“The American Dream” – Home Ownership, everyone is chasing it, but few approach it correctly. The majority of American’s believe purchasing a home is the single biggest transaction they will make in their lifetime. They are wrong!
The home loan you “purchase” to buy the home is the single largest transaction you will make in your lifetime. Let me explain. Let’s say you finance $200,000 at 4% over 30 years to purchase your home that you paid $240,000 for. If you make all 360 monthly payments, you will have paid $343,739.43 for your home.
The financing you choose to purchase your home is the single largest transition you will make in your lifetime! So, what should you do?
- Check your credit – Know what your credit score is and look for any negative information or erroneous information on your credit report. If there are error’s contact the creditor reporting them or the credit bureau reporting them. If you have derogatory credit seek advice from a credit advisor on how to properly address or correct the negative credit. Your credit directly effects the rate and down payment for your mortgage loan.
- Make a budget– The biggest mistake I see are home buyers looking at houses on line first before they know what they can afford. The second biggest mistake is talking to a Mortgage Loan Officer and asking them what they can afford to buy. Only you know what you can afford. A Mortgage Loan Officer is paid a commission based on the size of the loan amount. It is in their best interest to get you to borrow as much money as possible. Establish a budget for every expense you have, including saving for a rain day and retirement. A good rule of thumb for a housing payment is not to exceed 25% of your Gross Income (before taxes). Many Mortgage Loan Officers will try to convince you that you can go to 50% of your Gross Income. Again, the more they lend you the more they get paid!
- How much do you have for down payment and closing costs – This is very important. Your down payment and closing cost directly effect your rate and monthly payment. The less you put down the higher the rate and higher the monthly payment. The more you put down the lower the rate and the lower the payment. A 3% down payment is the minimum required down payment in most cases. There are some programs the require less, like VA Financing, but you must have served or currently be part of the US Armed Services to qualify for VA financing. If you put less than 20% down, you will have Mortgage Insurance. This will increase your monthly payment. Mortgage Insurance is another entire topic of its own.
- Shop for a mortgage lender – Yes, I said shop! Do not let them pull your credit! A loan officer does not need to pull your credit to quote you rates, terms and fees. Do not give them any money! They do not need an application fee or any other fee to quote you rates, terms and fees. If they will not give you a Fee Sheet or an Estimate without an upfront fee or pulling credit, move on. Shop at least three lenders and make sure you are providing each of them the same information. Do not shop online lenders! Do not fill out an online form! Your phone will ring for the next 90 days and your email will be spammed for months. Make the phone call and get a Licensed Mortgage Loan Officer on the phone.
- Get Pre-Approved – Do not get Pre-Qualified, there is a difference. Pre-Qualified is the Loan Officer asking a series of questions and giving you his opinion of what you should be able to qualify for. Getting Pre-Approved is documenting your income, your assets and having your credit pulled to prove your credit worthiness and home much of a mortgage you can qualify for. When getting Pre-Approved it is very important to clearly state to the Loan Officer how much cash you have for down payment and closing costs and that your PITI (Principal, Interest, Taxes and Insurance) payment is not to exceed what you have determined to be your budget friendly number. Getting Pre-Approved can take a few days, but you will receive a Pre-Approval letter. This letter proves that you are a serious buyer and your offers will be well received when you start looking for a home.
- Now it is time to find a Realtor and shop for a home!
Shopping for a home should be fun and exciting. By following the above steps you remove the most common home financing mistakes and remove the stress and false hopes from the home buying process.