Shopping for your first home? Here are some key pointers to keep in mind as you undertake the process of qualifying for a loan and finding the place of your dreams.
What you need to do before you start house hunting
Ready to get house hunting? Not so fast…you’ve got a little homework to do.
But don’t worry, this is the kind of homework that’s going to save you money in the long run.
Make sure your credit is in good working order
If you’re in the market for a mortgage, begin by visiting myFICO.com and getting your true credit score.
If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score; most lenders will base your rate on the lower score if you’re a couple.
In addition to your credit score, you’ll also want to pull a free copy of your credit reports at AnnualCreditReport.com. Check all three reports at once from Equifax, Experian and TransUnion.
Go through them thoroughly. You’re looking for two things in particular: any errors and any unpaid collections.
Errors technically should take 30 days to correct once your inform the bureau and creditor of their mistake. But in actuality, the process can take up to three or four months. So that’s why you want to get going on this early before you’re house hunting.
Should you run into a problem getting a legitimate error removed from your credit report, follow these steps.
When it comes to unpaid collections, you want to make sure there are no surprise delinquencies eating up your credit. If there are, many times they’ll be small piddling bills of a medical nature. Get those things paid off pronto before you apply for a mortgage.
Pre-qualify for a mortgage
It’s very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.
But here’s a warning: You’ll be approved for a higher home purchase price than would probably make sense in your life. It’s up to you to think through what that translates to as a monthly payment.
Don’t forget to add to that monthly taxes and insurance, along with possible repairs and maintenance that you wouldn’t pay when you’re a renter.
So look at the payment you’re facing and be realistic. Is it a payment level you can handle or will it make you miserable — what’s often called being “house poor”?
Where should you get pre-qualified?
My top choice for you to get a mortgage is at a credit union.
Years ago, credit unions weren’t the best place to look for a mortgage. But that was then and this is now. Today, credit unions are a great source for mortgages, especially if you’re looking for something more creative.
Credit unions make sense particularly for shorter term loans or mortgage refinances with terms of 7 years, 10 years, and 15 years. Many credit unions have low or no closing costs in return for bumping up the interest rate just a bit.
You’ll also want to get a quote from mortgage broker or mortgage banker. The latter has their own source of funds to lend out. The former is a salesperson who shops around for a loan for you.
Finally, you might also try small local banks — even though there are not many of them left — or even possibly a regional bank.
One place not to shop for a mortgage? At the giant banks. They charge much more for loans than the other sources named here.
Be sure to get more than one mortgage quote
Most people only get one mortgage quote. That’s the wrong way to go about it. You’ll want to get quotes from multiple lenders.
Mortgage lending is very competitive and to go with just a single lender won’t put your quote out there for competition. Plus, when you have more than one quote, you can play your top two quotes off each other and make them win your business. In some cases, you they may make you a better offer.
But it’s not just the interest rate that’s important…
Pay attention to points and closing costs
Beyond the interest rate, you’ll want to know about points and closing costs.
Each point is 1% of the amount of money you’re borrowing. A lot of people will quote you a low rate and they won’t disclose the points you have to pay to get that rate unless you ask them directly.
Meanwhile, when it comes to closing cost, the statement of closing costs that a lender gives you is written in stone. They can not exceed that statement under the law. So that give you real numbers you can compare from lender to lender.
BONUS TIP: When you apply for a mortgage, you’ll also face a variety of other junk fees. Many of them can negotiated down or away altogether. Know the junk fees so you can take action!
Minimize the window of time during which you get mortgage quotes
Here’s another warning: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file.
You can minimize the damage by getting all quotes within a 14-day period. That way it doesn’t look you’re applying for multiple loans from multiple lenders each time.
Be timely with your paperwork
As you go through the lending process, you will have to do a lot of paperwork. Get your lender the info right away when they ask for it. Then document that you got it and you gave it to them.
The last thing you want is to have a finger pointed at you for being negligent with paperwork when there’s a problem and you can’t close on time.
How much down payment is necessary?
For most people, the FHA Loan Program generally allows you to bring the least amount of money to the closing table possible. Most FHA loans require 3.5% down payment of the purchase price. If you don’t go the FHA route, many loans will require 20% down payment.
Just know that if you don’t put down 20%, you’ll typically have to pay private mortgage insurance (PMI) on both FHA and traditional loans.
Meanwhile, if you’re a veteran, VA loans require zero down payment — and they don’t require mortgage insurance, either.
Foreclosure or short sale?
OK, so you’ve been approved for the loan. Great!
I am neutral on the issue of whether you should buy a foreclosure, a short sale or just a home that somebody needs to get rid of because of divorce, death or relocation.
The latter will generally be in better shape and condition than a short sale. And foreclosures look downright sad many times.
I bought one foreclosure during the depressed economic cycle of last decade and it required expensive TLC to nurse it back to health. So if you do opt for the foreclosure route, you’ve got to build rehabilitation money into your budget.
I also want you to comparison shop for owner’s title insurance any time you buy a foreclosure.
As you start to look at properties, you want an agent who “farms” the neighborhood where you’re most interested in buying a home. That means they’ll have the inside scoop on available properties and can make the process much easier.
I also want you to look at a ton of homes, both online and in person, so you can target what’s a deal and what’s not. Know the neighborhood where you’re buying.
For women in particular, drive around the neighborhood at night and see if you’re still comfortable then.
Plan to stay put for years
Sure, real estate can still be a deal, but only if you buy and hold.
Back during the recession, I was advising people to stay in a traditional single-family home for at least a minimum of five years, maybe more like seven years, before they went to move and sell again.
That’s at least how long it took real estate values to recover from the trough of the recession.
If you’re starting out in a townhouse, that particular market remains a bit more distressed than the single-family home market. You need to dig in your heels and stay put in a townhouse for at least 10 years.