REALLY Good Advice, First Time Home Buyers, Part 1
Speaking as a Realtor, there is nothing harder in my line of work than telling a buyer who is willing to buy that he/she is not ready or able to move forward with a transaction due to lack of preparation. So, let's take a look at what it takes to be ready when the time comes to purchase your first home.
Home purchase requires 3 things:
CREDIT (Good Credit)
CREDIT: I know it sounds simplistic, but basically, you need to pay your monthly debts on time! It's not rocket science. Credit scores reflect a person's historic ability to pay their monthly debts on time. Why would a lender loan you money if you make most of your payments to your creditors late every month? You have to pay, so all of us needs to get it together and pay on time!
Lenders are also looking at the amount of credit you are using. A rule of thumb is to have at least 3 credit lines, but don't charge them to the max. Use these accounts only minimally or use them and pay them off each month. And, as you get close to the year you are planning to purchase a home, for heaven's sake, put off buying that boat, or car, or time share! Buy the home first and the toys later.
CASH: How much cash do I need? Before you get too involved, speak to a lender to get pre-qualified. The term prequalified is sometimes used interchangeably with the term pre-approved, but for our purpose, prequalified means that you have checked to see how much of a mortgage you can get with your current level of income, credit rating, and down payment without going through the application process. It's not a full approval. It is enough to give you a ballpark idea of how much cash you will need in hand to buy your home, once you know how large of a mortgage you can expect to get.
Depending on the size and cost of the home, there are programs that allow you tp pay as little as 3% down, but many lenders prefer 20% to keep you from having to pay PMI or take out a second. You also have closing costs that usually range from 2% to 3% of the purchase price of a home. Therefore, expect to have a minimum of 5-6% down payment for a modest home to 23% or more. Have you considered gift contributions from family members? Don't wait until the last minute before you close on a home to have this conversation. You don't know the answer if you don't ask, right?
And finally, have a little extra cash on hand for your move, to pay deposits on utilities, change locks, etc.
VERIFIABLE INCOME: Just because you get lots of free perks from work, none of this counts if it can't be verified. Many people who earn tips tell me, "My income looks low, but I really make a lot more in tips every shift that doesn't show up on my taxes". Not only is it illegal not to declare all earned income to the IRS, it will not be counted as verifiable income when you are trying to purchase a home. So if you "work under the table"" or don't declare all earned income, you are going to have a difficult time qualifying for the home that you really could afford if you had declared all of your income.
And while we are discussing income, DON'T CHANGE JOBS in the year leading up to your home purchase unless you are staying in the same line of work. And, for heaven's sake, don't change jobs for any reason once you are in the middle of a transaction. The lender will need to start over and verify your new job and income with your new employer. Even if you are going to be making more money, wait until escrow closes before you make the leap to the new job.
So, keep working on your Credit, your Cash, and your Verifiable Income, and you will then be ready for REALLY Good Advice, First Time Home Buyers, Part 2, The Actual Home Purchase!
Thanks for reading my blog!