Articles & Information Resources Pay off Debts:
Lenders assess a home buyer's credit profile, and high level of debt including credit card debt, loans etc. limit the buyer's ability to borrow. Lenders qualify home buyers to a loan amount based partly on a certain monthly debt to income ratio (between 35-40%, may vary by lender) i.e. ratio of monthly debt payments including mortgage (principal+ interest), property tax, property taxes, credit card debt, student loan, car loans etc. Thus, higher the existing level of debt, lower is the ability to borrow, thus paying off debt may, in fact, boost affordability.
Check your credit score:
You can access their credit scores through several paid websites. A recent amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. To order, access www.annualcreditreport.com, call 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Review your credit report thoroughly, and if you notice any discrepancies, errors or unwarranted entries, contact the concerned parties and fix them. A review of your credit report will help you catch any identity theft.
An understanding of your credit report will aid you in your negotiations with your lender and you will be in a better position to explain any discrepancies that may impact your interest rate.
Get pre-qualified and pre-approved:
Your realtor will often request you to get pre-qualified for a home loan before you begin house-hunting. Sometimes, in overheated markets like the San Francisco Bay Area, sellers won't take you seriously as a potential buyer unless you are pre-qualified for a loan. Pre-approval for an amount sufficient to purchase a house makes you more attractive to the seller.
A pre-qualification letter is an informal agreement between you and the lender. The lender renders an opinion on how much he can lend you based on information you provide .It is not an affirmation of the lender's willingness to give you a loan, but is based on the information you provide. The lender does not do any background check at this point. Typically, there is no charge to do this and both the lender or you are under no obligation to proceed with the loan if either the lender deems that the information you provided was inaccurate or if you find a better deal.
Pre-approval is recommended if you are worried about qualifying for a mortgage loan before you commence search for a home. In the pre-approval process, the lender collects your financial information - assets, liabilities, assesses your credit history, employment information etc. before they pre-approves you for a loan program and a loan amount. Sometimes, lenders charge for this pre-approval.
Determine your affordability:
The main drivers used to gauge affordability are: how much one can borrow (monthly cash flows) and down payment (upfront costs).
How much can you borrow?
Use the affordability calculator provided at www.anawise.com to determine a possible range. Typically, payments associated with home ownership i.e. annual mortgage payments, taxes and Home owners insurance should not exceed 28% of
gross income, however, different lenders have different qualification criteria and the ratio may vary slightly.
A good approach is to create a monthly budget after factoring in the mortgage payments, property taxes, homeowner's insurance and then determine if you are comfortable with the economics.
Downpayment and other upfront costs:
Remember, down payment is not the only amount you have to part with, you should also determine closing costs (typically between 2-5% of house price), renovation expenses you plan to undertake, moving expenses etc. to determine the upfront costs.
Plan to stay in the house for a few years. The transactional costs of buying and selling a house can take a bite out of any potential gains on sale of property.
'If you have a gain from the sale or exchange of your main home in 2004, you may be able to exclude from income up to $250,000 of the gain ($500,000, for certain married taxpayers filing a joint return). The exclusion may be allowed each time you sell or exchange your main home, but generally no more frequently than once every two years. You cannot deduct a loss from the sale of your main home.
To be eligible for exclusion, your home must have been owned by you and used as your main home for a period of at least two years out of the five years prior to its sale or exchange. The required two years of ownership and use during the five–year period ending on the date of sale do not have to be continuous. You can meet the ownership and the use tests during different two year periods. However, both tests must be met during the five–year period ending on the date of
the sale or exchange. If you and your spouse file a joint return for the year of the sale or exchange, you can exclude up to $250,000 of gain if only one of you qualified for the exclusion.' - Reference Topic 701- Sale of Your Home http://www.irs.gov. Refer to IRS publication 523 for more details.
Shop smartly:
1. Check online listing services: Searching for a home is a very time consuming process. Check house listings on local sites or on sites like www.realtor.com. You can prepare a shortlist of houses based on your specific criteria. Many listing sites provide photographs as well as video clips of the properties.
2. Buy a house in a good school district: A house in a good school district is often a top priority for home buyers.
3. Comparables: Request your realtor for data on sales of homes in the neighborhoods you are targeting. This can provide some good information on the listing price, average days on the market, sales price etc. which can be useful during house hunting especially during the bidding process. Some online services like www.iown.com or www.realestate.com also list sale data.
Home Inspection:
Hire a professional inspector to thoroughly inspect any home before you make an offer. You can also insert an ‘inspection contingency’ clause in your contract to protect yourself if the inspection proves unsatisfactory. Under the ‘List of Useful Websites’ section, we have provided the web addresses of some organizations like American Society of Home Inspectors and National Association of Home inspectors. You can hire an inspector from these organizations to conduct inspection.
The inspector should inspect the following at a minimum: roof, basement, plumbing, electrical system, heating and cooling system, ceilings, floor, insulation and ventilation, exterior, property – drainage, garden, sidewalks, basement and attic.
Read the inspection report properly and determine the gravity of any problems with the inspector. You may adjust your offer accordingly.
