Courtesy of msn.com May 14, 2008
Think you're ready to buy a home?
Get your house in order before you start shopping. Here's what you need to do, and when.
By Liz Pulliam Weston, MSN Real Estate
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Is the time right for first-time home buyers?
What realty agents won't tell you
Buying a home is a complicated process, and it can be particularly daunting for the first-timer.
The following timeline starts one year before you hope to start seriously shopping for a home. This is an ideal; you can arrange your finances and buy a home in less time, if necessary, but you'd be smart to walk through all of the steps in order. The more time you give yourself for this process, the better.
A year out (or as soon as possible)
Get your credit reports. Errors on your reports can force you to pay a higher interest rate on your mortgage or even torpedo your chances of getting a loan. You can get free copies of your reports from the three major credit bureaus -- Equifax, Experian and TransUnion -- at AnnualCreditReport.com. Look for accounts that aren't yours, collection accounts for debts you don't owe and negative marks (other than bankruptcy) that are older than seven years.
You should be able to dispute errors with the bureaus and get them removed, but if the bureaus or the creditors balk, you may need to hire an attorney. (The National Association of Consumer Advocates can refer you to lawyers with knowledge of the credit-reporting and debt-collecting laws.) Don't leave yourself in the position of having to pay a bogus collection account to get the loan you want or paying unnecessary interest because of credit-report errors.
Get -- and improve -- your FICO credit scores. Your credit scores, which are three-digit numbers used to gauge your creditworthiness, help determine the rates and terms you can get for a loan. There are hundreds of different credit-scoring formulas, but the one used by the vast majority of mortgage lenders is the FICO.
The only place you can buy your FICO scores for all three credit bureaus is MyFico.com. A package of three scores and three credit reports costs about $50. You can learn more about credit scores, how they work and how to improve them at MSN Money's Your Credit Rating Decision Center, and you can get a copy of my best-selling book, "Your Credit Score: How To Fix, Improve, and Protect the 3-Digit Number That Shapes Your Financial Future," which was published in a second edition in February 2007 (end of shameless plug). Three keys to better credit: Pay all your bills on time, pay down your credit cards and other revolving debt, and don't open (or close) any accounts while you're in the market for a mortgage.
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Consider a credit-monitoring service. Normally, I think these are a waste of money for folks who aren't at high risk of identity theft. But given how important your credit and credit scores will be in buying a home, you might appreciate the early warning if a collector tries to post a bogus debt.
Deal with your debt. Most people needn't pay off their student loans, auto loans or other generally low-rate debt before getting a mortgage. What you want to eradicate is "toxic" debt: credit-card balances and payday loans. These are signs you're living beyond your means. If you don't get your overspending problem fixed before you buy a home, your problems likely will get worse because homeownership typically involves plenty of big costs (property taxes, insurance, maintenance, repairs, improvements, decorating). Get your act together before you house shop.
Save, save, save. Stop eating out. Drop your cable-TV subscription. Do everything you can think of to put as much money aside as possible, using your desire to be a homeowner as a motivator. (Read "Could you stop spending for a month?" for inspiration.) In today's market, it's best to have at least a 5% down payment; boost that to 10% and you'll have even more financing options. Ideally, you'll also have enough left over after you get your mortgage to cover the payments for two or three months.
Put your bills on automatic. A single 30-day late payment can knock 100 points off your score, and it can take many, many months to recover. Make sure every bill gets paid on time. If you don't have a reliable bill-paying system, consider using automatic debits, so payments come directly from your checking account, or an online bill-payment system's recurring-payment feature.
6 months out
Sort through your mortgage options. A lot of people are losing their homes today because they didn't understand what kind of mortgage they had or they accepted bad advice. The low teaser payments that allowed them to buy a more expensive house have jumped skyward, leaving them unable to pay. It's up to you to understand the risks of the different types of mortgages and to select the right one for your family. My 2 cents: Stick with traditional, fixed-rate mortgages. If you can't commit to a 30-year version, at least use a hybrid loan with a rate that's fixed for as long as you plan to own the home.
Start calculating how much house you can afford. Once you've settled on a type of mortgage and have a rough idea of your down payment, you can start using online calculators such as the one below to see how much house you can buy. Consider buying less home than the absolute maximum you can afford; if you keep your housing expenses (mortgage, taxes and insurance) to 25% of your gross income, you'll be able to live more comfortably and have money left over for things like retirement savings, vacations and the kids' college educations.
