By Deborah Nayrocker
Dear Deborah: I am a single parent with two teenagers. What kind of advice would you give for buying a home? — Phoebe
Answer: To get attractive terms on a mortgage, a household must have a good credit record, a low or moderate amount of debt compared to one’s income, and documentation of regular income for several years.
Do you have money saved for a down payment? In general, to qualify for the best loan rate put down 20% of the home cost. By putting 20% down, you can save money by avoiding mortgage insurance.
According the The Wall Street Journal homebuyers who are unable to put at least 20% down are now “being funneled into loans insured by the Federal Housing Administration.” These FHA loans have extra insurance fees added.
Buying a home can come with several hefty transaction costs – such as commissions for real estate agents. So it is best to live in the new home for at least four to five years to help recoup costs.
In many areas of the U.S. house prices haven’t hit bottom. Yet this may be a good time to buy.
Decide how large of a monthly payment you can afford. Generally, homebuyers are advised to spend no more than 28% of their monthly pretax income to the mortgage expenses. This includes real estate tax and homeowner’s insurance. Consider that home ownership comes with many other extra costs.
Don’t spend more than 36% of your pretax income on all of your debts. This includes the mortgage, credit cards, and other loans. Too much debt can cripple your finances.
Before you begin house hunting, make a list of what you want in a home. How many bedrooms? Is there a favorite floor plan? You and your teens can make a list of the basic requirements.
Once you begin shopping for a home, stick with homes that are affordable. We’ve seen the results of people who couldn’t afford a home, but bought it anyway. Recently fifty percent of subprime mortgages were made to home buyers with bad credit and no proof of income.
Finally, it would benefit you to meet with a lender and have your mortgage pre-approved. This speeds up the purchasing process after you’ve picked out the home you like.
Deborah Nayrocker is an author and columnist. She is the award-winning author of The Art of Debt-Free Living and Living a Balanced Financial Life.
Copyright by Deborah J. Nayrocker. All rights reserved.