Home Buying Tips

Obtaining a mortgage involves three important elements.  These are your income, your credit and your assets. These elements operate together and are analogous to a 3- legged stool.  If one leg is bad then the entire stool topples over.  Lets look at the three elements individually.

Income

Your income will ultimately determine how much of a house you can afford.  Many individuals and families make the mistake of being house rich and cash poor by purchasing a home with a mortgage payment that is too high for their lifestyle and so they do not retain adequate disposable income to enjoy lifestyle essentials such as a vacations, social and sporting events, dining out occasionally etc.

It is critical to decide what is needed in a new home versus what is wanted. Other essential items include location, school district, overall amenities available in a neighborhood, safety, and proximity to work, commercial shopping areas and other places that the family visits frequently.

Deciding on how many bedrooms and bathrooms are needed to be comfortable and the size kitchen and backyard (particularly if kids need space to play) are of crucial importance. Do you dream of having a kitchen with plenty of counter space, and a big backyard with a pool and enough space for the kids to play? Many homes will have the appeal and match your desires but will such a home be realistic?

Credit

Your credit score is critical in determining qualification for a mortgage.  The higher the credit score the better the chances of getting approved.  Generally higher credit scores will attract lower interest rates than lower scores. When planning to purchase a home, ensure that your credit is meticulously managed. The following should be noted;

• Pay all bills on time. Schedule bill payments in advance, or pay them on due dates to avoid late fees.
• Ensure all revolving credit balances are maintained at no more than 30% of the credit limit. Plan on paying down card balances in advance of applying for a mortgage if the balances are higher than the 30% threshold.  It does not mean that you will not have satisfactory credit scores if balances are above the 30% threshold.  However the lower the revolving credit balances the better the chances of higher score.
• Monitor your credit report and check for errors/inaccurate reporting by the bureaus and be diligent in working with the bureaus to ensure errors are corrected.  Be on the lookout for identity theft items that may be reported on your credit and get these resolved expeditiously.

Assets

Purchasing a home will require funds to pay for downpayment and closing costs.  The more funds you have to satisfy these requirements the stronger will be your loan application.  Ensure that you have some form of savings. Retirement accounts are a source of assets that many potential home buyers do not consider in planning for a home purchase.  While it is not the ideal to utilize retirement funds this can certainly assist if you are short on savings or other available funds.

Generally funds need to be maintained in an account for at least two months prior to the mortgage application.  Accounts include savings, checking, brokerage accounts etc.  Large deposits made within this will two-month period will need to be sourced and explained. This means providing evidence of what the funds were and where it came from.  Many potential homebuyers have a difficulty with this requirement so please take note and ensure proper planning accordingly.

Many mortgage programs permit assets to be obtained as a gift from a family member for downpayment and closing costs.

Consult with a Mortgage Broker to get pre-qualified

A mortgage broker will analyze your income, credit and assets and provide a pre-qualification that will inform the price of the home that you can afford, and all the other aspects including the amount of funds required for closing.  A pre-qualification is required before you start working with a realtor to identify prospective homes to purchase.  The realtor will want to know that you are already pre-qualified before investing time to show properties.  Additionally, prospective sellers will be more comfortable accepting your offer for a contract on a home that you wish to purchase when you already have a pre-qualification.  In fact most sellers will not accept an offer without first having a pre-qualification from the buyer.

Traditionally, home buyers think about realtors as the first point of contact when deciding to look for a home to purchase.  However, one should first contact a mortgage professional to obtain pre-qualification before engaging a realtor

Establish a Budget and Reserve Account

For most Americans, buying a home is the largest purchase and the most important financial decision they will make in their lifetime. However, it’s not enough to know what neighborhood, style of house, or square footage one can afford. Consumers also need to organize their financial affairs such that they will be able to maintain mortgage payments if there is unforeseen financial distress such as a loss of job or other severe negative economic impact.

We recommend having a budget that not only takes care of the monthly mortgage and associated expenses such as homeowners association dues and taxes and insurance (taxes and insurance are included in most mortgage payments) but a monthly amount allocation to a reserve or rainy day fund.  The experts advise that this fund should be at least six months worth of living expenses including your mortgage payment. This fund can assist in offsetting significant repair expenses such as air conditioning, plumbing, the roof and other large dollar items.

Also, a budget will help to project what to expect financially, beyond the cost of the home purchase to avoid any major surprises that may arise after the home is purchased.

You will want to make a separate list of remodeling goals that can be met in the future if financial circumstances improve. If a home seems to be in your budget but requires many repairs, be sure to factor those costs into your financial plan to see if this home still fits within your reach.

Finding a Real Estate Agent

Most mortgage professionals maintain relationships with realtors and so will happily recommend a seasoned realtor for finding you the home given the particular situation. Working with an expert realtor who understands the market and the type of home that will suite your needs will be of tremendous importance. Take the time to speak and meet with your real estate agent to discuss your goals and objectives. If you speak more than one language and prefer to communicate in one over the other, finding an agent who can speak both English and your native language can help assure compatibility in working together throughout the process.

The most exciting part of the home buying process is going out for scheduled showings to look for the property that you will call home. Your real estate agent will work to schedule home showings in your price range and in accordance to the pre-qualification information provided by your mortgage professional. Open houses are also a great way to check out homes on the market. Be sure to ask your agent about open house events in the area.