Buying your first home is a major move, so why not make a detailed plan of action?
By Terence Loose
Are you planning on buying your first home but don't have a plan for doing it? That may be a mistake, because there are a lot of details that go into getting it right.
It's important not to rush into buying a home, because a mortgage is usually the largest debt that people will get into in their lives, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc. "So it's much better to ask all the right questions, plan accordingly, and plan early," he explains.And when he says early, he means it. "It's worth a year of planning in my opinion, because there are so many decisions you could regret later if they are made in haste," Duffy says.
With that in mind, here's a one-year plan to buying your first home.
One Year Out: Start Saving for a Down Payment
Cars breaking down, unexpected medical expenses, that new big screen TV you absolutely couldn't live without… saving money is tough. But if you want to own a home within a year, you're probably going to need to save up for a down payment.How much will you need to save? Well, it depends. First you need to figure out how much you can afford to spend on a home. To get an idea, you can use a home affordability calculator online that takes into account factors such as your salary, investments, and debt.
Next you'll have to figure out how much you are able to put down on a home.
It's possible to put less than 20 percent down, but just keep in mind that you'll have to pay private mortgage insurance (PMI), which protects your lender in case of default.
If you're a first-time buyer, you can also opt to put 10 percent down and get what is called lender-paid insurance, says Duffy. In this scenario, he says the lender charges an eighth to a quarter percent higher interest rate and in turn, they pay off the entire policy. Essentially, you're mortgaging the insurance just like the home.
Because you're spreading the payment over 30 years, the payment is only about $20 to $30 a month, rather than a few hundred a month with PMI, says Duffy.
Once you've established approximately how much you can spend on a home, and therefore how big of a down payment you'll need, it's time to start saving. Duffy suggests you then divide the projected down payment amount by the number of paychecks you get in a year, and then set aside that amount per paycheck.
Another good reason to start saving now? If you're renting you may not realize that owning a home comes with a lot of upkeep and surprise expenses, says Duffy.
"So if you're in the habit of saving and budgeting for that down payment, you'll be successful as a homeowner, because you'll keep that habit after buying a home."
Nine Months Out: Check Your Credit
Your credit is the first thing potential lenders will check, says Duffy, so you want to make sure it's the best it can be. And that might mean improving it or correcting errors in it. And both of those can take time.First, the easy one: fixing any potential errors. And odds are decent that there is one. "About 25 percent of credit reports have some sort of meaningful error," says Ken Lin, CEO of CreditKarma.com, a site where consumers can access their free credit reports. Worse, he says only about 35 percent of consumers check their credit annually, something you can do once per year for free.
If there is an error on your report, you need to call the creditor that made it to have it reversed, Lin says. But that takes time, says Duffy. "I had something that was wrong and it took five weeks to work it out. And I'm in the business!" he says.
The second issue - improving your credit so you can qualify for a mortgage or a better interest rate on your mortgage - could take more time. Lenders typically use the FICO credit score, which has a scale of 300 to 850, says Lin. The higher your score is the better.
Duffy says that to qualify for a mortgage you'll likely need at least a 620 credit score. For the best rates, he says you'll probably want 740 or more. According to FICO itself, the difference in the mortgage interest rate for borrowers with credit scores of 620 and 760 is more than a percent and a half. That can add up to hundreds of dollars a month.
So how do you improve your score? Assuming you are not delinquent or late on payments to creditors, both Lin and Duffy agree that your best shot is to make sure your outstanding balances on credit cards are at or below 30 percent of your available credit limit.
"If you can pay your credit cards down to 30 percent of your available credit, that will usually earn you 10 or 20 points right away," says Lin. But if you're also trying to save for a down payment, that might take time, so check your credit well ahead of applying for a mortgage.
Six Months Out: Find Your Future Neighborhood
Now's the time to casually look into different possible neighborhoods - without a realtor, so you feel no pressure, says Duffy.Why? Because you may think you know where you want to buy a home or where you can afford a home, but do you? This is a major investment and what you want out of it may change faster than you think.
