For most of us, buying a home is going to be the single biggest investment that we will ever make. While the benefits of homeownership are many, it does take some careful planning to make sure that you prepare yourself properly for the home financing process.
To assist you in this investment decision, I have included some tips that I have learned over the years while helping buyers prepare for the purchase of a new home.
- Get a credit report...Good credit is paramount in making sure you get lower fees and a better rate. Check your credit score with at least one of the major providers. Make sure that there are no mistakes and if there are, clear those mistakes up before applying. Dispute any inaccuracies that you see or work on paying off old unsettled depts. Scores 700 and above will get you the best rates and lowest fees.
- Determine what you can afford...Conventional wisdom is that housing expenses should not exceed 28 % of your gross monthly income. Remember that we are not talking about just the mortgage payments here. You also should include taxes, insurance, utilities. Some financial planners suggest that you try to bank what that amount if for 12 months prior to buying. This should show how it will impact your life and at the end you have a nice nest egg for a down payment or to make improvements once you move in.
- Build your Savings Account...We always hear that we should save more, well mortgage bankers feel the same way. Most want to know that you are not living paycheck to paycheck, so they like to see a history of savings. If you have a cushion on 3-5 months of mortgage payments saved up they will be more likely to give you a better rate.
- Avoid Large Purchases... If you are thinking of buying a home hold off on purchasing that new car or geting that new credit card. Major purchases will impact your Debt to Income Ratio and also will create hits on your credit. Applying for credit cards will also create hits on your credit. A large number of hits on your credit can negatively impact your credit score. Remember we want to keep that over 700.
- Try not to Switch jobs...Crazy as it seems, getting a new job (even if you get paid more) can raise a red flag with mortgage brokers. Part of the reason is that lenders use automated systems to assess risk and longevity at a job is one of the ways they assess stability. This is not to say it will preclude you from getting a mortgage, just make sure you are upfront with the lender and have your documentation in order for your previous and new job.
- Figure in Closing Costs...Plan ahead for the closing costs. The day that you are scheduled to get your loan you will also need to pay for expenses such as; attorney's fees, title insurance, and other lender fees. Closing costs can be anywhere between 2 and 7 percent of the selling cost of the home. The good faith estimate that you received from the lender will give you a good idea of how much you can expect to pay and make sure that you have enough to cover the cost in your bank account. In some cases you can also negotiate for the seller to include this in the purchase price of the home.
I understand that this might be a lot to take in, but it is an important step in your home buying process. Stay calm and remember that your lender and I will be available to help you with the questions you have. We have been through this many times with other clients and can advise you on how to make the entire process as smooth as possible. If you have any additional question, feel free to give me a call or send me an email.
Speak with a Lender
- Get referrals...Talk to friends to see who they used and if they had a good experience, then reach out to the lender they used. Also, make sure that you ask for references so you can speak to people that have done business with the lender in the past. If they are unwilling to provide you with a list of old clients, it could be a red flag that do not have many past clients or the past clients they do have did not have good experiences.
- Do your research...Now that you have a list of names, look online to see if you can find any reviews on them or incidents with the BBB. How long have they been in the mortgage business? Not necessarily the company, but how long they themselves have been processing loans. The more information you have the better and don't be afraid to ask the broker questions on what you find.
- Speak with Multiple Lenders...I would suggest that you speak with between 3 to 5 lenders in order to get an idea of the rates and fees that you will be offered. Rates and fees can vary from lender to lender. So look for the one that best fits your situation and also someone that you trust. Also, make sure that when you get a rate that they also give you a rate lock.
- Responsiveness...This is someone that you are going to be working with closely for several months. It is important to find someone that you can work with and also that responds quickly and professionally to your inquiries. If they are not answering the phone for you while trying to earn your business, you might also have a hard time getting in touch with them when a crisis comes up during closing time.
If you are undecided in which mortgage lender to use, feel free to give me a call. I have some that I have worked with in the past that have done a great job with their clients and could do a great job for you as well. In addition, whoever you end up working with I have included some questions you can ask them.
- What is the interest rate?
