Want to buy your first home? You’ve
probably got some cash saved for a down payment and maybe even recommendations
for realty agents from savvy friends you trust. But have you cleared up your
credit report, hired a tax adviser or considered the benefits of FHA financing
compared with a conventional mortgage? Not every first-time homebuyer will need
a tax adviser; but everyone interested in becoming a homeowner should prepare
early with orderly finances, information and plenty of patience for the long
and complicated process ahead.
Since the housing market’s collapse
in 2008, mortgage lenders and home sellers have become more demanding in the
documentation they require for a home sale. And with the real estate market in
the Washington area heating up for the spring season, you’ll need to think
through the contingencies and prepare your balance sheet to compete with the
other would-be home buyers making offers on properties — many of them with a
track record of homeownership.
Here are five quick tips on what
potential first time buyers need to do:
Step
1: Credit and Savings
First, request a free copy of your
credit report from the three major credit bureaus via https://www.annualcreditreport.com. Use only this link to avoid the many
credit-reporting scams out there. If you see accounts on your credit report
that you don’t recognize or if there are negative marks against you, act now to
clear them up.
If you see old credit cards that you
no longer use, consider closing some strategically, starting with the newest,
low-limit cards that are unused. Lenders prefer a low ratio of debt to credit
limit, so it’s good to have more credit available than you use on a monthly
basis. They also like to see long-standing lending relationships, so don’t
close your oldest credit card. Finally, if you close too many credit cards in a
short period, that raises a red flag as well.
Step
2: Stick to your Budget
Next, create or revise your monthly
budget so that you are setting aside whatever money you’ll need to pay as a
homeowner that you don’t pay as a renter. This includes the home mortgage,
mortgage insurance, property taxes, condo or homeowner association fees, home
furnishings, maintenance, cleaning and any utilities or fees that your landlord
currently pays. Living with this budget month after month will teach you what
you truly can afford when it comes to a house payment. It will also help you
pay off any remaining credit card debt or add to the savings that you should
already have amassed for a down payment. You’ll return to this budget when you
actually make an offer on a home, so consider this just a draft version.
Moreover, the bank and credit card
statements that you use to create your budget will probably be requested by
mortgage lenders when you get to that stage. Start keeping your financial
statements and pay stubs in a file, where you’ll put new documents as they
arrive so that everything remains current.
Step
3: Find a Good Agent
If you haven’t already found a
realty agent who can guide you through the house process, now’s the time. Not
only can your real estate agent advise you on the neighborhoods and new
listings of interest, that person is your advocate in a competitive market. Ask
friends, family and colleagues for recommendations of an agent with expertise
in your target market.
Your agent can help craft a strategy
for being a competitive bidder. For instance, sellers prefer a buyer with no
inspection or appraisal contingency, but you’ll need to think through your
comfort level with paying for an inspection ahead of your offer being accepted
and with buying a home that appraises for less than the sale price.
Step
4: Find a Good Lender
Your agent is also a terrific source
for the other important professional for home buyers: a mortgage lender.
Whether you work with a specific lender or a mortgage broker who can connect
you with many lenders, it’s important to interview several individuals before
choosing one. Don’t let anyone run your credit until you’ve made a decision,
because several inquiries could raise a red flag and lower your credit score.
Your lender can walk you through
your financing options and the pros and cons of each one. You’ll also get a
realistic view of how much you can borrow, based on your income and credit. Ask
that person to run a hypothetical scenario so that you have a written estimate
of the monthly principal and interest payments, closing costs, insurance fees
and property taxes.
Your lender can also walk through
your credit report with you and give advice on improving your credit score, as
well as a realistic view of how long it might take for your actions to be
reflected in the credit bureaus’ records. Make sure you understand in what
circumstances you’ll be required to buy the home — or will forfeit your earnest
money — even if your loan application is ultimately denied.
Step
5: Stay Alert and Ready
All that remains now is to look at
possible properties and to be ready to make an offer quickly if you find one
that meets all your criteria. That means keeping your finances spiffy for the
final check before the sale.
When you find a property you want to
buy, that’s the time to call utility providers for usage history, check on
condo or homeowner association fees, get the property taxes and build all those
extra costs into your monthly budget. Don’t let the beautiful home sway you if
the expenses will push you over the limit of what you can afford.
