Get Your Ducks in a Row Before Purchasing a Home

duckYou might be ready to buy a home, but are you armed with the knowledge you need? Do you know about credit score requirements? Are you familiar with flexible standards on Federal Housing Administration loans  Whether you are a first time homebuyer or an experienced owner, buying a house requires a “pre” check.  Here is a six-item checklist, including tips on two types of  you need, plus advice about what’s more important than buying a house for its resale value.

Strengthen Your Credit Score

It’s a brave, new world with respect to credit requirements for mortgages.  One old rule still applies: The higher your credit score the lower your down payment and monthly payments.  Below 660 or 680, you’re either going to have to pay sizable fees or a higher down payment.  And that’s pretty much the cutoff score for getting a mortgage.  While there are many qualified borrowers in the 580 range, the market today is probably looking for 640 to 660, at a minimum.  On the other end, a score of 700 to 720 will get you a good deal and 750 and above will garner the best rates on the market.

How Much House Can you Afford?

The buyer’s mantra: Get a home that’s financially comfortable. There are various rules of thumb that will help you get an idea of how much home you can afford. If you’re using FHA financing, as almost one-fifth of buyers get FHA-insured loans, your home payment can’t exceed 31 percent of your monthly income. But, with some mitigating factors, FHA will let you go higher.  For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income.

Save for Closing Costs and Down Payment

Depending on your credit and financing, you’ll typically need to save enough money to put anywhere from 3.5 percent to 20 percent down.  If you’re using FHA financing, then you need a score of 500 or higher. And in the 500 to 579 range, if you can find a lender, you’ll have to put 10 percent down instead of 3.5 percent.  One exception: Veterans Affairs loans, which require no down payment.  Another cash expense: closing costs. Whatever your loan source, you’ll also need money to pay closing costs, which run (depending on where you live), from $2,300 to $4,000.

Build a Healthy Savings Account

This is over and above your money for the down payment and closing. Your lender wants to see that you’re not living paycheck to paycheck. If you have three to five months’ worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you save a cash cushion.  That money will also help you with maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.

Get Pre-Approved for a New Mortgage

For serious home shoppers, the No. 1 thing is they better have everything in order. That means that, before the real home shopping begins, you want to get financing in place.   And the preapproval process is much more extensive than it was a few years ago.  Documentation around income and assets is very essential, more so than in the last five years.

Buy a House you Like

If you’re buying today for yourself and your family, you want a home that will make you happy for the next few years.  Gone are the days when you could count on a quick sale. Depending on how much you put down, and how much you have to shell out to sell and relocate, short-term ownership can be a pretty expensive proposition.