The 'magic numbers' behind buying a home now
Long Islanders considering a first home purchase may be feeling pressure to buy -- soon. They’re constantly reminded that this is the only time they won’t be saddled with a previous home to sell; interest rates, though on the rise, remain at attractive levels; and the local housing inventory is high while prices are low.
Those are nice incentives, but to find out if you’re really in a position to take advantage of them, you have to do the math, says Alex Matjanec, founder of MyBankTracker.com, an online resource for comparing lenders and rates. In order to assess your financial readiness, determine what you can afford and score the best interest rates, these are the magic numbers Matjanec says you need to remember:
31 percent. That’s how much of your pre-tax monthly income you should be prepared to pay toward your mortgage, Matjanec says. The Multiple Listing Service of Long Island reports that the median yearly income was $87,500 among first-time homebuyers here in 2009 -- that’s $7,292 a month. So a buyer in this income range should start by budgeting $2,260 for monthly house payments. Then factor in things like the down payment, closing costs and monthly upkeep to determine how much home you can afford.
740. Borrowers boasting a credit score of 740 are offered the best interest rates, Matjanec says -- and if an Federal Housing Authority proposal before Congress passes, soon those with a score below 580 may not be able to get a loan without a 10 percent down payment. According to the Federal Trade Commission, annualcreditreport.com is the only authorized source for the free credit report you’re entitled to see once a year. You can see your score for a fee of about $8 -- and if it’s far below the mark, it’s time to clean up your act. Visit ftc.gov to learn how to dispute errors on your credit report.
1/3. That’s the maximum amount of your available credit that you should owe. If your debt is higher than that, start paying it down now and don’t apply for any new credit cards, Matjanec says. Reducing your debt can help you score a better interest rate on your home loan. For help with debt management, consult a nonprofit credit-counseling agency such as the National Foundation for Credit Counseling.
20 percent. In New York, it takes a 20 percent down payment to get a conventional loan -- one that doesn’t come with a mortgage insurance requirement to offset the lender’s risk in the event of default. It’s best to save up for the full down payment because mortgage insurance fees add up, cautions Matjjanec: “Insurance fees will be different depending on the insurance company you use, but as of April 2010, government-insured mortgage fees are 3.5 percent. So for example a 30-year $300,000 mortgage could cost the buyer $30,000 in fees.”
