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Buying a House

Before you begin house hunting, get a copy of your credit report from each of the credit agencies (Experian, Trans-Union, Equifax). Since your interest rate is based on your credit report, make sure everything is accurate and there are no errors. Do not open a new credit card account or any other loans for several months before you apply for a mortgage. Lenders will view this new credit with caution and this might affect your loan terms.

Save for your house and if possible, pay at least 20% for the down payment. If you pay less than 20% you will have to pay PMI (Private Mortgage Insurance). PMI is a financial guaranty that protects lenders against loss if the borrower defaults. Premiums vary. They are determined by the size of the down payment, the type of mortgage and amount of insurance. In some cases, the premium could be as much as 1%. If you must pay PMI, the best way to eliminate it is to pay down your mortgage. If your house was purchased after 1999, your PMI must be terminated when you reach 20% equity on your home based on the original property value. This should happen automatically, but follow up just to make sure.

Before you make an offer, get pre-approved for your mortgage. You will know exactly what you can afford. This also reduces the chance of complications during the closing. Before closing, make sure that you can get home insurance on the house. If it has had a major claim in the past, your insurer might not cover the house.

The lender might qualify you for a loan that is much higher than you expect. Don’t look at this as an opportunity to buy a more expensive house. Just because you qualify for that amount doesn’t mean you can afford it. The mortgage, taxes and housing costs will eat up the rest of your budget. Moderate housing expenses give you more income to save. Mortgage payments, property taxes and homeowners insurance should be less than 25% of your gross income. Total debt (mortgage, credit card, student loans, auto loans) should not be more than 35% of your total income.

Don’t spend all of your money on the downpayment with nothing left for closing costs and life afterwards. Have enough in reserve for 3 months of expenses.

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