6 tips on getting finances in shape to buy a home
After years in the doldrums, the housing market appears back on track. Home sales and prices are up, and mortgage rates remain near historic lows, reinvigorating the appeal of homeownership.
But qualifying for a home loan remains a hurdle for anyone without a solid personal balance sheet.
"Now the requirements are much stricter," says Erin Baehr, a certified financial planner in Stroudsburg, Penn. "You have to have the right income, you have to have the right credit score and you have to have the right down payment to get the best rates out there."
In addition, a tight supply of homes for sale in many markets means sellers often have the leverage that comes with receiving competing offers. That means buyers with the financial flexibility to raise their offer stand a better chance of winning out — another reason to bolster one's finances before entering the homebuying fray.
Here are six tips to get financially prepared to purchase a home:
1. ASSESS YOUR FINANCIAL PICTURE AND HOW MUCH HOUSE YOU CAN AFFORD
Before you get too involved in looking at listings, take some time to evaluate your finances thoroughly. If you're a first-time buyer and haven't been saving money or have been living paycheck-to-paycheck while dealing with college loans and other debt, you'll likely have to make major lifestyle changes to get in the best position to buy a home.
Ultimately, you want to get an idea of how much of your monthly income you can reasonably afford to spend on a home.
Stew Larsen, head of Bank of the West's mortgage banking division, suggests using a rough formula that lenders use: Add up the monthly house payment — principal, interest, taxes and insurance — and subtract it from your gross monthly income. The house payment shouldn't be more than 28 percent to 30 percent of the monthly income.
Bankrate Inc. has online calculators that can help estimate how much you can afford based on your income and expenses. Here's one: http://apne.ws/12bNGkc .
2. BUDGET LIKE YOU'RE ALREADY A HOMEOWNER
You've figured out roughly how much money you should devote to housing. But can you actually live on that amount, especially when you consider other costs, such as repairs, utilities, which often run higher than in apartments, and if you live in a condominium, homeowner association fees?
Baehr recommends renters calculate the extra monthly costs that come with homeownership and start setting aside that amount. This accomplishes two goals: Saving money for a down payment and getting them accustomed to the financial constraints of homeownership.
"Start to put that money away and see if you can live without it," Baehr says. "If you can't do it now, you're not going to be able to do it later."
3. SHOOT FOR 20 PERCENT DOWN
While some loan programs allow homebuyers to make a down payment of as little as 3.5 percent of the purchase price, experts say you'll need to save enough for at least a 20 percent down payment in order to get the lowest interest rate and avoid having to pay private mortgage insurance, or PMI.
If you're a military veteran, you can qualify for a loan program that enables veterans to obtain a mortgage without a down payment.
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