Are you financially ready to buy a house?
BY JULIA LAYTON
Make sure you're on a financially sound footing before you start scouting out neighborhoods. See more real estate pictures.
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It's tough to miss one of the major themes of the 2008 U.S. housing-market disaster: A lot of people who were buying houses weren't financially prepared to do so. They thought they were. They were told they were. But as it turns out, not so much.
If you're considering home ownership, you've got a lot to think about -- and which neighborhood you want to live in is farther down on the list than you may think. If you buy a house before your financial situation warrants it, the house you choose in the neighborhood you love could end up being owned by the bank, among other unfortunate possibilities.
So, what are the most basic financial qualifications you want to meet before starting your home search in earnest? They're pretty simple, really, although it may take some time and effort to realize them.
Here, a few of the financial questions you'll want to ask yourself when considering purchasing your own place -- a place where you could tear out a wall if you wanted to, or put a skylight in every room.
First and possibly foremost, you'll want to know what the mortgage world thinks of you ...
How's your credit?
How much can you put down?
Can you afford the payments?
How's your credit?
The bane of so many impulse buyers, your credit score is not something you want to undervalue when you're thinking of purchasing a home. It should be one of the first considerations on your list, to be addressed well before you take a step into a bank or broker's office, because it affects the kind of mortgage they'll offer you.
Your credit score is a compilation of your entire credit history, pretty much every purchase, payment, loan, past-due balance, default or bankruptcy in your adult life. The better your credit behavior -- paying off credit card balances on time, having open credit appropriate to your income, making loan payments promptly -- all of it counts.
Scores range from 300 to 850. Very few people can manage an 850, which is perfect credit. Don't worry about perfection here, since anything above 720 is considered "excellent" and will win you the best mortgage rates available. If your score is above 720, you can check this one off your list.
"Good" credit (680-719) will also get you fine mortgage terms. "Average" (620-679), on the other hand, might require a bit more work. While it doesn't rule out a decent mortgage, it does require some extra attention to figure out if it's in your best interest to accept the terms: They may leave a bad taste in your mouth.
If your credit score is "Poor" (580-619), you can still get a mortgage, but you'll be paying a lot more in interest -- basically whatever the bank wants you to pay, since they consider you a risk. Being at the mercy of the bank is not a particularly smart way to go.
Below 580, and your best move, in fact your only move if you want to score even remotely fair terms on your loan, is to wait. Focus on raising your credit score through smart decisions and taking action to aid the process. It may take a while, but the difference in your mortgage terms will be dramatic.
Next, the big money drop ...
How much can you put down?
You'll need some serious savings for your down payment, but make sure it's not everything you have.
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It's possible to buy a home with little or no money down. Most experts, however, advise against this.
Your credit score and down payment amount are the two factors with the greatest influence on the kind of mortgage you can secure. Ideally, you want one with a low interest rate and low monthly payments. With good credit, you're halfway there. A downpayment that's at least 20 percent of the house price will get you the rest of the way.
This means that if you're looking at a $180,000 home, you want to have at least $36,000 in the bank set aside for this expenditure. For a $400,000 home, your home-savings account should boast at least 80 grand.
For most of us, that's pretty steep, and there are other options -- less ideal, but still manageable. If you put down less than 20 percent at closing, you'll be paying more each month and you'll have to purchase private mortgage insurance, an extra expenditure in the home-buying process.
Beyond having that 20 percent in the bank, though, experts advise against that chunk of cash being your entire life savings -- especially because you'll probably be paying several thousand in closing costs on top of the money you put down, and some homes can require large repairs early on. If you don't have additional, significant savings on top of that downpayment, you may want to hold off while you build up a better buffer.
Next, obvious but so often misunderstood ...
Can you afford the payments?
The bank informs you your monthly mortgage payment will be $1,900 per month. You've worked through your household budget and concluded you have exactly $1,900 a month to put toward your housing costs. Serendipity! Let's sign it!
In fact, if you have exactly enough to cover your mortgage payments, you don't have enough to buy a house. Your mortgage payments are going to be the biggest cost of home ownership, but they're far from the only ones. Just a handful of the other regular costs include homeowner's insurance (and separate flood insurance, if you'll be living in a flood zone), homeowners association (HOA) fees if the community requires them, yearly property taxes, and maintenance costs lest your home slip into disrepair and lose its value.
Your best move when determining whether you can truly afford to buy a home is to listen to your mortgage broker, take the numbers he or she has produced, and then run them again on your own. Online calculators can help, as can not-for-profit organizations set up to help people just like you enter home ownership smartly.
Even with all the preparations, calculations, waiting and saving, you'll probably find it was worth it when you sign on those dozens (and dozens) of dotted lines and take the keys to your first home -- a home you could, in theory, paint neon green on principal alone.
For more information on finances, home buying and related topics, please feel free to contact me, Kathy@billingsrealtybrokers.com