Thinking of buying a home?
There are a number of things that should be considered before jumping in the car to visit open houses. It’s great to know what you are looking for in a new home and while those things should be taken into account, you may want to look elsewhere first.
Taking a look at your credit score would be a good first step. You’ll want to have a score above 620 in order to obtain a loan from most lenders, but what many may not realize is that the higher your score, the better your pricing (rate) will be. If your score is at or above 740, you will qualify for the best pricing possible. In addition to your credit score, lenders will want to see a credit history and at least two or three sources of credit in order to qualify you as a solid candidate for a new loan. If you think you might want to buy a home in the future at all, it’s a good idea to look at your credit score and start working to establish a good credit record now. Factors that affect credit scores the most are credit card utilization, payment history, and of course any derogatory marks on your record will lower your score. If you are young and looking to buy in the future, open a credit card now, use it monthly and pay it off in full and on time. Be sure that there aren’t any annual fees for using the card and use it to pay for things that you would have to pay for anyways. After a while, ask for a credit increase so that you have greater flexibility when using it as well as a lower percentage of overall credit utilization, which will help you continue to raise your score.
Getting closer to buying a home? Figure out how much you can afford. Create a monthly budget and compare your earnings with how much you spend and what you spend it on. Remember, a house payment will include items not found in your monthly rental payment: principal, interest, taxes, insurance (PITI). Other possibilities include homeowners association (HOA) dues or mello-roos and other special assessments. There may be new or different utilities that could have been paid by your landlord while you were renting. Speaking of your landlord, who will you call when something unexpectedly stops working in your new home? It would be prudent to set up a separate savings account as part of your monthly budget towards home improvements. This way if something breaks, you’re covered. Even a home warranty (which should be included in your new purchase agreement) will charge you a deductible each time you utilize the warranty. If you find that you haven’t tapped into the savings in a while, you might consider using some of the money towards improving the home. Either way, you’ll be glad you set the money aside.
While we’re on the topic of setting money aside: how much money are you prepared to put down on your new purchase? At least 20% of the purchase price would be a target to try and hit. Many lenders won’t provide you with more than 80% of the appraised value of your new home and if you can’t come up with the remaining 20%, you have some options, but they will likely cost you more money. Some will allow you to borrow more than 80% but will charge private mortgage insurance (PMI) until your loan is reduced to 80% of the home’s present value. Lender Paid Mortgage Insurance (LPMI) is available through some lenders. In this case, the lender pays for the PMI and charges the borrower a slightly higher interest rate than what they would have otherwise qualified for. An additional option would be for you to put down 10% and take out a first loan for the 80% and a second loan, at a higher cost to you, for the remaining 10%. Ultimately, your strongest financial option will be to save for at least a 20% down payment, however with the options mentioned above, you certainly still have a path to homeownership if you are unable to obtain a sizable down payment. In a hot market, many sellers will look for an offer that is all cash or the highest down payment possible, but ultimately, they get paid at the close of escrow all the same. Whatever you decide, keep in mind that in addition to your down payment, there will be closing costs associated with your purchase and you’ll also probably want to fix some things or make them your own once you move in. The best idea would be to save as much as you can now, so that you have strong options when it’s time to buy.
Now that you’ve figured out how much you can afford to pay for your home, you’ll want to obtain some evidence from a lender in the form of a pre-approval letter. Unless you are paying cash for your new home, a seller will ask for this to accompany the offer that you will submit to purchase their home. Don’t mistake a pre-approval with a pre-qualification. When a lender pre-qualifies a buyer they simply take a snapshot of what the buyer says they make and gives an estimate as to what they could probably afford. In order to be pre-approved, a lender will require you to provide evidence of income, assets, and debt in order to determine what you actually can afford to pay. For this reason, the pre-approval letter is the one you will want to get. This may take a little bit of time and effort so make sure you allow time for this prior to shopping. The last thing you want to do is find your dream home, not be able to submit an offer, and then miss out on buying it because someone else was better prepared than you.
Don’t let all of that information scare you away from searching for your dream home. As real estate professionals, our job is to assist you in not only navigating through the purchase of a new home, but also preparing you for that purchase. Our brokerage can help you obtain a pre-qualification or pre-approval letter so that you are better prepared to make an offer when you do find the home that is right for you. We can also help you determine which loan best meets your needs so that after you purchase your dream home, you will feel confident knowing that you not only picked the home but that you made the best financial decision possible.