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1. Find and Select the Right Mortgage Professional
When preparing to buy a home the financial aspect is usually the starting point. Selecting the right mortgage professional to guide you through the steps below can save you time and much hassle; just make sure you choose the right one. Choosing the wrong professional can not only negate the advantages of these steps, but also cause you financial damage. And while the interest rate is important, don’t make the mistake of choosing solely based on this factor. The simple truth is that the rate isn’t set until you find a home and go into escrow, so rate shopping in the pre-qualification process is putting the cart before the horse.
- Recommended Action Item: Search Yelp in your local area and ask friends and family who they would recommend. Look for mortgage professionals who are willing to work with you well in advance of actually buying a home.
2. Knowing your Credit Profile (Teaser alert – it’s not just about Your FICO Score)
When getting a new mortgage and of course looking to secure the best rate, finding out your FICO score is usually the starting point. Yes, your score is important, but other factors such as credit history can be vital to you securing the best loan. You might be surprised how many misconceptions there are and how much of the information published is flat out wrong and doesn’t apply to mortgages.
If your credit profile is perfect (740+), great, then feel free to move on down the list. However, if your scores are not top notch and you have a few dings on your credit report, getting these items cleared or re-building new and positive credit can take time. This is why it is smart to evaluate your score with a mortgage professional well in advance. Given the economic events in the past 7 years, many people have short sales, foreclosures, bankruptcies, credit card charge-offs, or just a few late payments. Knowing how this effects your credit profile and ability to qualify is key; a mortgage professional can explain all of this to you in detail to help you build the better credit lenders are looking for.
Do you have your FICO score already from an online or consumer report? If so, you’ll want to read this. Not all FICO scores are created equal.
Note: While having great credit is a worthwhile pursuit, please know there are still solid financing options available for applicants with less then perfect credit or scores in the 600-680 range.
- Recommended Action Item: Inquire with your financial advisor or mortgage professional about what services they offer for a credit check-up as well as guided expertise to improve/optimize your credit profile. I recommend doing this 6-12 months before you plan to purchase the home.
3. Getting Clear on your Monthly Budget
In planning for the financing of your home, gaining clarity on how much cash you can or want to put down and what you can afford on a monthly basis makes everything easier. While the down payment is a one time factor and creates equity in the property (that you theoretically should get back when you sell the home), the monthly payment is something you are stuck with paying for the duration. Being honest with yourself on what you can truly afford and be comfortable with each month will keep you from being overwhelmed when it comes time to pay the mortgage bill. From my experience, it comes down to comfort level and a feeling of security. After all it is your home, not just an investment. There will be a number that you are uncomfortable paying, this would be your max, and then there is a window of what you can and are willing to pay if you find the right home. Working to get clear on your monthly inflows and outflows is what will give you this feeling of comfort and security.
- Recommended Action Item: Find a financial advisor or online management tool that you can use to determine your comfort level of what you can afford on a month to month basis.
4. Saving Cash and Paying Down Debt
This one is pretty straightforward, the more money you put down on a house, the lower the monthly payment will be. However, because every individual has different preferences, as well as different income earning and spending patterns, striking the right balance here is what matters and will lead to peace of mind. There is a trade off between cash in the bank and what your monthly payment will be. Some people like to keep their cash, while some people want the lower payment.
With regards to paying down debt, today’s lending guidelines are very sensitive to what is called the “debt to income ratio”. Regardless of all other factors (down payment/equity in property, credit profile) banks still need to see that you have the capacity f(from a cash flow perspective) to make the payment each month. The greater amount of debt you have, the less you can qualify for on a monthly basis with a new mortgage/home. And of course paying high interest rates on any existing debt is simply throwing money out the window and not a good practice if one is serious about purchasing a home at today’s prices. As in many aspects of life, when preparing to buy a home, cash is king.
- Recommended Action Item: First, go to work paying off any debts that have a moderate/high interest rate (cost) to them and then boost your cash savings. Try to get to where you have one or two credit cards, and maybe an auto loan. Credit that is revolving and you pay on a monthly basis, like an Amex card, is fine and will help your scores.
5. Be Mindful of Your 2015 Federal Tax Return
If you have filed the 2015 federal tax return, then it will most likely affect your ability to qualify. If not, then lenders will use your 2014 return or the average of 2014 and 2013 and request proof of extension. And once you file the 2015 return, lenders will know as they check directly with the IRS to find out and then they will base the qualifying off it. So there is no hiding or getting around what is shown on the tax return. The only exception would be that some non-traditional mortgage products don’t require it. Underwriters will deduct certain write-offs from your income, especially if you are self employed. Being savvy or aggressive on taxes can save you money, but then hurt you when it comes to qualifying for a mortgage. This is something you want to consider and discuss when meeting with your accountant or whomever prepares your taxes.
- Recommended Action Item: If you filed an extension for 2015, get pre-approved for a mortgage before filing your 2015 return. This will tell you if you have room to take those tax deductions and still qualify or if you need to be more conservative.
6. Getting Pre-Approved, not just Pre-Qualified
Do you know the difference between a pre-qualification and a pre-approval? Most people don’t and they really should, especially when preparing to buy a home. The biggest distinction is that the pre-qualification is issued from the loan officer or mortgage broker and the pre-approval is issued from an actual underwriter that works for a mortgage lender or bank. A pre-qualification is much less reliable and is completely subjective to the expertise and integrity of the mortgage professional issuing it. Coupled with the fact that most mortgage professionals are paid on commission and are basically sales professionals, thereby creating an inherent conflict of interest, the pre-qualification is simply much less dependable.
Other distinct advantages to getting a full pre-approval:
- Makes your offer to the seller more competitive in that it generates considerably more confidence in your ability to close.
- Allows you to close faster. Think 20-25 days instead of 30-40 days. Again, makes your offer more competitive.
- Creates a much smoother process with less turbulence. Because much of the up-front work has been done and an underwriter has already approved your application, your path to closing is much shorter.
7. Selecting the Right Real Estate Agent
With the ability to find properties online there are many prospective buyers debating whether they even need a realtor at all. While this line of thinking is understandable, there are still several key reasons why I don’t advise pursuing a home without a realator, nor would I personally buy a home without working with a realtor. There are a great many licensed realtors out there, but finding the right one is a crucial piece of the puzzle when it comes to successfully navigating and completing the process of buying a home.
Criteria for Selecting the Right Agent:
- Trust and likability: Trust is an obvious one, but the likability part is important because you will be working closely with them over a 60 to 120 day process. You want to try to enjoy the experience of buying a home and getting along well with your agent is a big part of that. Stay away from agents that gives you the “sales vibe”.
- Experience and Local Knowledge is key to having your questions answered along the way.
- Support Resources: In this business being very responsive and on top of things can make all the difference. That is why many successful agents have teams of professionals to support them and their clients. An agent without this can drop the ball at times during these all too common occurrences: getting too busy or overwhelmed, getting sick, have planned vacation, etc. Also do they have trusted resources for escrow officers, title reps, handymen, and more? These can make everything easier and will probably save you money and headaches along the way.
Recommended Action Item: Ask close friends and family, check Yelp or Google reviews, or throw out a Facebook post asking for recommendations of trusted agents. A referral from a friend puts an air of responsibility on both the friend and the realtor, they now have a second person to answer to should things go wrong.