Buying property in a tough housing market.
If you have a solid job, a bit of savings, and don’t own a home that’s losing value, you might be one of the lucky ones in the current economic situation. Economists predict housing prices should stay low for all of 2009 before they begin climbing again towards the end of 2010. Congress’s stimulus package also gives a substantial tax incentive to home buyers this year. In fact, with housing prices falling around the country (prices in Los Angeles’s suburban San Fernando Valley fell from a median of $650,000 to $420,000 between May 2007 and May 2008), you might think now is a good time to buy, especially if you were priced out of the market during the height of the bubble. Before you procure a real estate agent, here are some things you should do.
1) Save, Save, Save. Part of the problem with mortgage loans over the past decade is the "no money down" philosophy. Sadly, this means many people ended up owing more than their house was worth, especially if they opted to have closing fees or other debt rolled into their mortgage. If you put down less than 20%, you will also have to pay for Private Mortgage Insurance or PMI, which your bank will require until you build enough equity in your house for them to deem your mortgage less of a risk. Currently, lenders are wary of awarding mortgages to those with less than a 3-5% down payment in hand. The government agrees that banks should probably not approve buyers for a mortgage if they do not have at least 1.5% of the cost of the home available for a down payment. If you are planning on staying in your house for 5 years or less, aim for 10-15% so you can start building equity in your home right away, even if the value of your property falls further. In addition, you’ll want to have a small nest egg in savings which you aren’t using for the down payment. Lenders are more likely to give you favorable rates if you have some savings left over. Plus, you’ll need extra savings for your closing costs, which can cost between 2-7% of your total purchase price, property taxes and any repairs that aren’t covered by the previous owner in your contract.
2) Build your credit score. Your FICO score is a number between 350 and 850 which lenders use to determine how much of a credit risk you are. Because banks are now trying to minimize their risks, many people who may have been approved for a mortgage two or three years ago are being denied based on poor credit scores. The more risky you are (translation: you pay bills late or not at all), the less likely they are to extend credit to you at all, let alone on favorable terms. And with a mortgage, you want favorable terms. The higher your score, the lower the annual percentage rate on your mortgage. Since we are normally talking about hundreds of thousands of dollars, even a half percentage point reduction in your APR will save you thousands of dollars in the long run, and perhaps hundreds off your monthly mortgage payment. Beginning six to twelve months before you buy, pull your credit reports and scores from Transunion, Equifax and Experian, the three large credit bureaus. Check them carefully and make sure there are no mistakes. Work on paying your bills on time and paying down (or off) credit card debt. Keep your cards open though – the more credit you have available to you, the higher your score (which is why a maxed out card, besides showing fiscal irresponsibility, can be bad for your credit). Do not apply for new cards or a car loan – your score can take a hit of 5-10 points each time you open a new line of credit.
3) Get approved and shop around. Before you start looking, get pre-approved for a mortgage. This will let you know exactly what you can afford and save you the heartache of falling in love with a home that is out of your price range. Next, make sure to hire a trusted real estate agent, especially if you’re a first time home buyer. A licensed agent has access to many more listings than you do and can work with the seller’s agent as well, and inform you about the process. Third, look for a good deal. Currently, many semi-custom home builders have a glut of property and new houses, and might give you free upgrades, such as custom paint colors or granite counter tops. If you’re looking at foreclosures or soon-to-be foreclosures, make sure there are no nasty surprises waiting for you, like unpaid property taxes or costly hidden repairs. A bank foreclosure can be a great deal, but be sure to know what you are buying! They almost always come in as-is condition and may need to have more money invested into repairs and upgrades to make them safe and habitable, especially a home that has been sitting vacant.
Hopefully the flailing economy will be able to produce a silver lining for some, like your own home! Good luck searching!
This article is brought to you by fightforeclosurenetwork.com.
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