If you've decided it's time to move up to a bigger home or a home in a more coveted area, your next challenge will be getting there financially. It's likely you'll need more cash, a larger income and, perhaps, better credit than you had when you purchased your current home. Putting all the pieces in place for the move up could take some time and detailed planning.
1. Credit Clean-Up
Although your credit rating may have been sterling as a first-time home buyer, years of credit card and utility accounts, car payments and consumer loans may have scuffed up that financial image a bit. Late or missed payments have a negative effect on your credit profile, as do large, long-term balances on your accounts. Your credit score, a rating system many lenders use to evaluate your financial situation, may prevent you from borrowing as much as you'd like for your next home or getting the lowest interest rate currently available.
The wise buyer will take stock of his or her credit standing and debt status well before attempting the next home purchase. You may need some time to reduce your debt, catch up on any delinquent accounts, remove inaccuracies and blemishes from credit reports and make other adjustments to increase your credit score.
2. Loan Shopping
A quick way to sift through these issues is to contact a lender who can pull a credit report to see if there are any glaring spots on your record. If nothing needs immediate attention, you can continue with a complete application, providing the financial information needed for loan pre-approval. The loan officer will determine the maximum loan amount you qualify for based on your income and debt profile.
You may want to shop around at this point, comparing loan programs and interest rates. Consider how well your current loan has worked for you and remember that rates aren't everything. The lowest rate may be accompanied by high points. If so, you'll have to keep the mortgage long enough to justify paying the steep up-front cost of the loan.
Consider whether a non-traditional mortgage program could meet your needs. An adjustable-rate mortgage may be a good choice if it looks as though interest rates will be falling. A 40-year mortgage might reduce the monthly payment enough so you qualify for a larger loan.
3. Collecting Cash
An important factor in the equation that determines your buying power will be how much cash you have for a down payment and closing costs. The best mortgage interest rates are available to buyers with down payments of 20 percent or more. If you make a smaller down payment, you may have to take a higher interest rate or pay for private mortgage insurance, both of which will reduce your buying power.
Unless you're a prodigious saver, chances are the equity you have in your current home will provide the largest source of cash for your next home purchase. Equity, of course, is the difference between the market value of the home and the balance on any mortgages secured by the home.
We would be happy to conduct a comparative analysis of your home to determine the right sales price—at no obligation to you. By determining the value of your home and subtracting out selling costs (paying off the old mortgage, marketing fees and settlement expenses), you'll have the basis for a down payment on your move-up property.
4. Fine Tuning
After taking stock of your financial situation, you may find it necessary to delay your move in order to get the type of home you've targeted. Perhaps you need to save more cash for down payment and settlement costs. You may need to pay down outstanding debts to improve your credit score and qualify for a larger mortgage or a lower interest rate. Remember, it's likely your home's value and your equity in it will continue to grow as you get yourself in a position to move up successfully.
Give me a call and I will help get all of your finances in order before you start shopping for your next home.
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