Are you thinking of buying a home, but don’t know where to start? Here in a three part blog series I hope to help demystify the mortgage process. We will discuss the first steps to take in preparing yourself for the process, I will provide information from local banks about their first-time-home buyer programs, and I will give a general overview of other loan types that are available. For most of us this is the largest purchase we will ever make. Our goal is to provide tips for helping you navigate the process with confidence.
Today I will start the series by discussing the four steps you should take when you first decide you want to buy a home.
Take an in depth look at your financial situation. You should find out your credit score, look at how much you earn, how much you owe, and how much savings you have. This all helps you prepare for meeting with a mortgage loan officer and helps you to better understand your financial picture. I suggest doing this even if you’re not planning on buying a house. It can be a very eye opening experience. It’s important to look at your finances on paper so that you know how much you owe and how much savings you have. If you do this it will be a much smoother process when you are ready to talk to a mortgage lender. The lender will use this information to determine how much of a loan you would qualify for. They look at DTI (debt to income ratio) to help determine the loan amount you will qualify for. DTI is a ratio figured by taking your monthly debt payments and dividing them by your monthly income amount. The lender will use your credit score to assess your ability to repay debt. They look at whether or not there were late payments, how much you owe, and how long you have had credit. All of these factors go into determining a credit score that is issued by the credit reporting bureaus. For those of you unfamiliar with credit reporting agencies there are three Transunion, Equifax, and Experian. You can get access to your credit score ahead of time and also call the agency if there are any discrepancies on your credit report before meeting with the lender. If you would like to find out your credit score you could go online to myfico.com and for a fee you can pull a credit score from all three credit bureaus. Your credit score may be different from each of the bureaus however, the mortgage lender will use the average credit score in the qualifying process.
Determine the amount you have to put down for your purchase excluding closing costs. You might have heard you need a 20% down payment now because of all the tightening of lending regulations. Well, I have some good news about that you don’t! Now, if you are lucky enough to have 20% for a down payment you should definitely use it. It will help lower your monthly payment and that is a very good thing. If however, like many people, you don’t have 20% you can still consider buying a home. There are programs that will accept as little as 3% down. Of course you still need to qualify for the loan by proving that you have the income ability and credit history to pay the loan on a monthly basis. However, having to come up with a lower down payment could put home ownership closer to your reach. Keep in mind that your down payment amount does not include closing costs and so you will need to have some additional funds to pay for the fees associated with buying the home. When you speak to a lender about qualifying for a home they will also provide you with the information about closing costs. Closing costs usually include such items as the appraisal fee, attorney’s fees, taxes, insurance, recording fees and other items. The lender will provide you with a good faith estimate and this will have estimated closing costs. If something doesn’t make sense, always ask! This is a huge financial decision and any lender who knows what they are doing will be happy to answer your questions.
Get prequalified or even preapproved for a loan. Contact a lender, ask about their first-time-home buyer programs and get prequalified for a loan so that you know how much home you can afford. It would be very disappointing to start looking at homes in the $600,000 price range, find one you love, put in an offer and then find out you don’t qualify for the loan. I am a huge proponent of not putting the cart before the horse. I believe it is very important to know how much of a loan you can qualify for and how much of a down payment you need to have before looking at homes. It gives you control over your search.
**I will discuss programs that our local banks offer in my next post.
Find a real estate agent that you feel comfortable with. Once you have determined the price range that you qualify for you should find a real estate agent. The agent you choose may come through the referral of a friend or relative and that can be very helpful. Maybe you visited an open house when you first started thinking of buying and you really liked the agent that was there. You should feel satisfied that the person you are working with has your best interests in mind. You should value their opinion because part of their job is to help advise you. Remember this is a huge financial decision and the person helping you should be able to answer any concerns you may have. You shouldn’t feel pushed into doing something you aren’t ready to.
Finding a home is a process, take your time, find the right professionals to help you and have fun!
**Next week’s blog post will provide more information on the different first-time-home buyer programs that our local banks offer.