Research all the costs of owning a home. Your mortgage will be just the start. You'll have to pay property taxes and insurance on the home. There may be homeowners- or condo-association fees as well. You may face higher utility bills, and you'll take on maintenance and repair costs as well. Decorating your new house can cost a pile of money as well: Have you shopped for window coverings lately? Your home-owning friends and a friendly real-estate agent or two can help fill you in so you know what to expect.
Adjust your saving strategies. What you've learned so far may inspire you to boost your savings. A bigger down payment, for example, can result in a larger home or a lower mortgage payment. Or you may simply want to build up your emergency fund so unexpected home expenses don't knock your finances off the rails.
3 months out
Reduce your credit utilization. The FICO scoring formula is sensitive to how much of your available limits you're using on your credit cards and other revolving lines of credit. The less, the better. It doesn't matter if you pay your balances in full every month; the figure the scoring formula typically uses is the balance that shows on your most recent statement. Try to keep that balance below 30%, or even lower. If you can't -- because you charge a lot for work-related travel, for example -- make a payment before the statement's closing date to reduce the balance reported to the bureaus. Just be sure to make a second payment after the closing date, so you don't get reported as late.
Don't open or close any accounts. Until the mortgage process is completed and you've moved into your new home, continue to avoid actions that could potentially harm your credit, such as opening credit accounts or closing old ones.
Home Affordability Calculator Yearly gross income $
Monthly debt payments $
Cash avail. for purchase $
2 months out
Get an idea of the mortgage rate you can expect. Order a fresh set of FICO credit scores -- don't worry, checking your scores doesn't ding them -- and talk to some mortgage lenders about what rates you might qualify for. (You'll find current national averages here.) Don't apply yet or give permission for your credit to be pulled; you just want to get a feel for what you can expect.
Understand the effect of mortgage-shopping on your score. You want to get the best rate and terms possible, which means you'll need to shop around, but how does that affect your credit score? Here's the lowdown: Every time you give a lender permission to check your credit, a "hard inquiry" appears on your credit report, and that can ding your score a bit. Fortunately, the FICO scoring formula lumps all mortgage-related inquiries made within a specified period and counts them as one. (The period used to be 14 days, but the most recent versions stretch that to 45 days.) Furthermore, the scoring formula ignores any inquiries made in the previous 30 days. So you want to do your serious mortgage shopping in a fairly concentrated period of time, typically after your offer on the home you want is accepted.
Get approved for a mortgage ahead of time. Pre-approval, in which a lender gives a commitment to make you a loan, is different and more valuable to sellers than pre-qualification, which merely gives you an idea of the size of the mortgage you might afford without making any commitments. You don't have to get a loan from the lender that offers you a pre-approval letter. Getting a pre-approval does involve giving permission for a hard credit inquiry, but the small potential ding on your credit is worth it because you'll be in a stronger position with sellers.
Consider a mortgage broker. Once your offer is approved, you can shop for a mortgage on your own, but if you want a lot of hand-holding through this process or your credit is particularly troubled, you might benefit from the services of an experienced, ethical mortgage broker. Get referrals from family and friends; you can also get a referral from the National Association of Mortgage Brokers.
Begin researching neighborhoods and look for an agent. Check Internet listings, attend open houses and find an experienced guide to help you refine what you're seeking.
Once you've found your home and your offer is accepted
Shop for a mortgage. There are thousands available, and sorting through the possibilities can be overwhelming. That said, you may want to include some of the biggest national mortgage lenders, local lenders and online brokers. You'll need to move fairly quickly to secure the loan, because the full approval process typically takes four to six weeks.
Arrange for an appraisal, a home inspection and a walk-through. The appraisal is required for your loan to be approved. An inspection isn't necessarily required, but don't skip this essential step, which can alert you to serious problems before the deal closes. The walk-through is usually done within 24 hours of the deal closing, so you can make sure that the home sellers have performed any agreed-upon repairs and the place is in move-in condition.
Get homeowners insurance. Mortgage lenders require this coverage, and you'll need to prove you have it at closing.
Confirm how much money you'll need at closing. "Closing" is when you sign all the paperwork and pay agreed-upon amounts, which can include your down payment and your share of legal fees, paperwork costs, property taxes and title insurance.
Enjoy your new home!