First Home
Today marks the day we signed a lease to a town home. Granted, the market for buying houses isn't the greatest time and opportunity to do so, but it's better than the alternative (homeless).
There are Credit Unions and other available lending services that will help you get your first home. Be sure to shop around first before embarking on this kind of investment. As I have mentioned in previous blogs, there are people out there that want to mooch off from you.
Tips for first-time homebuyers, 12+ months out
- Check your credit score
The higher your credit score, the better the interest rate on your mortgage.
Thoroughly understand where your credit stands. When pulling free reports from all three agencies (Equifax, Experian and TransUnion), look for any errors or past-due accounts that might have gone to collections. These liabilities can create roadblocks when you apply for a home loan. If anything is amiss, contact the creditor to see if you can sort it out. Your credit score is largely based on your amount of available credit.
Whether it be credit card limits, overdraft-protection amounts and any other lines of credit you have especially how much of that you’re currently using. Ideally, your credit utilization ratio should be 30 percent or less. “For many people, this is something they have to plan for and work to pay down to achieve that 30 percent number,” says Lindsey Shores, assistant manager of Real Estate Originations with Schools First Federal Credit Union in Sacramento.
A great place to start if you need to improve your credit is to focus on paying down your debt and keeping credit card balances low. You also want to make sure you’re paying all of your bills on time. Late payments will drastically impact your credit score.
Keep periodic tabs on your credit history through any number of free services, including those offered by various banks. If you’re not signed up for a credit monitoring service already, you might consider doing so. You’ll get notified if your credit score changes, or if there’s suspicious activity on your report. - Nail down your budget
Think about not just how much house you can afford, but how much you can take on in recurring costs once you’ve purchased your home.
Mortgage, insurance and property taxes are the three primary monthly expenses of homeownership, but you’ll also need to cover utilities and possibly Home Owner's Association (HOA) fees, plus it’s a good idea to put aside a bit of money on a regular basis to account for maintenance and unexpected repairs.
"As a rule of thumb, prepare to spend 1 to 3 percent of the value of your homes each year on house expenses. You might need to set aside more if the home you end up buying is older, bigger or has maintenance-heavy amenities, such as a pool,” says Steve Sivak, a certified financial planner and managing partner of Innovate Wealth in Pittsburgh.
“One lesson from the housing crash: Just because the bank approves you for a certain amount, it doesn’t mean you can afford it. Another thing to consider: If you shop for houses below your budget, you’ll actually have some leverage to go above asking price in the event of a bidding war, a not-uncommon occurrence in the current market,” says Lauren Lindsay, a Houston-based independent financial planner. - Consider your needs and wants
Finding the ideal location and address can take a lot more time than you expect. Begin scouting neighborhoods as early in the process as possible.
“Drive and walk around that area at different times of the day and night. This will help you get a feel for what you like and don’t like,” says Bill Golden, a Realtor and associate broker with RE/MAX Around Atlanta.
Along with pinpointing the neighborhood, now is a good time to narrow down your preferences for the home itself.- What type of house are you looking for?
- What can you compromise on?
- What are the deal breakers?
Think about what you like about where you currently live — that can help inform your list of needs and wants. - Get assets in place (3-4 months out)
Regardless of level of income, you should be able to document to potential lenders that you have a stable source of earnings. "Your income will be scrutinized by lenders, who will look for a two-year employment history and want to see how much consistent income you receive hourly, monthly, annually or if you're self-employed,” explains Tom Hecker, a loan officer with Cherry Creek Mortgage in Greenwood Village, Colorado.
In terms of your liquid funds and overall financial health, in addition to reviewing your credit report, mortgage lenders typically look at your bank statements from the last two months when assessing your application. If you plan to make any deposits into your checking or savings accounts from other assets, such as a down payment gift, do it before the 60-day window. This allows the funds time to mature.
