on their credit report. If you do find an error, be sure to report it.
How much debt you have – In deciding whether to approve your mortgage application, lenders consider your debt to income ratio, and prefer that it to be 36% or less, including any mortgage you take out. Therefore, if you already have a lot of debt, you should consider paying some off before applying for a mortgage, especially if you have consumer debt (as opposed to student loan debt).
How long you plan to live in your new house – If you plan to move within the first five years of buying your house, consider whether you’ll need to sell or if you’ll be able to rent the house out. If you need to sell, think twice about buying now – most of the money you send to your mortgage lender will be for interest so that you won’t be building much equity during that time. Additionally, if the market plummets, the value of the property could decrease without leaving you time to recoup your investment.
Moreover, the length of time you plan to stay in the house can affect the type of mortgage you take out. An adjustable rate mortgage might be more attractive if you don’t plan on staying long-term.
How much work and maintenance you’re willing to do – Before you start looking at houses, you should have an idea about whether you want a place that’s move-in ready or one that requires some (or a lot) of work. You should also know whether you want to maintain a yard and pool, or if you’d rather pay someone. These preferences can significantly impact your budget, as well as the types of properties you’ll want to consider buying.
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