Want to buy your first home? Maybe you’ve got some cash saved for a down payment and maybe even recommendations for real-estate agents from savvy friends. But have you cleared your credit report, hired a tax adviser, or weighed FHA financing compared with a conventional mortgage?
Sam Williams, 31, has taken all three steps in a yearlong quest to buy her first home. “This whole experience has taught me that it’s important to have your financial act in order,” said Williams, a manager in Minneapolis, MN.
Not every first-time buyer will need a tax adviser, as Williams did to fill out forms needed to withdraw part of her IRA without being penalized. But everyone should prepare early with orderly finances, information, and plenty of patience for the long, 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 market heating up, you want to be prepared.
Step 1: credit and savings
Start by requesting a free copy of your credit report from the three major credit bureaus via www.annualcreditreport.com. If you see accounts you don’t recognize or negative marks on your credit report, clear them up now.
Williams learned that her father was still a joint holder on her checking account, so she asked him to write a letter certifying that all the funds were hers. She also noticed a negative item about an old dispute with Verizon over a landline that never functioned, for which she refused to pay the bill.
“I had to call them multiple times until I could talk to someone who was sympathetic and would get it removed,” she said.
If you see old credit cards 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 monthly. 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
Create or revise your monthly budget so you’re setting aside the money you would 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 your landlord pays.
Living with this budget will teach you what you truly can afford, as well as help you pay off credit-card debt or add to the savings you should already have amassed for a down payment. You’ll return to this budget when you make an offer, so consider this a draft version.
A lot of people jump into homeownership before they should. They get excited — their friends are doing it and the rates are really low. That’s not always a good starting point for making good financial decisions.
Step 3: find a good agent
Your real-estate agent can advise you on neighborhoods and new listings of interest and be your advocate in a competitive market. Ask friends, family and colleagues for recommendations of an agent with expertise in your target market.
Step 4: find a good lender
Your agent is a terrific source for the other important professional for homebuyer: a mortgage lender. Whether you work with a specific lender or a mortgage broker who can connect you with many lenders, interview several before choosing. But don’t let anyone run your credit until you’ve decided, as several inquiries could raise a red flag and lower your credit score.
Your lender can walk you through financing options and give you a realistic view of how much you can borrow based on your income and credit. Ask the lender to run a hypothetical scenario so 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, give advice on improving your score, and estimate how long it might take for your actions to be reflected in the credit bureaus’ records.
Step 5: stay alert and ready
All that remains is to look at properties and be ready to make an offer quickly. That means keeping your finances spiffy for the final check before the sale.
When you find a property you want, call utility providers for usage history and check on homeowner-association fees and property taxes; then build all those 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.
You always run into this thing where someone’s trying to push your budget, either the lender or your realtor telling you that you can afford more. Remember that you need to have the money to take care of the home as well.
Don’t drain all your liquid resources to pay for the down payment and closing costs. It’s better to have slightly higher debt and enough cash on hand to afford emergency repairs or unexpected expenses.
Buying a home is a lot of responsibility, but it’s a rewarding responsibility. It’s like getting your first car times 10.
“I imagine building our lives there,” said Williams of her first home. “That’s why real estate is such an emotional thing, because it’s going to be a part of our lives now — the third member of our family.”
Shawna Frazier, a realtor for Re/Max Results, has had a successful full-time real estate business for the past 12 years. Her goal in the coming weeks is to share information of value to MSR readers that will include tips on selling, buying, investing, and restoring your credit. She welcomes reader responses to Shawna.firstname.lastname@example.org.