Don't buy if you can't
stay put. If you can't commit to remaining in one place for at least
a few years, then owning is probably not for you, at least not yet.
With the transaction costs of buying and selling a home, you may end
up losing money if you sell any sooner. Start by shoring up your
credit. Since you most likely will need to get a mortgage to buy a
house, you must make sure your credit history is as clean as
possible. A few months before you start house hunting, get copies of
your credit report. Make sure the facts are correct, and fix any
problems you discover. Aim for a home you can really afford. The
rule of thumb is that you can buy housing that runs about
two-and-one-half times your annual salary. But you'll do better to
use one of many calculators available online to get a better handle
on how your income, debts, and expenses affect what you can afford.
Don't worry if you can't put down the usual 20 percent. There are a
variety of public and private lenders who, if you qualify, offer
low-interest mortgages that require a down payment as small as 3
percent of the purchase price. Buy in a district with good schools.
In most areas, this advice applies even if you don't have school-age
children. Reason: When it comes time to sell, you'll learn that
strong school districts are a top priority for many home buyers,
thus helping to boost property values. Get professional help. Even
though the Internet gives buyers unprecedented access to home
listings, most new buyers (and many more experienced ones) are
better off using a professional agent. Look for an exclusive buyer
agent, if possible, who will have your interests at heart and can
help you with strategies during the bidding process. Choose carefully
between points and rate. When picking a mortgage, you usually
have the option of paying additional points -- a portion of the interest
that you pay at closing -- in exchange for a lower interest rate. If you
stay in the house for a long time -- say five to seven years or more -- it's
usually a better deal to take the points. The lower interest rate will save
you more in the long run. Before house hunting, get pre-approved.
Getting pre-approved will you save yourself the grief of looking at
houses you can't afford and put you in a better position to make a
serious offer when you do find the right house. Not to be confused
with pre-qualification, which is based on a cursory review of your
finances, pre-approval from a lender is based on your actual income,
debt and credit history. Do your homework before bidding. Your
opening bid should be based on the sales trend of similar homes in
the neighborhood. So before making it, consider sales of similar
homes in the last three months. If homes have recently sold at 5
percent less than the asking price, you should make a bid that's
about eight to 10 percent lower than what the seller is asking. A
home inspector, Sure, your lender will require a home appraisal anyway.
But that's just the bank's way of determining whether the house is
worth the price you've agreed to pay. Separately, you should hire
your own home inspector, preferably an engineer with experience in
doing home surveys in the area where you are buying. His or her job
will be to point out potential problems that could require costly repairs
down the road. Home ownership means you no longer pay monthly rent
for the roof over your head. You can do what you want with your house.
When you leave, you can sell it to recoup the purchase price and - with
any luck - earn a profit too. But don't kid yourself. home ownership comes
with a slew of disadvantages, responsibilities, and downright headaches. So
before going any further, consider whether your lifestyle and finances
make homebuying a smart move. High costs mean you should be prepared
to say put. Except in a roaring real estate market, it usually doesn't
make sense to buy a home you'll own for less than three or four years.
Reason: the high transaction cost of buying and selling property means
you could lose money on the deal. If you do make money, you'll pay
capital gains taxes if you're in the house less than two years. So ask
yourself if you can really stay put for that long. Will you need to move
because you are transferred by your current employer or a new one? Are
you thinking of going back to school? It may make more sense to rent.
On the financial side, one key question is whether it costs more, on
average, to rent or own in your area. The rule of thumb is that if you
pay 35 percent less in rent than you would for owning - including the
monthly mortgage, property taxes, and any homeowner's fees - then
it's smarter to continue renting. Only if all those answers still point
towards owning should you proceed to the next step - getting the
money right. For most people, buying a house involves a double financial
whammy. First you have to assemble a pile of cash for the down payment
and closing costs. Then you must convince a bank to lend you an even
more staggering sum - generally 80 percent or more of the purchase price.
So your first step, even before you start the actual hunt for a property,
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. Among other things, they show whether you are
habitually late with payments and whether you have run into serious credit
problems in the past. A credit score is a number calculated by Fair
Isaac based on the information in your credit report. You have three
different credit scores, one for each of your credit reports. 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. Try Fair Isaac's MyFICO.com, which charges upwards of $50 for all three
reports and scores. Errors are not uncommon. If you find any, you
must contact the agencies directly to correct them, which 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. 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's in your league. 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 28 percent of your gross
monthly income. The size of your downpayment will also determine
how much you can afford. Line up cash, If you haven't already,
you'll need to come up with cash for your down payment and
closing costs. Lenders like to see 20 percent of the home's price as a
down payment. If you can put down more than that, the lender may
be willing to approve a larger loan. If you have less, you'll need to find
loans that can accommodate you. Various private and public agencies,
including Fannie Mae, Freddie Mac, the Federal Housing Administration,
and the Department of Veteran Affairs - provide low down payment
mortgages through banks and mortgage companies. If you qualify, it's
possible to pay as little as 3 percent up front. For more, check out their
Web sites at Fanniemae.com or Freddiemac.com. 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. Increasingly, though, lenders are giving
qualified buyers the option of using "piggyback loans" to cover a
portion of a home's downpayment and avoid paying PMI. These second
loans are usually in the form of a home equity loan or line of credit for
10 percent to 15 percent of the home's purchase price. Once you've
considered the downpayment, 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 to more than $10,000 - and often run to 5 percent of the
mortgage amount. If your available cash doesn't cover your needs, you
have several options. First-time homebuyers can withdraw up to $10,000
without penalty from an Individual Retirement Account, if you have one,
though you must pay taxes on the amount. You can also receive a
cash gift of up to $12,000 a year (the limit for 2006) from each of your
parents without triggering a gift tax. Gift taxes are paid by the donor,
not the recipient. (In fact, if your and your spouse's parents are both
well-heeled, they can give you a total of $96,000 in one year - $12,000
from each of the four parents to each of you.) Check on whether
your employer can help, some big companies will chip in on the down
payment or help you get a low-interest loan from selected lenders. You
can also tap a 401(k) or similar retirement plan for a loan from yourself.
