Before you can see how much home you can buy, you will have to have your credit score pulled by a lender, banker or mortgage broker. Credit reports are kept by the three major credit agencies: Experian, Equifax, and TransUnion. Among other things, they show whether you are habitually late with payments and whether you have run into serious credit problems in the past. They use this information, among other factors to determine your credit score called a FICO.
A credit score is a number calculated by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports.
A low credit score may hurt your chances for getting the best interest rate, or getting financing at all. So get a copy of your reports and know your credit scores. Try Fair Isaac's MyFICO.com.
Errors are not uncommon. If you find any, you must contact the agencies directly to correct them, which can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer before you buy a home.
Next, you need to determine how much house you can afford without being a slave to your monthly payment. You can start with one of the Web's many calculators. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine the kind of loan that's in your league.
The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.
Another rule of thumb: All your monthly home payments should not exceed 36 percent of your gross monthly income.
The size of your down payment will also determine how much you can afford.
If you haven't already, you'll need to come up with cash for your down payment and closing costs. Lenders like to see 20% of the home's price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you'll need to find loans that can accommodate you.
Various private and public agencies, including Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs, provide low down payment mortgages through banks and mortgage companies. If you qualify, it's possible to pay as little as 3% up front. For more, check out their Web sites at Fanniemae.com or Freddiemac.com.
A warning: With a down payment under 20 percent, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5 percent of the total loan amount to your mortgage payments for the year. So if you finance $200,000, your PMI will cost $1,000 annually. However, many first-time home buyer programs offer either reduced PMI or in few cases, NONE AT ALL. Call me today to inquire about such programs.
Once you've considered the down payment, make sure you've got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney's fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 and often run to 5% of the mortgage amount. It is NOT uncommon to ask for the seller of the home to give what's called "seller contribution towards closing costs." Most lenders and loan programs allow this and it's a great way to get into a home.
If your available cash doesn't cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift of up to $12,000 a year (the limit for 2006) from each of your parents without triggering a gift tax. Some loan programs allow this type of sourcing and others don't. You must check with the lender doing your loan.
Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.
For further counsel and /or for a referral to any one of the several lenders, bankers or mortgage brokers on my team, feel free to contact me for further assistance.