a home is often the largest investment and purchase many people will
make during their lifetimes. Therefore, it only stands to reason that
when you are considering making your first home purchase you need to
make sure your finances are in order first.
Unfortunately, many first-time home buyers make the
mistake of jumping in feet first and shopping around for a home before
they check their finances. The result is often disappointment when they
find they cannot afford the home they have fallen in love with.
current market is one of the best in a long time for prospective home
buyers. Around the country, home prices remain low and interest rates
are still more than affordable. There is also a large inventory of homes
to choose from. Even so, the meltdown of the housing market has caused
many lenders to step back and as a result, mortgage loans are not as
easy to get as they once were. This makes it even more important for
prospective buyers to ensure their finances are in order before they
begin looking for a home to buy.
The first and most important
step should be to check your credit. Buyers must realize that while
mortgage loans are still available, financing is typically restricted to
consumers who have good credit. Your credit score can range from a low
of 300 to a high of 850. The median credit score for consumers in the
United States is around 725. If your score is below 680, you can usually
expect to either pay higher interest rates or have your application for
a mortgage denied altogether. If you check your credit score and find
it is not high enough, give yourself a few months to work on improving
it. Focus on paying your bills on time and also on paying down your
debt. Also, if you notice any errors on your credit report, be diligent
about having them corrected.
In the months leading up to your
home purchase you also need to focus on saving up the money you will
need for the out of pocket expenses associated with purchasing a home.
In the best scenario you will need approximately 20% of the purchase
price as a down payment. Of course, there are mortgage loans available
that offer lower down payment options, but keep in mind that if your
loan to value ratio is higher than 80% you will need to pay private
mortgage insurance each month. In addition, you will also need
additional funds to pay for closing costs.
Getting approved for a
mortgage loan is not just about your credit score. Lenders check a
variety of factors when considering whether to offer approval for a
mortgage application or not. One of those factors is your debt to income
ratio. Many mortgage loans have very specific guidelines regarding the
maximum debt to income ratio you may have and still be able to be
approved for a mortgage. Prior to shopping for a home, make sure you are
away of all of your debts. If you see that your debts are on the high
side, it is probably a good idea to work on paying down some of that
debt before you make an application for a home loan.
need to start doing some research so you will be informed about the
state of your local real estate market and also current interest rates.
Spend some time finding out the average sales price for homes in your
area. Also, research interest rates. Right now, interest rates are
historically low. Remember that you'll pay a higher interest rate if
your credit score is low.
Finally, you need to begin looking at
how much you can comfortably afford each month for housing expenses.
Remember that housing expenses include not only your mortgage payment
but also homeowner's insurance, real estate taxes and maintenance. If
you purchase a home that is part of a homeowner's association, you will
also have monthly dues for that as well. Most experts recommend keeping
your total housing expenses at around 33% of your total income. Make
sure you allow plenty of leeway in your budget so that you will still be
able to afford your housing expenses even if something unexpected
should occur in the future. Also, try to keep your total debt payments,
including your housing payments, car payments, credit card payments and
student loans at around 45% of your income.
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The Home Sold Team
Tel: 714.496.8116 | Fax: 714.849.5798