So You Think You're Ready To Buy A Home?
Get your house in order before you start shopping. Here's a timeline of what you need to do, how and when.
Buying a home is a complicated process, and it can be particularly daunting for first-timers.
The following is a timeline that starts you off one year before you hope to start seriously shopping for a home. This is ideal, however you can arrange your finances and purchase a home in less time if necessary. The purpose of this timeline is to educate you on how to walk through all of these steps in order. The more time you give yourself for this process, the better your homebuying experience will be.
• Get your credit reports. Errors on your reports can force you to pay a higher interest rate on your mortgage or even torpedo your chances of even getting a loan. You can get free copies of your reports from the three major credit bureaus -- Equifax, Experian and TransUnion -- at AnnualCreditReport.com. Look for accounts that aren't yours, collection accounts for debts you don't owe and negative marks (other than bankruptcy) that are older than seven years. You should be able to dispute errors with the bureaus and get them removed, but if the bureaus or the creditors balk, you may need to hire an attorney. (The National Association of Consumer Advocates can refer you to lawyers with knowledge of the credit-reporting and debt-collecting laws.) Don't leave yourself in the position of having to pay a bogus collection account to get the loan you want or paying unnecessary interest because of credit-report errors.
• Get -- and improve -- your FICO credit scores. Your credit scores, those terrifying three-digit numbers are used to gauge your creditworthiness, and ultimately determine the rates and terms that you will get regarding your mortgage loan. There are hundreds of different credit-scoring formulas, but the one used by the vast majority of mortgage lenders is the FICO. (FICO is the acronym for the Fair Isaac Corporation, the private corporation creating the most-known and -widely used credit score model in the United States). The only place you can buy your FICO scores for all three credit bureaus is MyFico.com. A package of three scores and three credit reports costs about $50.
• Consider a credit-monitoring service. Normally, I think these are a waste of money for folks who aren't at high risk of identity theft. But given how important your credit and credit scores will be in purchasing your new home, you might appreciate the early warning if a collector tries to post a bogus debt.
• Deal with your debt. (For Most People) Don’t worry so much about paying off student loans, auto loans or other generally low-rate debt before getting a mortgage. What you want to eradicate is "toxic" debt: credit card balances and payday loans. These are signs you're living beyond your means. If you don't get your overspending problem fixed before you buy a home, your problems will likely just get worse because homeownership typically involves plenty of big costs (property taxes, insurance, maintenance, repairs, improvements, and lots of decorating). Get your act together before you house shop!!!
• Save, save, save. Stop eating out 7 days a week, shopping for more shoes and clothes, and maybe even drop your cable-TV subscription. Do everything you can think of to put as much money aside as possible, using your desire to be a homeowner as a motivator. (Even one month of no extra spending can make a ton of difference). In today's market, it's best to have at least a 5% down payment; boost that to 10% and you'll have even more financing options. Ideally, you'll also have enough left over after you get your mortgage to cover the payments for two or three months.
• Put your bills on automatic. A single 30-day late payment can knock 100 points off your score, and it can take many, many months to recover. Make sure every bill gets paid on time. If you don't have a reliable bill-paying system, consider using automatic debits, so payments come directly from your checking account, or an online bill-payment system with a monthly recurring-payment feature.
6-Months Out (Back to top)
• Sort through your mortgage options. A lot of people are losing their homes today because they didn't understand what kind of mortgage they had or they accepted bad advice. The low teaser payments that allowed them to buy a more expensive house have jumped skyward, leaving them unable to pay. It's up to you to understand the risks of the different types of mortgages and to select the right one for your family. (My personal advice: Stick with traditional, fixed-rate mortgages. This doesn’t mean commit to a 30-year version, just a hybrid loan with a rate that's fixed for as long as you plan to own the home. The national average is about 5 years).
