As the last decade has shown us, it’s not enough to get into a home of your own – you have to be able to stay there, including having enough of a cushion to ride out rough times.
That’s why the secondary market –investors like Fannie Mae who buy mortgages like yours from banks - are taking a proactive interest in making sure you buy within your means.
Using Fannie Mae’s five steps to home ownership as a guide, here’s some advice that goes one step further – to make sure your home ownership is sustainable:
Get educated. The first thing you should do is to learn all you can about mortgage loans so you can apply for the best loan for your situation. Fixed-rate mortgages, adjustable-rate mortgages, FHA and VA loans, conforming jumbo loans, hybrid loans and others each have an advantage for the right borrower.
You also need to know what makes the same loan cost you more than others, from credit scores, to paying discount points to bring the interest rate down, to lenders’ fees.
Your real estate agent may know of local homebuyer education programs, and neighborhood banks or mortgage lenders. Fannie Mae recommends contacting the HUD website, hud.gov
, to find housing authorities in your area. Local HUD housing counselors can alert you to special buyer programs for which you may qualify, such as no-down-payment loans for teachers, law enforcement, nurses, firefighters and other workforce personnel.
Get Your Finances in Order. All government guaranteed loans such as FHA and VA and conforming loans that are sold to the secondary market to Fannie Mae and Freddie Mac are enforcing stricter guidelines.
Before you choose a home, you must know if you can qualify to buy it. You need to obtain a copy of your credit report that includes your credit score. If your credit score is low (anything below 620), take the time to improve it. If you find errors on the report, take the time to correct them, advises Fannie Mae. See: www.annualcreditreport.com
Establish a Budget. When you apply for a loan, your lender will tell you how much you can afford based on your maximum gross income and income-to-debt-ratios. To buy safely within your means, your mortgage payments should not exceed 28 to 33 percent of your total monthly gross income. If you have debts such as student loans, car payments, child support payments, or revolving credit cards, your debts plus your mortgage should not exceed 36 to 40 percent of your total monthly gross income.
Create a monthly budget that itemizes your recurring bills, and then add in the bills you’ll receive once you own your home – yard maintenance, HOA fees, utility bills, and home maintenance and improvement. If you can pay all these bills, plus contribute to a savings plan such as a 401K, Sep IRA or other, you are ready to buy a home.
Start Saving. Depending on the type of loan you think you will obtain, you should have cash reserves to make your down payment and closing costs. Earnest money, a deposit to the seller, is usually required, beginning at about $500 to two percent of the purchase price. This is subtracted from your closing costs at closing.
Get pre-approved. A preapproval means you have shared your financial information with a lender. The lender has pulled your credit report and matched your income and debt ratios to various loan programs to see where you qualify. Once you and the lender agree to a loan program, the lender will issue you a preapproval letter with a maximum amount for the loan. You can buy a more expensive home than the loan amount only if you can provide the difference in cash. Use the preapproval as your best guide to shop for the right home.
A preapproval isn’t bulletproof. You can’t apply for a loan until you have an address, which means the loan won’t be approved until it goes through the underwriting process. If the underwriter approves, you’ve got your loan.
Homeownership isn’t for everyone, but it may be the right move for you. If you intend to stay in your home a number of years to build equity, and you can afford your home without undue financial stress, you’re a good candidate to be a homeowner.
Blanche Evans is CEO of Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and twice recognized as one of the industry's most "Notables."