Five steps before buying:
- Get educated. Learn about the loan process before you begin. Understand what type loans are available -- fixed-rated mortgages, adjustable rate mortgages, FHA and VA -- and also learn about the costs involved with each -- points, appraisals, origination fees. The U.S. Department of Housing and Urban Development web site provides a lot of free information.
- Get your financial house in order. Get a copy of your credit report, which includes your credit score. If your score is below 620, take steps to improve it. If you find errors on the report, make sure to correct them. This may delay your home-buying dreams, but it will result in a better loan -- and in some cases, being able to get a loan at all.
- Know your budget. As a rule of thumb, your housing expense (the mortgage) should be no more than 28% to 33% of your monthly gross income and all revolving debt (car payments, credit cards and mortgage) should be no more than 36% to 40% of your total monthly gross income. Will the first person who actually does that please tell me how it's done? Spending a disproportionate amount of our income on housing has been a way of life for many Americans. The message here is that it really no longer makes sense to pour your entire paycheck into a house if the house isn't an appreciating asset.
- Start saving. Home ownership involves some upfront costs that you should be ready to bear, including a down payment of between 5% and 20% of the purchase price. There's also a deposit, typically 2% of the purchase price that you must fork over when you make an offer. If your offer is rejected, this deposit or earnest money will be returned. If your offer is accepted, it will be applied toward the down payment. Closing costs add another 3%-5% to the purchase price. This includes all the fees required to complete the sale, which include appraisals, points on the loan, title insurance and attorney fees in applicable states. If you are anticipating getting help with the down payment from relatives, now is a good time to get all your ducks in a row. Phone home, E.T., phone home.
- Get pre-approved for a loan. A lender will gather information about your job, assets, debts and income and determine how much financing you are qualified to receive. A pre-approval letter shows that you are a serious and qualified buyer, according to Fannie Mae. It does not commit you to use that lender, nor does it commit the lender to give you a mortgage loan. While Fannie Mae recommends it, in today's buyers-control-all market, it's not likely that you will lose a house to a competing buyer because you didn't have this letter. In fact, most sellers would be happy enough if you pass the mirror-under-the-nose test. Please, just make them an offer.
For those already in over their heads, Fannie Mae encourages hiring a housing counselor. And to avoid getting caught up in a mortgage modification scam, there are these suggestions:
- Do your homework. Ask a lot of questions and don't stop asking them until you understand the answers. Don't sign anything you don't understand and don't sign papers in exchange for a promise that someone else will pay off your mortgage. There are no mortgage fairies waving magic wands here and your mortgage won't just go away. And yes, read the paperwork.
- Don't pay for counseling. There is plenty of free legitimate help. Call 888-995-HOPE or go to the HUD web site to fine a free HUD-approved housing counselor.
- Don't give your mortgage payment to anyone other than the mortgage company. Scammers might ask you to pay them instead of your lender; they'll just pocket the money. For more information on avoiding scams, visit www.loanscamalert.org; to report a scam, visit www.preventloanscams.org.