Why Do You Want to Buy?
The emotional part of the decision comes into play when you think about why you want to move. If you’re a first-time buyer, you need stability in your career and the desire to commit to living in the same community for five to seven years. You should want to establish roots in a neighborhood and look forward to decorating as you please without requiring a landlord’s permission. Purchasing a home is a lifestyle choice that requires you to think about how you like to spend your time and the type of community where you want to live, such as a rural area without nearby neighbors, a highrise building in a city or a home within a planned community with recreational amenities. The more you understand your priorities for a home, the easier it will be for you to narrow your real estate decisions. Homeownership can also be a powerful way to increase your personal wealth for you and your family, since you’ll be building equity in your home as you pay off your mortgage.
Are Your Finances Ready for Homeownership?
While your dream home may or may not be within your reach right away, you can take steps to become a homeowner the moment you earn your first paycheck. In order to qualify for a mortgage loan, you’ll need good credit, a pattern of paying your bills on time and saving money, and a maximum debt-to-income ratio (your gross monthly income compared to the minimum payments on all recurring debts) of 43 percent. Some lenders have stricter guidelines, so the lower your debt-to-income ratio, the better your chances of a loan approval. While loan programs are available with low down payments of 3 to 5 percent, and a few programs offer no down payment at all, you’ll still need some savings to pay for closing costs and moving expenses, a deposit on a home, and for cash reserves after you buy. Saving money and preserving or improving your credit history are essential elements to homeownership.
What Can You Afford to Buy?
Housing prices and rents vary from one location to another, but you can use a rent-vs-buy calculator to estimate the difference between your current rent and buying a home. In some markets buying a home can cost the same or even less than renting. Remember, when you’re a homeowner you need to include homeowners insurance, property taxes and homeowner association dues in your housing costs. You can also use a home affordability calculator to help you estimate what you can pay for a home. You should also think about your plans for the future and how you spend your money, along with your comfort level with a mortgage payment. A lender will tell you how much you can borrow, but that lender won’t know how much you spend on travel or golf or your plans for potentially reducing your work hours when you have a family.
Once you’ve thought through the emotional and financial aspects of becoming a homeowner, your next steps should be to find a reliable, experienced Realtor to become your partner in the home buying process and to meet with a reputable lender who can discuss your options for financing your purchase.
2. Get a Realtor
Buying and selling real estate is a complex matter. At first it might seem that by browsing online sites you could quickly find the right home at the right price.
But a basic rule in real estate is that all properties are unique. No two properties —even two identical models on the same street — are precisely and exactly alike. Homes differ and so do contract terms, financing options, inspection requirements and closing costs. Also, no two transactions are alike.
In this maze of forms, financing, inspections, marketing, pricing and negotiating, it makes sense to work with professionals who know the community and much more. Those professionals are the local REALTORS® who serve your area.
How Do You Choose a REALTOR®?
The best place to find a local REALTOR® is from realtor.com®’s extensive listing of community professionals and properties. Other sources include open houses, local advertising, websites, and of course the best one of all, referrals from your neighbors, friends and family!
In many cases buyers will interview several REALTORS® before selecting one professional to work with. These interviews represent a good opportunity to consider such issues as training, experience, representation and professional certifications.
What to Expect From a REALTOR®
Once you select a REALTOR® you will want to establish a proper business relationship. Each REALTOR® will explain the options available, describe how he or she typically works with individuals and provide you with complete agency disclosures as required in your state.
Once hired for the job, the REALTOR® will provide you with information detailing current market conditions, financing options and negotiating issues that might apply to a given situation.
Remember: Because market conditions can change and the strategies that apply in one negotiation may be inappropriate in another, this information should not be set in stone. During your time in the marketplace REALTORS® will keep you updated and alert you to each step in the transaction process.
3. Get a Mortgage Preapproval
Few experiences are more frustrating than falling in love with a home that’s for sale and then discovering you can’t afford to buy it. The majority of first-time buyers need to finance their home purchase, and a consultation with a mortgage lender is a crucial step in the home buying process because you need to understand your purchasing power before you begin to look at homes.
What Is a Loan Preapproval?
Lenders offer borrowers a prequalification letter or a preapproval letter, but most Realtors® recommend that you get a preapproval before shopping for a home. A prequalification letter will state the amount a lender thinks you can borrow based on your income and your credit profile without any actual documentation. Mortgage lending standards have tightened since the housing crisis and all loans now require full documentation and verification of income and assets, so most sellers will only accept an offer from a buyer with a full preapproval letter that’s based on verified information.
Sellers aren’t the only ones who benefit from you obtaining a loan preapproval, though. You’re better off with a preapproval for two reasons:
- First, you’ll have gone through the credit check and paperwork requirements for a mortgage, so you’ll have clarity about your ability to finalize a home purchase. If the lender finds a problem with your credit or an error on your credit report, you’ll have time to fix it before making an offer.
- Second, since your documentation will already be in place, a loan preapproval based on everything other than the actual value of the home you’ll purchase will speed up the process once you make an offer.
Your Realtor® should be able to recommend a lender or two for you to interview, but you should also ask friends and colleagues for someone they trust. You can check for a loan officer’s license and read reviews online to be sure you’re working with someone reliable. As a first-time buyer, you should call a few lenders to find someone experienced with first-time buyer needs who can possibly help you identify special loan programs in your area that could help you get into a home.
What to Expect From Your Lender
The best lenders take a collaborative approach with borrowers and explain all your loan options. When your lender checks your credit report, you should get feedback about ways to improve your credit profile and recommendations for how to handle your money between the time you apply for a loan and settlement day. Your lender should provide advice about when to lock in your loan rate and discuss the pros and cons of various loan programs.
What Your Lender Expects From You
Your lender needs you to be honest about your finances and responsive to all requests for additional information, no matter how unimportant it may seem to you. The more cooperative you are with a lender, the easier the loan process will be. You should be prepared with tax returns, W2s, bank statements, employer names and addresses, and your current landlord’s information.
Your lender will generate a loan approval based on your debt-to-income ratio and credit score, but you should also consider your budget and your own comfort level with a payment. There’s no need to borrow the maximum amount you qualify for, particularly if you know you plan to spend money on items that don’t show up on your credit report such as club memberships or ski trips. Your careful planning and preservation of your emergency funds are important for responsible, long-term homeownership.
Next Week we will discuss the mortgage options you have and the process for making an offer!
