What Comes Next?
So, if you read my last blog, you sat down and created a budget. You know how much you can afford to pay on your monthly mortgage. You started implementing any changes to your spending to make your dream come true. Now, you're psyched to buy a home!
Don't Sign a Contract to Purchase a Home Until You Talk to a Lender!!
Please, don't sign a contract until you talk with a lender! Pretty please! I've seen too many people who got caught up with the excitement of finding a home that had no clue as to what their monthly payment was going to be or how much money they needed to complete the transaction. Talk about a buzz kill! It breaks my heart to see people almost cry when I tell them how much their mortgage payment is going to cost them. Unfortunately, numbers don't lie. If you need a $250,000 loan and rates are 5.75%, your principal and interest payment will be $1458.93. You can't get that payment to the $800.00 you thought it would be and still amortize the loan! So before you even look at homes:
Pre-qualify With a Lender
Alright, I know any Realtor reading this is cringing at the word pre-qualify! "In today's market, you have to be pre-approved for your financing, not pre-qualified" is what they will tell you. They are right. But, you may not be ready to be pre-approved. So start with being pre-qualified.
What's a pre-qualification? The lender runs your credit report, obtains information on your income and assets and discusses different loan options that might be suitable for you. Before calling a lender, have the following ready:
Recent pay stub
Recent W-2
Recent bank statement
Employment history for the past 2 years
Housing history for the past 2 years
If you are self-employed, have your last 2 years worth of tax returns ready (the loan officer might ask you to fax them over). If your income varies, examples would be someone on commission, in the trades, or subject to overtime that is seasonal, you will be asked to supply more information. For example, be prepared to break out salary from commissions or straight pay from overtime. Usually, a 2 year history will also be required.
Remember, these are just the basics for a pre-qualification not for a full-fledged loan application and pre-approval.
One last thing before I move on, be brutally honest with the loan officer! Don't try to hide anything, eventually we will find out and it may cost you your dream home! I don't want to get into too many details, but I've had my share of people telling me they are going to live in a home and instead they are going to rent it out. They tell me they are employees when instead they are the owners. I've even had people go so far as to present fake tax returns to me. We usually find out the truth and the deal falls apart. In some cases, had we known the truth upfront, we could have obtained a mortgage for the borrower.
Benefits to a Pre-Qualification
When you pre-qualify, ask a lot of questions. What is my payment? How much of a down payment do I need? Is this a fixed rate or adjustable? Is there a pre-payment penalty with this loan? If so, how much and for how long? It's real important to ask for a Good Faith Estimate of Charges. What a Good Faith will show you is all the costs the lender anticipates you will have during the deal. It will show you your monthly payment. It will show you the type of loan, but it will not have all the details of the loan.
Ask questions about what types of mortgages that are being offered. Sometimes, you may qualify for a couple different types of mortgages but the lender only offers one. It may be that the lender doesn't offer other programs or is not proficient in all the programs that the company offers.
If the rate seems high or the program seems sketchy, ask why and what you need to do to obtain better terms. If you are not happy with the answer, talk with another lender. Get a referral from a family member or trusted friend. Don't feel pressured to take a loan that doesn't meet your needs.
Now What?
At this point, you can do one of two things:
Proceed with a full pre-approval and look for a property
or
Set a timeline for the pre-approval and purchase of a home
Pre-qualifying can open your eyes to your readiness. It might be that your credit is good, you have your money lined up and budget in shape to move forward and look for a home. You might have to work on some things. Maybe saving more. Maybe paying off a debt or disputing a collection. Maybe, you're just a little overwhelmed and want to sit back for a short period of time.
Where's the Fun?
Once you have done all this to line up your financing, the fun begins! Now you can look at homes and picture yourself living there knowing that you can afford the payment and have the necessary funds to close the deal! Having peace of mind with your financing will lead to an enjoyable house hunting adventure. I'll talk a little bit about comparing homes in a future blog. As a preview, my wife and I have looked at many memorable homes that we nicknamed. Like the "Green House" that had all green shag carpeting throughout the house. Or the "Sauna Home" that had a built in sauna with naughty decorations and switches.
Next
I'll concentrate a little more on credit in the next blog.
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