Moves to Make Before You Move
By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management August 27, 2012 09:00 AM
If you hope to buy a house next spring, it's time to get moving. With prices 33% below their mid-2006 peak, as measured by the S&P/Case-Shiller Home Price Indices, you might be tempted to buy that first house, trade up to a larger place or purchase a vacation property. But buying a home is a major undertaking--and it can take months to get your finances ready. Here are some steps to consider.
Pile up the savings. Prices may be far lower than six years ago, but mortgages are also tougher to qualify for. Lenders want more documentation of income and, in many cases, larger down payments. With that in mind, try to save as much as you can. To avoid taking out private mortgage insurance, you typically need to put down 20% of a home's purchase price. Even if you have that 20% in hand, you may want to sock away additional money. Remember, you might also need to pay for an attorney, title search, home inspection and more.
Fix your credit. Before you start house-hunting, check your credit history. To get a free copy of your credit report from the three major credit bureaus, go to www.annualcreditreport.com. If there are errors, write to the credit bureaus and explain what you believe is wrong.
Boost your score. While you're at www.annualcreditreport.com, you can pay to find out your credit score. Is it low? To improve your score, you might try paying down credit-card balances, avoid applying for new credit cards in the months ahead and make a concerted effort to pay your bills on time.
Get pre-approved. Banks generally will let you take on monthly mortgage payments, including property taxes and homeowner's insurance, equal to 28% of your pre-tax income. For instance, if you earn $75,000 a year or $6,250 a month, you might qualify for a mortgage with monthly payments of $1,750.
How big a mortgage could you get, given your income and current interest rates? Try playing around with one of the online mortgage calculators. You might then see if a lender will pre-approve you for that amount, which will give both you and the seller greater confidence that any deal you strike will go through.
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