For instance, says Duffy, a young couple who doesn't have kids now but wants them in the future might want to check into the schools in different neighborhoods. They likely haven't even thought about schools until now.
"People often move to neighborhoods just because it has a great public school," he says. So, even if you're more into alcoholic bars than monkey bars at the moment, that could change down the line.
Second, you may be surprised at how much prices can change from one neighborhood to another, says Duffy. It can literally be tens to hundreds of thousands of dollars difference within the space of a mile.
He says it also takes time to discover the nuances of a neighborhood - the benefits as well as the disadvantages that you may not see driving by on your rush to work.
Three and a Half Months Out: Find a Mortgage Broker or Lender and Research Mortgage Options
Now that you know the neighborhood in which you want to buy, it's time to find a mortgage broker or lender rep and look into the various mortgage options. Because, yes, there is more than just the 30-year, fixed-rate loan that everyone's so familiar with.For instance, perhaps you want to pay your home off earlier than 30 years so you can retire without the burden of a mortgage payment. In that case, you may want to get a 15-year, fixed-rate mortgage, says Duffy. These come with lower interest rates, and because you are paying them off in half the time, you could save tens or even hundreds of thousands of dollars in interest during the life of the loan, he says.
Or, perhaps you want an adjustable-rate mortgage. "This option won't fit most people these days, because interest rates on fixed rates are still low, historically speaking," says Duffy.
But for those who know they will be selling their home before the rate adjusts, typically in five to seven years, it may be a good choice, he says. That's because the interest rate for that first five- or seven-year period will be lower than a 30-year fixed rate.
Then there are options such as VA loans for military veterans, which come with easier qualifying and lower down payment requirements, he says.
As for finding a good mortgage broker, Duffy says you'll want someone you trust and who knows the neighborhood or market in which you want to buy a home. The Internet is always an option for researching lenders, of course, but you may also want to ask friends who bought homes. Referrals from people you trust are always helpful.
Three Months Out: Get Pre-Approved
If you think that you should find a house first before starting the mortgage process, you might want to think again. Duffy says that in this seller's market, with sometimes stiff competition among buyers for homes, pre-approval is often demanded by sellers to weed out buyers who can't qualify for a mortgage and thus waste everyone's time.A simple pre-approval means that your mortgage broker or the lender's agent has reviewed all your tax documents, bank statements, income and asset documents, credit report, etc., and you're looking good for a mortgage of a certain amount, says Duffy.
But he suggests having the broker or banker go a step further and getting a full credit approval. "Then, the only thing lacking is the property information. That way the buyer can close faster, which is very important in a seller's market," Duffy explains.
In a pre-approval with a full credit approval, your mortgage rep will essentially do everything that is needed to get the mortgage, including getting the lender's underwriter to approve you for a mortgage, says Duffy. Then, the only thing lacking in the mortgage application is the property information.
According to Duffy, presenting a full credit approval letter lets sellers know that you will have no problem getting a mortgage to buy their home.
The other obvious advantage to this is that you know exactly how much house you can afford. And finally, the reason for the three-month window is that credit reports are good for 120 days with most lenders, says Duffy. "So that gives you time to actually find the home and be closed on the home without having to redo credit," he says.
Two Months Out: Find a Good Realtor and Find Your Dream Home
Okay, time to get really serious. It's time to find a realtor. This late in the game? You might think that you should look for one earlier but that could be a mistake.
First, Duffy says finding a realtor after you find a mortgage expert, such as your lender, may sound counter-intuitive, but is actually very practical.
"Mortgage professionals tend to do a lot more transactions in a month than a realtor, so we get a good feel for who the good realtors in a particular marketplace are, what their strengths are, and who to steer clear of," he says.
Second, it may sound crazy, but you don't want to start looking too early, especially in markets where properties don't stay on the market for long, says Duffy.
"If you do this too early, you might see properties that will be sold by the time you're ready to buy," says Duffy. That just spells a lot of broken hearts and frustration.
But if done right, with a solid plan, buying a home can be a wonderful, well-thought-out experience. After all, the expression is Home Sweet Home, not Home Sweat Home.
www.JayCermak.us
