Are you thinking about buying a home in 2011? The good news that interest rates and property values continue to be low. The bad news is that buying a home is much tougher than it was a few years ago. Gone are the days when everyone and anyone could waltz into a bank and get a nice little mortgage. These days, banks and lenders are more apt to turn you down.
For women looking to buy their first home in 2011, it will take some strategic planning to put yourself in the best possible position for a home loan. Here’s how it done.
1. Visit with your banker. So, how much of a house can you afford? Back in the old days, multiplying your annual income times a factor of 2.5 gave you a rough ball bark figure of a price that worked within your budget. While this still seems like a pretty good rule of thumb to use, meeting with a banker before house shopping is the best strategy for learning what you can actually afford. From this visit, you will also learn other important information including how to best maneuver yourself into position for buying a home.
2. Clean up your credit. When I refinanced my home a couple of months ago, I was surprised to learn from my banker that borrowers with a credit score of less than 650 are being turned down for home loans and refinancing.
What these tougher requirements mean for borrowers is that a minimum credit score of 700-720 is needed to qualify for a home loan, though in certain cases even this may not be good enough for FHA loans. (source: Sunsentinel.com.) The new benchmark for home financing seems to be in the 720 range, with scores higher than this to ensure the best possible interest rates. The better the interest rate, the more house you can afford to buy.
If home ownership in 2011 is your goal, then improving your credit rating will put you in position to make this happen. Making payments on time is the biggie here. Some other tips for cleaning up your credit prior to a home purchase can be found in this article, “Tips for Improving for Improving Your Credit Score” by C. Jeanne Heida.
3. Freeze your borrowing. Just as important as cleaning up the credit is to put a freeze on your borrowing. Why does this matter? Every time you charge a new purchase, open up a new credit card, or finance a car or furniture, your loan eligibility drops. One of the criteria in determining your loan eligibility for a new home are your monthly credit card payments or existing loan payments. If your debit to income ratio is too high, the bank won’t loan you money for a new home. In the year leading up to buying that first home, try not to buy a new car or go crazy with the borrowing. To avoid the temptation of using your credit cards for frivolous purchases, do what I do and store your credit cards in a safety deposit box where they won’t be so easy to access.
4. Save like mad. Depending on the type of loan you’ll be obtaining, your down payment could be anywhere from 3% to 20% in addition to closing costs. These closing costs range from 1% to higher and usually can not be rolled into the loan. The more you save, the better position you’ll be in for buying a home.
From my own experience, I have learned that a new homeowner should save even more money than the required down payment. Moving into a new home comes with a few expenses many new homeowners never anticipate such as washing the drapes or carpet, utility deposits, cable hookup fees, sprinkler start up costs, spraying for spiders, and so on. Having a little extra cash means you will be able to cover those costs without derailing your budget.
Buying that first home really is an exciting time, but does involve a bit of prep work before hitting those open houses. For 2011, purchasing a home will continue to be difficult but not impossible as long as you have followed these four steps.