One old rule still applies: The higher your credit score, the lower your monthly payments. Below 660 or 680, you may have to pay sizable fees or a higher down payment. Vicki Bott, a former official at the U.S. Department of Housing and Urban Development, says that her office noticed much the same thing. “While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum,” Bott says. 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. Improve your chances by reviewing your credit report for FREE on Credit Karma. Stop applying for new credit a year before you apply for financing. And keep the moratorium in place until after you close on your home.
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. Improve your chances by: trying on that financial obligation long before you sign the mortgage papers. Before you home shop, calculate the mortgage payment for the home in your intended price range, along with the increased expenses (such as taxes, insurance and utilities). Then bank the difference between that and what you’re paying now. Not only does it allow you to build a nice nest egg, but “you can back away from it,” or scale back, if the payments start to pinch.
Depending on your credit and financing, you’ll typically need to save enough money for a down payment — somewhere between 3.5percent and 20 percent of the home’s price. If you’re using FHA financing, then you need a credit score of 580 or higher. 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. Closing costs typically run between 2% and 5% of the sales price. In a buyer’s market, you can also negotiate to have the seller pay a portion of the closing costs.
Building your savings is something you should do over and above saving 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 have a cash cushion. That money will also help cover 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. Improve your chances by: setting aside money every month. A good rule of thumb: On average, you’ll spend 2.5 percent to 3 percent of your home’s value annually on upkeep, repairs and maintenance.
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. Improve your chances by: getting financing in place before you walk through the first house.
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