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  Buying a home
Top 10 things
The details:

Are you ready?

Lining up cash

Picking a team

The hunt

Closing the deal

For sellers only
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|> About Money 101

investing 101

  Lining up cash
Forget location, location, location. Think credit, credit, credit

For most people, buying a house involves a double financial whammy. First you have to assemble a huge pile of cash for the down payment and closing costs. Then you must convince a bank to lend you an even more staggering sum -- generally 80 percent or more of the purchase price. So your first step, even before you start the actual hunt for a property, should be to get your financial house in order.

Start with your credit. All mortgage lenders do a thorough financial analysis of applicants, including looking over your credit reports. These reports are kept by the three major credit agencies, Experian, Equifax and TransUnion. They contain a lot of basic information -- your name, age, address, years at that address, even your income, if the agency can obtain the data. They also list all the open credit lines you are now responsible for, including credit cards, gasoline cards, revolving charge accounts, student loans, and the like. A credit report will show whether you are habitually late with payments and whether you have run into serious credit problems in the past, such as a bankruptcy within the last seven years.

Blemishes here can delay or kill your chance for getting financing. So get a copy of your own report -- try ConsumerInfo.com, which charges about $30 for a combined report from all three agencies -- and make sure it's correct. If there are errors, you must contact the agencies directly to correct them -- which can take two or three months to resolve. And if the report is accurate but shows past problems, be prepared to explain them to a loan officer.

Next you need to see how much house you can afford. The best way to do so is to use one of the Web's many calculators. Such as Quicken.com and Microsoft's HomeAdvisor. If you're doing the calculation at home using a spread sheet or calculator, here's what the results are based on. Banks generally insist that: 1) your monthly housing costs, including mortgage principal and interest, property taxes, homeowner's insurance and private mortgage insurance, should equal no more than 28 percent of your gross monthly income; and 2) that sum plus your minimum monthly payment on any long term debts should equal no more than 36 percent of your gross income.

The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary. Use this only as a general guide, though. Many factors can change that equation. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby (read: boat), then you may need to set your sights lower.

You must also raise cash for the down payment and closing costs. Most lenders like to see at least 20 percent of the home’s price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you'll need to find loans that can accommodate you. Various private and public agencies -- including Fannie Mae, Freddie Mac, the Federal Housing Administration and the Department of Veteran Affairs -- provide low-down payment mortgages through banks and mortgage companies. If you qualify, it’s possible to pay as little as three percent up front for a loan. For more, check out their websites at www.fanniemae.com or www.freddiemac.com.

One caveat: With a down payment under 20 percent, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds from 0.5 percent to 1.25 percent of the total loan amount at the closing, plus annual fees that will be built into your monthly mortgage payments.

Also make sure you've got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney’s fees, inspection fees and the cost of a title search. They can easily add up to $5,000 to $7,000 -- and often run to five percent of the mortgage amount.

If your available cash doesn’t cover your needs, you have several options. You can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can receive a cash gift of up to $10,000 a year from each of your parents without triggering a gift tax. (In fact, if your and your spouse's parents are both well-heeled, they can give you a total of $80,000 in one year -- $20,000 from each set of parents to each of you. This is a good type of family to have.) Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.

The thing you cannot do is use borrowed money to meet the down payment. Banks will recognize that for what it is, a loan, and treat it as one of your debt obligations, not cash on hand.

Next: Picking a team


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