Menu
Finances and buying a house
For most people, buying a house is the largest purchase of their life. Qualifying for a mortgage can
also be difficult and time consuming. So your first step, even before you start the actual hunt for a
house, should be to get your financial house in order.
Start with your credit
Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They
keep the history of your debt and your spending habits.
A credit score is calculated from a formula created by Fair Isaac based on the information in your
credit report. You have three different credit scores, one for each of your credit reports. The scores
can vary depending on the accuracy of the report.
Errors are not uncommon. If you find any, contact the agencies directly to correct them. This 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.
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. You can request your credit report for
free once a year. The official website for this is: www.annualcreditreport.com.
Know what you can afford
Next, you need to determine how much house you can afford. 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 works best for your situation.
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.
Line up cash
If you haven't already, you'll need to come up with cash for your down payment and closing costs.
Many private and public agencies - including Fannie Mae, Freddie Mac, the Federal Housing
Administration, and the Department of Veterans Affairs - provide low down payment mortgage
programs. If you qualify, it's possible to pay as little as 3 percent up front. For more, check out their
Web sites at www.Fanniemae.com or www.Freddiemac.com.
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. Ouch!
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 and often run to 5 percent of the mortgage amount.
If your available cash doesn't cover your needs, you have other options. First-time homebuyers can
withdraw up to $10,000 without penalty from their Individual Retirement Account or their 401k. You
can also receive a cash gift of up to $13,000 a year (the limit for 2009) from each of your parents
without triggering a gift tax. Gift taxes are paid by the donor, not the recipient.
If you have any questions about qualifying for a mortgage or the steps to buy a home, give me a call. I'll be glad to help.
Pamela Edwards
Ebby Halliday Realtors
(972)715-0152
[email protected]
also be difficult and time consuming. So your first step, even before you start the actual hunt for a
house, should be to get your financial house in order.
Start with your credit
Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They
keep the history of your debt and your spending habits.
A credit score is calculated from a formula created by Fair Isaac based on the information in your
credit report. You have three different credit scores, one for each of your credit reports. The scores
can vary depending on the accuracy of the report.
Errors are not uncommon. If you find any, contact the agencies directly to correct them. This 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.
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. You can request your credit report for
free once a year. The official website for this is: www.annualcreditreport.com.
Know what you can afford
Next, you need to determine how much house you can afford. 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 works best for your situation.
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.
Line up cash
If you haven't already, you'll need to come up with cash for your down payment and closing costs.
Many private and public agencies - including Fannie Mae, Freddie Mac, the Federal Housing
Administration, and the Department of Veterans Affairs - provide low down payment mortgage
programs. If you qualify, it's possible to pay as little as 3 percent up front. For more, check out their
Web sites at www.Fanniemae.com or www.Freddiemac.com.
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. Ouch!
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 and often run to 5 percent of the mortgage amount.
If your available cash doesn't cover your needs, you have other options. First-time homebuyers can
withdraw up to $10,000 without penalty from their Individual Retirement Account or their 401k. You
can also receive a cash gift of up to $13,000 a year (the limit for 2009) from each of your parents
without triggering a gift tax. Gift taxes are paid by the donor, not the recipient.
If you have any questions about qualifying for a mortgage or the steps to buy a home, give me a call. I'll be glad to help.
Pamela Edwards
Ebby Halliday Realtors
(972)715-0152
[email protected]