Tuesday Tips: Preparing for Home Ownership

21 Jun

One of the most overwhelming experiences of your life will be purchasing your first home, but if you are knowledgeable about the home-buying process, you won’t feel so exhausted at the settlement table.

The first step to buying a home is to know what is on your credit report.  There may be collections or judgments on there that may not be yours or maybe they’ve already been paid off but still showing as unsatisfied on your credit report.  Most lenders will require all judgments to be paid off, so take care of those before applying for a mortgage.  Also, keep an eye on your score. The magic number these days is 640.  Good credit scores will save you thousands over the years.

The next step is to figure out what you can afford and set realistic expectations.  Your monthly mortgage payment, plus any other loan payments including auto loans, credit cards, and student loans, should equal no more than 36-percent of your gross pay.  Also set a realistic goal for yourself of how much you can afford to spend for a housing payment.  If you pay $1,000 in rent now, that equates to a home listed at $158,000 with a 6.5% interest rate.

Before applying for a mortgage, you’ll need to have at least two months of reserves in a bank account.  These reserves will show the lender you have some money set aside for “just-in-case” moments so you’ll be able to pay your mortgage in an emergency.  Two months of reserves equals two months of mortgage payments.  There are 100% financing options available to first-time home buyers, but having a down payment, as well as reserves, will increase your odds of securing a lower interest rate. Reserves are not necessarily required but they do show the lender you are able to save and that you have a stash of money set aside for emergencies so that your bills are paid if something were to happen to you.

Prequalification will be your next step.  Sellers will take you more seriously if you have a pre-qualification letter to show you can afford the house.  This document will be drawn up by a mortgage loan officer based on verbal information given to them by you about your income, assets, and debts.  He or she will also obtain your credit report at this time.  A pre-approval, on the other hand, goes a step further.  Your mortgage loan officer will ask you to provide verification of employment (paystubs and W2s) and assets (two months of bank statements).  You will then receive a pre-approval letter to be attached to a contract on a house you would like to purchase.

Next, find a Realtor you can trust.  If you have a found a realtor, continue working with them instead of calling the realtor on the sign in front of the house you like.   You need a realtor who will work in your best interest, and not for both parties involved.  Ask for recommendations from friends and family to see who they have used in the past.

It will now be time to make an offer on a house you like, so be prepared to play the offer game.  In today’s buyer’s market, make sure you ask your loan officer if you are allowed to receive seller’s help to defer closing costs.  Some first-time home buyer programs allow up to 6% help (USDA loans allow for unlimited sellers help), which can even help to buy down the interest rate.  Make sure you tell your realtor what you qualify for so he or she can include that into the contract.  With your contract, you’ll be required to put down an earnest money deposit to show you’re serious.

Once you have a contract signed by both parties, your realtor will send that to your loan officer to start the process.  Let your loan officer know which attorney (if you live in an “attorney state”) and insurance agent you would like to use.  The loan officer will order an appraisal, order title work, schedule closing with an attorney, and send in the application package to the lender.  Once the application has been approved, there will be conditions to fulfill, so be prepared to provide more information or paperwork if needed.

During this time, your realtor will be ordering a home inspection.  You’ll want to attend the inspection with your realtor and write down any foreseeable problems your inspector mentions.  Don’t be afraid to ask questions no matter how silly they may seem.  This will be your home, and you should know how everything works.

Closing day will be an exciting and stressful day.  Make sure you do a walk-through of the home 24 hours before closing to see if all agreed-upon repairs have been made and to see if the owner left the home in good condition.  At closing, be prepared to sign a lot of papers and hear a lot of information.  If your attorney/settlement agent goes through things too quickly, don’t be afraid to ask him/her to slow down.  If the owner did not agree to pay for your closing costs, remember to bring along a checkbook.  Read over the settlement sheet carefully and ask your realtor to help you understand any fees that might seem confusing.

When it’s all over, you’ll be handed the keys to your new home.  It will definitely be time to celebrate!

I am a licensed home loan originator in the state of Delaware. If you have any questions regarding credit, mortgages, or homeownership, please email me at runeatdatesleep @ gmail.com.

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2 Responses to “Tuesday Tips: Preparing for Home Ownership”

  1. Sonja June 21, 2011 at 1:11 pm #

    These are really good tips! Going through the homebuying process was the most stressful thing I have ever done. I just wanted it to be done! It took us two years to get through it. (not everyones situation is the same obviously) but it was rough. If I had known half of what I learned during the process I would have been so much better off!

    Thanks for sharing!!

  2. Buying a house is the most stressful/annoying time ever! Those tips are really helpful though. Thanks for your help:)

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