Financial Strength = A Strong House Buyer

Financial Strength = A Strong House Buyer!

Be a Strong House Buyer By getting your financial house in order before you start to shop for your new house.  As a house buyer in this active and competitive market, it is imperative that you are able to present your strongest offer.  If your financial house is in order, you will be prepared to set yourself apart from the competition. 

Present a Strong Offer:  Sellers are typically receiving multiple offers.  With several offers to choose from, a seller will naturally select the offer that they feel is the strongest.  There are several ways that an experienced Realtor can help make your offer stand apart from the competition!

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6 Tips on Getting Finances in Shape to Buy a Home
By Alex Veiga, AP Business Writer | Associated Press – Wed, Feb 27, 2013

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 a house buyer with the strongest financial picture often stand a better chance of winning a bidding war.

Tips for Financial Preparedness

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 house 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.

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. Click Here to access the on-line calculator.

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?

Renters should 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.  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 a house buyer 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.   (There are options available for a house buyer who wants to buy a house with a down payment of less than 20%. – TB)

If you’re a military veteran, you can qualify for a loan program that enables veterans to obtain a mortgage without a down payment.

Even if you end up getting a loan that requires private mortgage insurance, once you’ve made enough payments to build your stake in the home to 20 percent, you can apply to have PMI waived.  And until then, PMI is tax-deductible.

In addition to a down payment, you’ll also have to set money aside for closing costs, which can run into the hundreds or sometimes thousands of dollars.

4. TACKLE ANY CREDIT SCORE PROBLEMS EARLY

A person’s credit score is a critical element of how lenders determine how much money homebuyers can borrow and at what interest rate.

A house buyer seeking a shot at the most favorable interest rate on a home loan must generally have a FICO score of at least 720 out of 850.  Loans backed by the Federal Housing Administration require a FICO score of at least 580, but you’ll pay a higher interest rate.  (Your FICO score can be improved, often dramatically, with the help of a credit score counselor.  A “rapid rescore” can quickly boost your FICO score.  –TB)

A prospective house buyer should check their credit report for any errors that may be weighing down their credit score.  Disputing errors can take months, so it’s best to get this process going well before you’d like to buy a home.  

A major component of one’s credit score is the ratio between how much credit you have available versus how much debt you’re carrying.  You can improve your credit score by paying down debt over time, another reason to get started well before you apply for a mortgage.  (Making ANY changes to your financial picture, even changes that may appear to be for the better, can damage your credit score.  Click Here  to see a list of “Do’s and Don’ts” while you are shopping for a mortgage.  –TB)

Consumers are entitled to a free credit report every 12 months from each of the credit bureaus: Experian, TransUnion and Equifax.  To get a copy of your credit report: Click Here

Even borrowers who like to use their credit cards often and pay down the balance every month should refrain or ease back on using credit cards for a couple of months before applying for a home loan.

5. GET FINANCIAL DOCUMENTS IN ORDER

When it comes time to formally apply for the loan, lenders will probe deep into your financial records.

Get ahead of the requests by pulling together at least three months of bank statements, pay stubs, and at least two years of income tax filings.

If you’re going to be receiving financial help from family on the down payment, the bank will want to know the source.  That might mean that your benefactor may also need to show bank statements related to their financial gift to you.

6. GET PRE-APPROVED FOR A LOAN

Before you begin your home search, ask a lender to assess how much you can borrow.  Once the lender issues you a pre-approval letter, it’s a solid indication of what you can spend.  It’s not like having cash in hand, but it’s almost as close.

One caveat: Understand the difference between a preapproval letter and being prequalified for a loan.  (This is an important distinction.  Read below!  –TB)

Being prequalified for a loan doesn’t commit the lender.  It’s basically an opinion drawn from a cursory assessment of your financial profile.  A preapproval letter is preceded by a thorough credit and income review, though the loan won’t go through until all of the borrower’s financial information is verified.  (All sellers want to see a PRE-APPROVAL letter with your offer.  Your pre-approval letter assures the seller that you are a solid house buyer who will probably be able to obtain a mortgage.  –TB)