• Start calculating how much house you can afford. Once you've settled on a type of mortgage and have a rough idea of your down payment, you can start using online calculators like the one at LendingTree.com to see how much house you can buy. Consider buying less home than the absolute maximum you can afford; if you keep your housing expenses (mortgage, taxes and insurance) to 25% of your gross income, you'll be able to live more comfortably and have money left over for things like retirement savings, vacations and the kids' college educations.
• Research all the costs of owning a home. Your mortgage will be just the start. You'll have to pay annual property taxes and home owner’s insurance on your new home. There may be association fees as well. You may face higher utility bills depending on the size of your new home as well as periodic maintenance and repair costs. Decorating your new house can cost a pile of money as well.
• Adjust your savings strategies. What you've learned so far should have inspired you to boost your savings. A bigger down payment, for example, can result in a larger home or a lower mortgage payment. Or you may simply want to build up your emergency fund so unexpected home expenses don't knock your finances out of line.
3-Months Out (Back to top)
• Reduce your credit utilization. The FICO scoring formula is sensitive to how much of your available limits you're using on your credit cards and other revolving lines of credit. The less, the better. It doesn't matter if you pay your balances in full every month; the figure the scoring formula typically uses is the balance that shows on your most recent statement. Try to keep that balance below 30%, or even lower. If you can't -- because you charge a lot for work-related travel, for example -- make a payment before the statement's closing date to reduce the balance reported to the bureaus. Just be sure to make a second payment after the closing date, so you don't get reported as late.
• Don't open or close any accounts. Until the mortgage process is completed and you've moved into your new home, continue to avoid actions that could potentially harm your credit, such as opening credit accounts or closing old ones. Realtors dislike to words “Let me get my credit together then I’ll call you”.
2-Months Out (Back to top)
• Get an idea of the mortgage rate you can expect. Order a fresh set of FICO credit scores -- don't worry, checking your scores doesn't ding them -- and talk to some mortgage lenders about what rates you might qualify for. (You can go to bankrate.com to find daily mortgage rates.) Don't apply yet or give permission for your credit to be pulled; you just want to get a feel for what you can expect.
• Understand the effect of mortgage-shopping on your score. You want to get the best rate and terms possible, which means you'll need to shop around, but how does that affect your credit score? Here's the lowdown: Every time you give a lender permission to check your credit, a "hard inquiry" appears on your credit report, and that can ding your score a bit. Fortunately, the FICO scoring formula lumps all mortgage-related inquiries made within a specified period and counts them as one. (The period used to be 14 days, but the most recent versions stretch that to 45 days.) Furthermore, the scoring formula ignores any inquiries made in the previous 30 days. So you want to do your serious mortgage shopping in a fairly concentrated period of time.
• Get approved for a mortgage ahead of time. Pre-approval, in which a lender gives a commitment to make you a loan, is different and more valuable to sellers than pre-qualification, which merely gives you an idea of the size of the mortgage you might afford without making any commitments. You don't have to get a loan from the lender that offers you a pre-approval letter. Getting a pre-approval does involve giving permission for a hard credit inquiry, but the small potential ding on your credit is worth it because you'll be in a stronger position with sellers.
• Consider a mortgage broker. Before you submit an offer on your dream home, you should have already selected your Mortgage Broker. As a first time home buyer, it is recommended that you select someone who will do a lot of hand-holding through the process. Likewise, if your credit is particularly troubled, you might benefit from the services of an experienced, ethical mortgage broker. Get referrals from your real estate agent if applicable, or family and friends as they will be more prone to treat you honestly and fairly due to the established relationship.
• Begin researching neighborhoods and looking for the right agent. Check Internet listings, attend open houses and find an experienced guide to help you refine what you're seeking.
