Get ready to buy a home
The first step is to get your credit in top shape. The last few years have been difficult for many people and most have the credit ‘dings’ to prove it. Your credit score will not only dictate if you qualify for a loan but also what your down payment will be and what interest rate you qualify for. If you can get your credit up by sometimes just 10 or 20 points you may qualify for a lower interest rate or a more lenient loan underwriting standard. Just to give you an idea, financing $100,000 over 30 years at 4% vs. 5% will save you $21,000 over the life of that loan.
Start by pulling your credit report from all three credit agencies. Look over the reports and make sure that the information is accurate. The best money you can spend is to hire a REPUTABLE credit repair attorney if there are any discrepancies on the reports. Yes, an attorney. Nothing gets attention like a letter from an attorney disputing a credit report and quoting the law. One can also take these simple steps to get your credit score up:
- Get a credit card if you don’t have one.
- If you have a credit card, try not to go over 30% of your approved limit and of course pay them on time.
- Add an installment loan to the mix. You will get the fastest improvement in your scores if you show you’re responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).
- Have items removed from your credit such as: Late payments, charge-offs, collections or other negative items that are not yours.
- Credit limits reported as lower than they actually are. Accounts listed as “settled,” “paid derogatory,” “paid charge-off” or anything other than “current” or “paid as agreed” if you paid on time and in full. Accounts that are still listed as unpaid that were included in a bankruptcy.
- Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports.
Once you’ve started getting your credit in shape the next long term step is to start saving money. If you think you’re going to buy a house with little or no money I can assure that those days are over. In addition to a hefty down payment you will need money for closing costs, moving costs and (everyone forgets this one) reserves. The Lender will want to see that you have 3-4 months of their payment in your savings account when you close.
How much cash will you need? Well, let’s go through a basic scenario for a $200,000 purchase of a single family home. In this case you will need the following for cash:
- Equity, the easiest thing to consider is your equity. A bank will loan you money to purchase a property based upon a loan to value particular to each loan program but let’s use 20% for this scenario. That’s $40,000 cash required on closing day as equity in your new home.
- The Home Inspection fee is approximately $400.
- The Termite Inspection fee is approximately $50.
- A land survey of the house is approximately $400 and is required by your lender for detached single family homes and townhouses.
- If required, a Condo/HOA application fee is approximately $100.
- A loan application fee is approximately $100.
- An appraisal of the property will be approximately $400.
- A Closing Agent fee is about $400.
- Documentary stamps on the mortgage are $560 (=0.35 per $100 of the new loan being $160,000).
- A State intangible tax on the new loan is $320 (=0.20 per $100 of the new loan amount being $160,000).
- Simultaneous issue of a Lenders Title Policy is approximately $400.
- To record the deed and mortgage in the public record is approximately $150.
- Initial payment to the real estate tax escrow fund is typically 3 months so let’s say +/-4,000 per year in real estate taxes and thus $1,000.
- Initial payment of your wind storm policy. Insurance is pre-paid and thus when you close you will need to pay for at least one half of the annual wind storm and homeowners insurance policies. On a $200,000 home the estimate would be $2,000 for 6 months or $4,000 per year.
- Almost done now but remember those pesky reserves for yourself. Your lender will want to see that after all these closing costs are paid that you have 3 months of principle & interest (960) plus taxes (333) and insurance (333) in the bank. This is about another $5,000 in the bank after you close.
Credit repair and saving up a block of tax paid cash can take time.