It’s best to avoid opening any new credit accounts or loans, or generating more debt at this stage. All these activities could possibly impact your credit report in a negative way. - Shop multiple lenders
At this point, you should know what monthly payment you’re comfortable with, what areas of household features you can afford, and how much you can put down.
Compare mortgage rates from different types of lenders, including different types of mortgages, to help you decide whether this is a good time to lock in your rate. Consider your experience with the lender, as well.
In this market, you can find competitive rates and service, but you want to pay close attention to lenders’ responsiveness and communication.
It’s also a good idea to focus all the terms of the mortgage especially the rates you’re being quoted for.- What are the late fees?
- What are the estimated closing costs?
- Is there a prepayment penalty?
- If I'm able to get a mortgage with the bank where I already have accounts, will I get a better deal?
Sometimes it makes sense to choose a loan with a slightly higher rate if the other terms are more favorable overall. - Get preapproved
Once you settle on a lender, get preapproved for a mortgage. Prequalification, is a projection of the possible loan size you’ll be able to get whereas a preapproval, is an official letter from a lender stating exactly how much money they will loan to you. A preapproval will put you in a much stronger position when you’re making an offer on a house. It will ease the process once your offer has been accepted and you’re actually applying for your loan.
Preapprovals usually expire after 90 days. Ask your lender how long your preapproval will be good for. If you’re a first-time homebuyer with significant debt or with an average credit score, you might want to apply for a preapproval as soon as possible. Zero-in on issues to fix any obstacles.
“Once you have a preapproval in place, keep to your budget and savings plan. Consistently continue to pay all your debts on time. At best, try not to make any extraordinary purchases or take on extra debt either. - Look for down payment assistance
There are many first-time homebuyer and down payment assistance programs, including at the local, regional and national level, that can help cover your down payment or closing costs. These programs are typically limited to borrowers with an income below a certain level (based on location), and can impose a cap on the home’s price, too. Talk to your loan officer and explore your options to see what you might be able to pair with your mortgage: - Work with a real estate agent
After you have your financing business squared away, and a preapproval letter in hand, your next step as a first-time homebuyer, is to hire a Real Estate agent.
An experienced Local Area Real Estate agent, who knows what you're looking for in a home, can advise you on market conditions, and whether homes you want to make offers on, are priced properly. Your agent can also identify potential issues with a home or neighborhood you’re unaware of, and may bat for you to negotiate pricing and terms.
As a buyer, it costs you nothing to work with a Realtor, but they can save you a lot of time and hassle especially in your search for homes suitable for you. You can start by asking friends, relatives or co-workers for referrals.
Don’t blindly pick an agent. Make sure it’s someone who works in the general area you’re looking into and whom you feel trustworthy with. Despite the competitive market, new listings come up every day, and a good Realtor will be on top of that, and get you to see new listings as soon as they become available. - Put contingencies in writing
When you find a contender and prepare to make an offer, be clear about any contingencies that will allow you to walk away from the deal happy. These can include the home inspection, revealing costly issues, or your mortgage approval falling through. If these terms are spelled out in writing with deadlines, you’ll have an out if the transaction doesn’t go as planned. Make sure you get your earnest deposit back, too.
If there is a problem with the home, get estimates from contractors regarding any repairs or upgrades the house might need before you close on the deal. Doing this research can help you plan for those expenses and buy you time to have the work done before moving in.
It’s also a good idea at this stage of the game to enlist a real estate attorney to review your purchase contract and protect your interests. - Keep the status quo
A mortgage preapproval doesn’t mean things are set. Lenders recheck your credit, bank statements, income and employment just before closing to make sure you’re still able to handle the repayment. Making big purchases, taking out new loans or lines of credit or even closing accounts can delay the closing or kill your loan application altogether.
Any debt or past due payments you may have in your financial closet will be found, so it’s best to be as honest and upfront as you can.
You don’t want to risk having your loan declined at the last minute. Don’t make any large purchases, like a new car, before closing on your home loan. Don’t get pressured into applying for any new retail store credit cards and avoid making any new charges once you have been preapproved for your mortgage.
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