A high credit score snags you the best deals. “Below 660 or 680, you’re either going to have to pay sizable fees or a higher down payment,” says Barry Zigas, director of housing policy for the Consumer Federation of America.
A score of 700 to 720 will get you a good deal, and 750 and above will garner the best rates on the market.
Pull your credit reports and make sure you’re not penalized for old, paid or settled debts.
Stop applying for new credit a year before you apply for a mortgage. Keep the moratorium in place until after you close on your home.
Step 2. Figure out what you can afford
There are various ways to determine how much house you can afford. If you’re usingan FHA loan, your monthly payment can’t exceed 31 percent of your monthly income. The FHA will let you go higher under some circumstances.
For conventional loans, home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, retired director of personal finance publications for adults for the Credit Union National Association, or CUNA.
Use Bankrate’s calculatorto figure out how much house you can afford. Add to that other housing expenses, such as taxes, insurance and utilities. Then, bank the difference between that total and what you’re paying now.
Step 3. Save for down payment, closing costs
You’ll need to save between 3 percent and 20 percent of the house price for a down payment. Your credit history and loan terms help determine how much you’ll need to come up with.
For example, with an FHA loan, the down payment requirement can be as low as 3.5 percent. You’ll need a credit score of at least 580. Home loans backed by the Department of Veterans Affairs, or VA, require no down payment.
If a big down payment is a hardship, look for down-payment assistance. Search online using the city name, the county name and key word combinations such as “down payment assistance,” “first-time homebuyers” or “homebuyer’s assistance.”
Down-payment assistance often is based on location or for particular buyers, such as first-time buyers. In a buyer’s market, you can negotiate to have the seller pay a portion of the closing costs.
Step 4. Build a healthy savings account
Building up yoursavings, not just for a home, is very important. Your lender wants to know that you’re not living paycheck to paycheck. If you have three to five months’ worth of mortgage payments set aside, you’re a much better loan candidate. Some lenders and backers, like the FHA, will give you more latitude on other criteria if they see that you have a cash cushion.
That money will also help pay for maintenance and repairs of the home. Most repairs are sporadic, but big-ticket fixes such as a new roof or water heater can come up suddenly and drain your budget.
A good rule of thumb is to assume that you’ll spend 2.5 to 3 percent of your home’s value each year on upkeep and repairs. If you buy a $250,000 home, aim to save $520 to $625 per month.
“The No. 1 thing is (homebuyers) better have everything in order,” says Dick Gaylord, of Re/Max Real Estate Specialists in Long Beach, California, and a former president of the National Association of Realtors.
Gaylord says you should get a mortgage preapproval “before you walk through the first house.” Otherwise, “How do you know how much you can afford?”
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