Financial planning can ease homebuying stress
Before you start perusing real estate websites looking for your dream home, you first need to get serious about your money. Check your credit, savesome cash and design a budget you can live with, and you’ll be on your way to buying your first place.
“There are really two important numbers you need to know when you want to buy a home,” says Michael Smalley, Florida regional manager for Waterstone Mortgage. “You need to know how much you’re comfortable spending on your housing payment each month, and you need to know how much cash you have for a down payment.”
Here are steps you need to take to put your finances inorder before you plan to purchase:
■ Credit prep: While it’s smart to check your free credit report from each of the three credit reporting bureaus yearly at annualcreditreport.com, the credit score you see is different from what lenders see.
“Everyone should go see a lender and ask for the lender to pull their credit,” says Douglas Benner, branch manager and senior loan officer at Sandy Spring Mortgage. “Your lender can help you look for errors and make suggestions about the best way to increase your score if it needs improvement.”
The minimum credit score for many loan programs is 620. Borrowers with compensating factors such as a higher down payment or a low debt-to-income ratio can sometimes qualify with a lower credit score.
“A loan officer can talk about available loan programs and down payment resources that could impact how much you need to save,” said Henry Brandt, branch manager of Planet Home Lending. “You also need to learn about the cash you’ll need for closing costs and to get an estimate of your insurance and taxes.”
■ Paym e nt plann ing: A lender can estimate the amount you qualify to borrow, but your comfort level with a monthly payment is more important than maxing out your borrowing power.
“Your debt-to-income ratio must be 50 percent or less, although sometimes there are exceptions and it can be higher,” Brandt said. “But it’s important to stress that this formula uses your gross income, not your take-home pay. You’re better off with a much lower debt-toincome ratio.”
Brandt recommends saving the difference between your rent and your estimated mortgage payment to see if you can live comfortably with the higher payment.
■ Deciding on a down payment: How big your down payment needs to be depends on the home price and loan program. Most lenders have special loan programs for first-time buyers. Some with income qualifications have low down payment requirements and don’t require mortgage insurance.
Veterans may qualify for a VA loan with zero down payment needed. Buyers purchasing a home in a rural area may qualify for a USDA Rural Development mortgage.
A NeighborWorks survey found that 73 percent of all consumers were not aware of down payment assistance programs in their area for middle-income buyers, yet most states have these programs. DownPaymentResource. com provides a searchable database of them.
Another potential down payment source is your 401(k), says Benner. You can borrow up to 50 percent of your vested funds or $50,000.
Typically, you need to repay the loan through payroll withdrawals. The repayment period varies by company.
“Some companies have special provisions about how you can borrow from your retirement account, so it’s best to call your human resources department to find out the rules and how they could impact you,” Smalley said. “You can’t borrow from an IRA, but you can cash it in. However, you’ll face tax implications that could mean it’s not worth taking out the cash.”
A home is the most expensive purchase most people will make in their lives. With a bit of planning, you can avoid the anxiety that can plague these transactions.