6 questions to ask real-estate agents. Interviewing candidates serves two purposes: You get an education about your local market while learning how the agent proposes to represent you. Ask detailed questions. Here are the most-important areas to investigate:
1. May I see your resume? (Back to top)
Since you're searching for an above-average agent, look for evidence of advanced training and designations, professional recognition and membership in professional organizations, all signals of commitment to the profession. There are about 2.6 million real-estate agents in the country. They're licensed by their states, and each state's licensing and education requirements are different. (Use the Association of Real Estate License Law Officials (http://www.arello.com) to check an agent's license. About only half of licensed agents belong to the National Association of Realtors. Those members call themselves Realtors. NAR membership doesn't have to be a deal breaker, but it provides some assurance, since the industry group requires ethics training periodically and members must subscribe to its code of ethics.
2. What makes you special? (Back to top)
Don't settle for someone who just promises to show you homes, make an offer, and ask for referrals. Every agent has to do those things, what you want to know is, "What sets you apart? What will you do to go the extra mile for me?"
3. How often will I hear from you? (Back to top)
Your agent's communication style and availability should mesh well with yours. Prepare for your agent interviews by asking yourself whether, for example, you'd need a twice a week check-in, even if there’s already an accepted offer. Do you prefer to keep in touch through e-mail or phone calls? How promptly do you want a response? While you're inquiring about the agent's availability, remember to ask who will return your calls and assist you should a problem arises while your agent is out of town.
4. How many transactions did you complete last year? (Back to top)
Some agents keep score in dollars, saying, "I sold $30 million in real estate last year." But property values vary, so what you really want to ask is, "How many deals did you complete?" Super salespeople are a mixed blessing. The bonus is, that they're knowledgeable expert in the field. But a Superseller might be too busy for hand-holding. If a solo agent is selling more than 50 homes a year, they're likely not going to have time to hold your hand for every detail.
5. What do you know about the neighborhoods where I want to live? (Back to top)
A super salesperson is no good to you if he/she isn't doing any active business in your target neighborhoods, so ask how many homes he/she has sold in your target area? Really great agents start their careers by specializing in either Exclusive Buyer’s or Seller’s Agency. Likewise, they spend time studying the top two or three Builders/Communities in their target areas. Agents have a wealth of data at their disposal from local multiple listing services. Good ones will share it, educating you about the median income and educational level of a neighborhood's residents. However, they can't discuss school performance or crime -- that would violate fair-housing laws. But they should point you to Web sites where statistics on crime and school performance are listed.
6. Are you a solo agent or part of a team? (Back to top)
There's no right answer to this question. Teams are growing in popularity. They're good for engaging several individuals' expertise at once and for allowing high-powered salespeople to concentrate on what they do best, offloading to associates tasks like: filing and tracking documents, appointment setting, showing houses and post-closing follow-ups. Being part of a team lets a salesperson handle more clients and manage more sales a year by handing off detail work to teammates. When you get right down to it, it's that sparkle that distinguishes the superstar agents, and there's no way to find it without sitting down with a few of them and asking these 6 questions.
Contract Time (Back to top)
• Once you've found the perfect home for your family. The key word is “perfect” home for your family. Buying a home is a give & take process of elimination as there’s never going to be “The Perfect” house. Make sure your Realtor is a skilled negotiator the can present your offer without insult and/or resulting in rejection or unfavorable counter-offers.
• Arrange for an appraisal, home inspection and a final walk-through. The appraisal is required for your loan to be approved. An inspection isn't necessarily required, but don't skip this essential step, which can alert you to serious problems before the deal closes. The walk-through is usually done within 24 hours of the deal closing, so you can make sure that the Sellers have performed any agreed-upon repairs and the place is in move-in condition to your satisfaction.
• Get homeowners' insurance. Mortgage lenders require this coverage, and you'll need to prove you have it at closing. Your Realtor should have a list of companies to compare and chose from.
• Confirm how much money you'll need at closing. "The Closing" This is when you sign all the paperwork and pay pre-determined cost, which can include your down payment, share of closing cost, attorney fees, pre-paid property taxes and title insurance (Lender coverage--required & Owner--Optional). This is a very exciting day… Make sure you don’t leave without your keys!!!