Sarasota, FL, June 03, 2011 --(PR.com
)-- Renters who fear they can’t afford a home may be missing out on the opportunity of a generation to become homeowners this year.
"People who were priced out of an overheated housing market can now find homes at unprecedented values," said Jim Soda, team leader of The Soda Group at Keller Williams Realty in Lakewood Ranch, Florida. "While mortgages may be harder to get today, you can improve your chances by taking steps to strengthen your credit worthiness." Sue Stewart, senior vice president for Move, Inc., offers the following tips to help first-time buyers improve their chances of getting a mortgage on favorable terms.
1. Pay down debt. Before you apply for a mortgage, reduce your total payments on credit cards, auto loans, etc., to help reduce your overall debt-to-income ratios and improve your credit score. Generally, your ratio should be 36 percent of your gross monthly income. Also, the total of your housing expenses alone, whether you are renting or buying, should not exceed 28 percent of your monthly gross income.
2. Clean up your credit. Obtain a free credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and carefully review them. Contact creditors to correct inaccurate or outdated items. It will take time, but you need to raise your credit score to a minimum of 680 and ideally to 720 and above to qualify and to avoid being penalized with a higher interest rate.
3. Make no new large purchases and don’t apply for new credit before or during the period that you are applying for a mortgage all the way up to closing. Lenders check credit reports at the time of an application and again right before closing. Last minute questions about your credit can cause a delay, a higher interest rate, or a denial from a lender.
4. Increase your down payment. This will reduce the loan-to-value ratio and increases the likelihood of getting a loan and better terms from your lender. Increasing your down payment immediately increases your equity, reduces the amount you borrow and reduces your monthly mortgage payment. If you are in need of down payment assistance, more than 4,000 local and state governments offer workforce house assistance for low- to medium-income buyers.
5. Gather documents beforehand. Don’t wait until the last minute and find yourself having to scramble for paperwork that supports your employment status, assets and credit. Have all the necessary documentation ready for review when you apply. Collect your income tax returns, pay stubs, bank statements and student loan paperwork. Stay on top of your documentation and keep it updated while your application is pending.
6. Anticipate closing costs. Closing costs, which can run 5 to 7 percent of your total transaction, add up quickly and must be paid in cash - in addition to your down payment. Be prepared to have adequate cash on-hand.
7. Determine the type of loan you need. Fixed rate? Adjustable? FHA or VA? Fifteen or 30-year term? Jumbo? Second trust? These decisions aren’t just financial; they also reflect your lifestyle, your risk tolerance and the programs for which you might qualify. Do your homework and make a decision before you go house hunting. Don’t let someone talk you into a different game plan to stretch your finances to afford a particular property.
8. Ignore “bait rates.” Some mortgage advertising can be misleading with low rate promises. These “bait rates” are only for those with extraordinary credit with no contingencies. Your rate will be based on many factors: your credit, your debt-to-income and loan-to-value ratios, the size and type of your loan, where you live and the day you lock your rate, etc. Pick a lender you trust, who will work with you and help you find the best all-around deal.
9. Negotiate a lower home sales price. Getting a better deal on your home not only works for you, it works for your lender because it lowers your loan-to-value ratio. Prices are still falling in many markets and sellers are eager to make a deal.
10. Have a cash reserve. A good rule of thumb is to have at least three months’ salary saved as a cushion before you buy.
The Soda Group is a member of the RISMedia Top 5 in Real Estate network and is authorized to use this content.