I’ve wanted to buy my first home for a while, but when my landlord told me that my rent was going up to $900 a month, I got serious about it.
So I researched the estimated value of the house I rent now ($160,000) on my local property appraiser website. Then I plugged the number into Zillow’s Mortgage Calculator. If I owned this house, my total monthly payment would be $817. In other words, I could pay my mortgage, property taxes, and homeowners insurance for $83 less than what I pay in rent each month.
I’m not alone in thinking it’s time to buy. In the video below, Money Talks News Founder Stacy Johnson talks to a real estate professor who says if you’ve been sitting on the sidelines, now’s the time to get in the game. Check it out, then read on for a checklist to get you started…
But get informed before you do anything. Last year, the mortgage website Zillow surveyed prospective home buyers for a study on mortgages. They gave the wrong answers to basic mortgage questions 46 percent of the time – and 44 percent admitted they don’t understand the mortgage process. So if you’re confused, you’re clearly not alone. Here are some steps to take…
1. Make sure you’re ready
Housing turnaround or not, being a homeowner doesn’t work with every lifestyle. Ask yourself:
- “Is my job secure?” – Taking on a huge debt might lead to financial trouble if you lose your job in a few months or years…especially if finding a new one requires relocating.
- “Do I plan to stay put?” – I know I want to spend the rest of my life in my city. If I buy a house now, I won’t be selling it for a long time. But if you’re not sure where you’ll be five years from now, renting might make more sense. That’s because using a real estate agent to sell a house can cost 6 percent or more – sell your home before you have that much equity and you’ll lose money.
- “Am I in a transition?” – If you’re not changing towns, you might still need to change homes. Life changes like marriage and kids can require a different house.
2. Know what you can afford
You don’t want to end up house poor and struggling to pay your other bills because your mortgage is too expensive.
Your housing payment – including the mortgage, real estate taxes, and homeowners insurance – shouldn’t exceed 28 percent of your monthly gross income. To determine the most you can afford each month, multiply your annual take-home pay by 0.28 and divide that number by 12.
3. Shine up your credit
Lenders have strict credit requirements after the housing market apocalypse. In 2011, the average credit score approved for a Fannie Mae or Freddie Mac mortgage was 760, according to CNNMoney. The average credit score for an FHA approval was 700. To qualify for the best conventional loan, you’ll need at least a 740 credit score, according to Bankrate.
Order free copies of your credit reports through AnnualCreditReport.com, then check out 3 Tips to Raise Your Credit Score – Fast for ideas on boosting your score before you apply for a mortgage. You should check your credit at least 6 months – preferably a year – before home shopping so you’ll have time to improve it before applying for a loan.
4. Get your down payment together
These days many lenders want at least 20 percent down, but even if they don’t, the bigger the down payment, the better. Zillow analyzed 3.6 million mortgage inquiries and found that the best loan rates came with an average down payment of 28 percent, according to USA Today.
If you go with an FHA loan, you can qualify with a lower down payment – as low as 3.5 percent of the purchase price – according to HUD. But make sure you have it before you apply. Also be aware that without 20 percent down, you’ll be faced with an extra expense: Private Mortgage Insurance, also known as PMI. See Ask Stacy: Can I Avoid PMI?
5. Get pre-approved for a mortgage
Once your credit is good and you have your down payment together, it’s time to apply for a mortgage. Do it before you start home shopping and be sure you’re pre-approved for a loan: That means the lender has agreed in writing to lend you up to a certain amount. This is critical, because pre-approval means that unless your financial situation changes, you basically have that amount of money in your pocket and can pounce when you find your dream home.
Use our mortgage search to find the best mortgage deals in your area.
6. Build your team
Buying a house isn’t a solo project. You’ll need a good lender and a great real estate agent to get the best deal. Before I selected a lender, I used the Nationwide Mortgage Licensing System and Registry to make sure they were licensed in my state, and checked the BBB and complaints sites for past problems. Then I followed Brandon Ballenger’s advice in Buying a House? Pick the Right Pros to find a real estate agent I wanted to work with.
7. Know your housing market
Stories like this one and others in the national media about the housing market turning around are good news, but that alone isn’t enough. As Stacy said in the video above, real estate is local. National statistics aren’t important – what’s happening in your neighborhood is.
Find the answers to the following questions. Some you can get by reading the local paper, some by contacting your local chamber of commerce, and some by talking to your real estate agent…
- How long are houses sitting on the market? – Your agent can tell you the average number of days it’s taking to sell homes in the neighborhood you like. You’d like to see these numbers dropping.
- Inventory – How many homes are available in the neighborhood? Again, you’d like to see falling numbers, because that indicates demand is gaining on supply.
- The employment picture – Without jobs, there’s no need for houses. Is the unemployment rate falling?
- Population growth - Population growth supplies the demand for housing. If you’re in an area with a shrinking population, that’s not a good sign.
More articles on home buying:
- 5 Dumb Moves Homebuyers Make
- How NOT to Buy a Foreclosure
- 10 Ways to Cut the Cost of Homeowners Insurance