Buying a home is often the largest purchase you will make in your lifetime. For first time home buyers, this big decision can lead to both excitement and fear. Navigating the process in a systematic way can save you both time and money, while you search for a new place to call home.
After you decide where you want to live, the next step to purchasing a home should begin with your finances. Unless you are using cash to buy your first home, you must secure a loan with a lender. Take these steps for a smooth financial journey to home ownership.
Get Your Financial Ducks in A Row
Here are the steps to getting your financial ducks in a row:
1) Check your credit at www.annualcreditreport.com. This website offers a free report every year from each of the three credit bureaus. The bank will check all three reports for the loan and you should do the same.. Look over your credit report and correct any errors, including items such as addresses, jobs, and other non-credit related information. Some companies use the credit report to verify your identity, and inaccurate information can lead to more paperwork and delays.
2) Organize your finances. Gather two or three months’ worth of bank and investment account statements. Make a list of all debts and income along with two months’ worth of pay stubs. Banks typically require two years of tax returns to verify consistency with income. For the self-employed, tax returns may be the primary source of income verification. It is not uncommon for lenders to average adjustable income such as commissions bonuses because they do not represent guaranteed income.
3) Meet with a lender. Find a lender you trust and hold a meeting to evaluate your potential application. Mortgage brokers, bank officers, and other lenders will discuss potential loans available based on your needs and help you decide the best route. The lender will review your credit, income, and assets and discuss potential underwriting roadblocks.
4) Get pre-approved, not pre-qualified. Pre-qualified is easiest and you can receive a pre-qualification letter over email without ever sitting down with a lender. You simply input your estimated income and debt levels, and a computer program spits out a potential loan approval amount. The problem with this process is that it does not see your loan from the bank's eyes: They may not count certain income or may count debt you did not consider, which will impact approval amounts. Pre-qualification does not pull credit, which is a major barrier for many borrowers.
A pre-approval requires the submission of a formal application, a review of credit, income, assets and other factors, to offer a realistic view of what you can afford. The Pre-approval process takes longer and may require an application fee. The lender, and sometimes an underwriter, will review the application before establishing an estimated loan approval amount. The loan amount plus your down payment will tell you the price range of home you can purchase. The pre-approval process increases the likelihood of approval, speeds up the closing, and reduces disappointment of the loan falling through.
5) Don’t rely on the lender’s approval parameters. Review your budget. Lenders do not consider every line item in your budget: They do not consider how much you pay into savings or retirement each month, the price of children’s extra-curricular activities, vacations, or hobbies. These expenses add to your quality of life and may be more important than a more expensive home. There are tradeoffs to every financial decision. The purchase of a home requires a long-term commitment and over buying can have an expensive long-term tradeoff to your quality of life.
6) Carefully select your loan. Many buyers focus only on the interest rate. However, there are many factors in the loan to consider. One of the big ones includes whether to secure a fixed or variable loan. The variable rate offers a lower starting point, allowing you to buy a higher priced home. However, when the rate adjusts, you could wind up paying more if you remain in the house for decades. A fixed loan has a higher starting point but never changes unless you sell or refinance. Loans can also vary in requirements for down payment, assets on hand, and assistance with needed repairs.
7) To escrow or not. With every home purchase, you must pay taxes and insurance on the home each year. These prices will change over time, which can impact your monthly outlay from year to year, even if the rate remains the same. Banks encourage you to escrow, which creates a forced savings. You pay money each month into an account. Then when the bill arrives, the bank pays the taxes and insurance. You have the ability to compare prices and change insurance policies at will, and the new company will communicate with the lender. If you select the option of paying taxes and insurance on your own, the mortgage payment will be lower, because it lacks the escrow feature. You then pay the bills as they come due.
8) Pay attention to the total costs of home ownership. Owning a home involves costs in addition to the mortgage payment. You must pay taxes and insurance, which typically the bank pays through the escrow process. You also must pay for repairs and maintenance on the home. Experts estimate it costs 1% of the home’s value each year. This number varies based on the age and condition of the home at the time of purchase. You will also find the need to update and upgrade the home over time to maintain its market value. A home is an investment of both money and time, beyond a basic roof over your head.
When you address the financial side of home buying before the house hunt begins, you will find the process less stressful, and the home buying will go more smoothly. You can close faster and have a stronger offer in a competitive bidding situation.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website.