Thinking about Buying a Home?

Are you starting to think about buying a home? Are you overwhelmed and intimidated by the process and all of the different financing options? Then set your bookmarks to this series Home Sweet Home: The Smart Buyers Guide. We’re breaking down the steps to get you into your new house and out of that rental!

In Part 1: Break it Down, we discuss how to prepare. What do you need to consider before jumping right into house hunting?

I know it’s frustrating, writing that check every month for walls that you can’t even put a nail into without wondering how much it’s going to cost you at the end of your lease. Or having the peace of mind knowing that you are stable and secure in that humble abode for the indefinite future, without having to succumb to the whims of the person that actually owns it. But actually moving forward with buying something of your own can be very intimidating. There are so many things to consider, so many financing options, and how do you know who you can trust to truly help you make the best decision for the largest purchase of your life?

We’ll get to some of that other nitty, gritty later, but for now let’s talk about getting yourself ready.

Ever heard that saying Fail to plan, plan to fail? As much as it pains me to say it, it’s true. There have been so many times where we can look back and see that if only we had set a little more time aside to prepare, we might not have the remorse we do now. But that’s good because it teaches us and helps us grow. So, go ahead and whip out your little calculator, gather up your bills and bank statements, and get cozy. You’ve got some work to do.

Budget: What can you realistically afford?

Do you know what that $129,900 house is going to really cost you on a monthly basis? Sure you can hop on over to bankrate.com and rustle up a nice looking little mortgage payment by plugging in some numbers, but that’s only one part of the picture. Depending on the mortgage product, interest rates, credit score, insurance, down payment, PMI, etc., that number could grow to be a lot bigger than you anticipated. So you’ve gotta get real. Most people look at that little sliver of a mortgage payment at the beginning and work in the other factors later with a lot of disappointments along the way. But not you! No. You’re a financially smart cookie. You’re starting with reality and working your way around to find the right house that fits you emotionally and financially! So, let’s get to it!!

Write down all of your expenses for a given month, including: food, gas, insurance, entertainment, etc. How much actually goes out each month? Don’t forget to add in savings, retirement, and the like. Now subtract that from your monthly income. This is your surplus budget from which you can draw your housing budget.

How does that look compared to your current rental payment? This is when you will want to tweak those numbers to either tighten your belt in other areas of expenses so that you can make that number bigger, or when you can adjust your visions to something in a little bit of a higher budget. This all depends on what your goals and ideas are.

Credit History: What are you able to afford?

When you know how much your budget actually is, then you will want to start looking at your credit history to see what types of services and rates are going to be available to you, and what their costs might be. Interest rates can inflate a payment beyond what you can afford pretty quickly, so you will want to make sure that you aware of your credit reporting history so that you can take care of any clean ups now and ensure a better bargaining position with the banks.

Run your credit report with score from all major credit reporting agencies. Each of those agencies have different rating formulae that they work off of to come up with a score, so each one will have a different number. This is extremely helpful when shopping for loans because you can inquire from the bank which agency they use and then you will know what products you might be able to fit into.

More importantly, though, you want to see your entire credit history. Comb through it to spot any errors or unauthorized activity. Ideally, you should do this once a year, but sometimes, we can’t. So now is the time! Make sure that any debts listed are actually yours and that all balances and history are correct. If there is anything that is incorrect, take care of it now so that you have time to get everything cleared up and corrected before having it run by the banks.

Now, if your score and report aren’t favorable, this is when you need to roll up your sleeves and dig in to clean it up and make it shine!

Pay down your debts.  This helps to lower your debt-to-income (DTI) ratio, which is also a deciding factor in a bank’s decision to approve your loan. DTI is a number in percentage form that is the result of dividing your monthly obligations by your monthly gross (pre-tax) income. You can have good credit and a good score, but if you’re overextended with a high or even borderline DTI, you run the risk of being denied. They’re not going to loan you money when you’re squeezing by every month. Nope. Not gonna happen. So take some time to pay down your balances. Make a plan to pay an extra $20 or $50 dollars a month to bring those balances down…. Whatever it takes. You want to have a DTI under 35%.

Clear off old or incorrect accounts.  Each type of account has an age limit, so check to see that any older, negative accounts should really be included. If not, contact the creditor to have them remove it. Incorrect or unauthorized accounts also need to be handled at this time. There will be some hoops to jump through and documentation to provide, but it is necessary to make sure that your report is true and correct and that you get the best possible products available to you to ensure you aren’t wasting away all those pennies you work so hard for.

Once you have a neat and tidy budget, and a bright and shiny correct credit report, it’s time to start shopping! You can now confidently walk into a bank, prepared and knowledgeable about what you can afford, what you want to afford, and what is available to you. This gives you confidence and negotiating power. So, it’s time to get pre-qualified!

— Lee Anne Chevalier