- What is the APR (annual percentage rate; includes fees, points and mortgage insurance)?
- What is the initial rate (if it is an ARM - adjustable rate mortgage)?
- What is the highest the rate can go to next year (ARM)?
- What are the annual and lifetime caps on the interest rate and payment (ARM)?
- How often is the rate or payment adjusted, and when (ARM)?
- What index is the rate based on (ARM)?
- What margin is added to the index (ARM - it might be the index plus 3%, for example)?
- Can any of the fees or costs be waived?
- Is there a prepayment penalty?
- How much is the prepayment penalty?
- For how long is the penalty in force?
- Are extra principal payments allowed?
- Is an interest rate lock available?
- Can I have the lock-in in writing?
- Is the rate locked in at time of application or time of approval?
- If rates drop, can I get a lower rate locked-in?
- What inspections and/or surveys are required?
- Can I get an estimate of prepaid amounts that I'll have to pay at closing?
- Are there "points," and what will these cost (discount points to reduce interest rate)?
- What state taxes, local taxes, stamp taxes and transfer taxes will I have to pay?
- What other costs will there be?
- Is there anything else I should know?
- What is a pre-qualification...A pre-qualification means that you have spoken with a lender and have gotten an estimate from them on what they would approve you for. This is useful in the home buying process because when you get an idea of what you can afford so you can focus on properties that are in your price range.
- What is a pre-approval ...A pre-approval, on the other hand, is much more valuable and a must have for serious home buyers. With a pre-approval a lender will have checked your credit and verified your documentation and will approve you for the amout that they are willing to fund. This approval is generally good for a specified amount of time - typically 90 days but can vary with lenders.
- Benefits of a pre-approval...So why do you need a pre-approval? What if you walk into a home that you love and want to make an offer right away? It is a good price, great location, and you know that there will be multiple offers. If you have a pre-approval you can make the offer immediately. You will not need to spend the next couple of days scrambling to get your documentation, find a lender, and get pre-approved. If the home owner has 2 offers, one from someone who is pre-approved and one from someone who is not, then they tend to look more favorably on the pre-approved buyer as there is less risk involved.
- Items you will need ...Long gone are the days when lenders will approve essentially anyone. These days you need to produce documentation to show your income, assets, credit, and employment. Getting items like your tax return, recent pay stubs, bank statements, drivers license, and social security together will help you to get through the process smoother and faster.
- Rate lock...A rate lock means that the lender has agreed to provide you with an agreed upon rate regardless of whether rates have changed between the time of the loan approval and the closing date.
- Why a rate lock...A rate lock will protect you from fluctuations in mortgage rates. If mortgage rates go up and you do not have a rate lock in place this means that you could end up with a higher rate and a higher payment over the life of the loan. On the other hand, rates can also go down which would mean that a rate lock too early could lock you in at a higher rate than you might otherwise have secured. Which brings us to when to lock?
- When to lock...There is no perfect answer to this question. A lot would depend on the state of the economy and where experts predict interest rates are headed. The majority of home buyers wait until they have a ratified contract to lock in their loan. The reason being they do not know how long it will take to buy and close on their home and longer duration rate locks are more expensive (in loan points or a higher interest rate). It is best to speak with your lender and me during the process so we can provide you with the best options for you at that time.
In my experience a pre-approval is never a bad thing for a serious home buyer. If you have any question on the mortgage approval process please call or email me and I would be more than happy to provide additional information
One of the first things you would want to do is to determine how much you can afford. I have included some links to calculators that will allow you to determine the house you can afford as well as other things such as the annual cost of owning a home.
There are also a number of good resources out there that you can use which I have provided links to below:
- The Federal Government mandated that each person can get up to one free credit report each year. You can access yours on the following page: www.annualcreditreport.com
- The Mortgage Professor site has a lot of resources such as spreadsheet downloads, gloassry of terms, etc... and can be accessed here: http://www.mtgprofessor.com/
These resources are great to go to when you are educating yourself on the mortgage process. I have helped many buyers through this process, so if you have any questions or need additional guidance do not hesitate to call or email me.