Buying a home is probably the single largest investment most people make in a lifetime. By preparing yourself and your finances before a home purchase, you can ensure a smooth finance process and can potentially save thousands on your loan.
Start by checking your credit
To get the best possible mortgage rate, make sure your credit is healthy and accurate. Aim to raise your credit score above 650 in order to qualify for most prime loans.
If your credit score is not quite 650, focus your efforts on paying bills on time, reducing your debt balances, avoiding new inquiries and clearing negative inaccuracies from your credit report. It is possible to improve your credit score quite a bit over a few months.
Make sure the information on your credit report is correct and fix any problems you discover. Give yourself 30-90 days for correcting inaccuracies. You can learn more about the dispute process by downloading the following PDF document.
You may also have the option to make some improvements in your Credit Score with Rapid Rescoring. What is Rapid Rescoring? Read the linked article that explains it.
Figure out how much you can afford
How much home can you afford? The rule of thumb is that most borrowers can afford a home that runs about two-and-one-half times their annual salary. Thus, if your annual salary is around $36,000 ($3,000/month), you may be able to afford a home around $90,000. There are other factors that effect this, however.
How much can you afford to borrow? If your loan-to-value ratio is above 80%, your rates will increase significantly, whether site built or manufactured home.
To calculate loan-to-value: 1. Calculate Loan Amount Loan amount = Selling Price - Down Payment 2. Determine Loan to Value (Loan amount / Selling Price) X 100
Thus, if you have a limited down payment, Smart HomeLease with the HomeBuyer's Account is the best place to begin, in order to accumulate a down payment. You may request that a 20% down payment be accumulated during the Smart HomeLease. This will increase your monthly payment, but will cause you to set aside sufficient down payment to get the best interest rate at time of purchase.
How much monthly payment can you afford? To determine this, calculate your debt-to-income ratio by adding your monthly debts and dividing by your monthly income. A debt-to-income ratio under 20 and up to 39 percent is usually considered good and will help you be perceived as financially stable.
Monthly debts / monthly income = debt-to-income ration
Dont' be afraid to start small. Just because you can qualify for a large loan doesn't mean that it is a smart financial decision to buy as large a home as possible. Take a careful look at your family budget and your housing needs before you decide thow much you can really afford.
What are the ongoing property expenses? Homes and properties vary a lot in how much it costs to maintain them, thus sustaining the value of your investment. How much yard is there to maintain? How expensive will it be to maintain it? Is there a pool? What condition is it in and how much does it cost to purchase the chemicals it needs? Does it have a gravel or dirt driveway that needs to be scraped regularly? Who will do that and what is the cost?
There is the cost of utilities that increase with things like home square footage, height of ceilings, amount of windows, age of home, etc. Energy bills can add significantly to your monthly payments.
Cost of improvements and maintenance needs to be calculated into the budget. Does the home needs painting, or will it need painting before I sell it? What repairs need to be done? Can I do them or will I have to hire someone? What are these estimated costs?
