Friday, February 6, 2009

First Time Home Buying 101

INTRODUCTION

This blog is based on a scenario presented to me from my daughter who has been a renter. Her family is moving across country and considering purchasing their first home.

It is easy to let buying a home become an emotional decision, but it is also important to choose wisely. It is likely the greatest financial decision you have made to date, other than having children! The information included here is to assist you in making wise choices by asking questions, avoiding the impulsive, and having some knowledge of the process involved in buying a home. The laws pertaining to real estate will differ in every state; therefore, this is not intended to supersede the advice from your professional expert, but may include tips or clarifications any first time buyer may find beneficial.

Now is the time to buy!

You have great credit. The real estate market will probably never see as great a decline in home prices as we have seen in the past couple of years. It may get slower, but that is unpredictable. With all the foreclosures, employment losses, there is a "glut" of homes making it a "buyer's market. I don't think you should wait to see if this is the bottom of the market, if it isn't, it is close enough!

  • "Media" experts are predicting interest rates at unprecidented lows.
  • The new economic stimulus package is offering large tax credits for home purchases.
  • As always you can deduct mortgage interest from your taxes, whereas rent is not deductable.

PREPARATION: The first thing I think you should do, even before looking for homes is to go to your bank and speak to your loan officer and/or a mortgage broker. Loans are harder to get - find out what you qualify for and what you preparations you will need to do.

The loan officer at the bank is an employee of the bank. They are selling the products of that bank, i.e., the loan. An independent mortgage broker sells "loans" from various lenders. Each lender offers different "products" with different rates, terms, etc., eventually I'll talk more about that. However, the choices offered have obviously gotten less with the high home foreclosures.

  • Explain to bank/broker your situation, i.e., moving to another state, new job, more income, in the same industry, and want to prepare to purchase a home.
  • Ask the bank or broker to run your credit report (usually nominal fee). Retain the report or a copy of it for your records. Each time a report is run, you can lose points on your FICO score. (Prior to final approval on a loan, the lending company will always run your credit report to verify information).
  • Upon seeing your credit report, your banker/broker may make suggestions to you-- what you might want to "pay down" or "pay off". Lenders want to see that you have credit cards (usually 3), they want to see what your limits are, if they are "maxed" out, how you pay on them, so don't try to eliminate ALL your debt.
  • When you see your good credit score, don't make a major purchase like buying a car. It could change your position on buying a house.

Take into consideration what you pay for rent now; is it a struggle to pay? If so, you don't want your house payment to be more. You will be responsible for taxes, insurance and maintenance. Your lender and real estate agent will help you with that later. Right now we are just doing homework. (I know you just can't wait to start browsing the net for homes!)

HOMEWORK - Set up your folder, either physical or electronic.

This is a good time to begin collecting all the information the banker/broker will need when getting your loan for that dream house. Start putting your folder together and keep it where you have secure, but easy access to it.

  • Ask your banker/broker what information will be needed in that folder to apply for a loan.

The banker might talk about "conditions". This is really a term used by the lender that describes all the things they are going to ask you for. Some are pretty basic; they vary with different lenders and each loan program. When you think you've done them all, they will ask for something else or they will want them sent again! (That is why I recommend having this folder).

Examples of items for your folder or "conditions";

  1. Credit Report;
  2. Two years of bank statements;
  3. Possibly a certain number of future house payment months in "reserve" (savings, or other form of available cash);
  4. Verification of rent paid from your landlord; (have their name, address & phone available)
  5. Verification of employment; (again, have contact information)
  6. Verification of mutual funds, stocks, etc.;
  7. Copies of business licenses;
  8. Current pay stubs;
  9. Tax returns for (?) years. These will vary with every loan to some degree. Invariably, you might think you have every possible bit of information in your "file" and when it comes right down to loan approval -- they will think of something else!
  10. Your first born child. (Just checking to see if you are paying attention!) Actually, it may feel like this may be the next request at times. Don't get impatient...we know loans are harder to get and there are less companies to give them. Consider yourself one of the lucky ones.

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