Home Buying For The Savvy
Mortgage lenders go through your credit report with a fine-toothed comb, and they’re going to make decisions based on how creditworthy you appear to be, including whether to offer you a loan at all … and at what rate. Taking the time to make a decision that can affect your personal finances for 30+ years, is reason alone to do your homework. Here are simple, savvy home buying tips to begin priming your research engine. Thank you to Sebastian Rivera at MVB Mortgage for contributing your advise on this post.
Tip #1: CLEAN YOUR CREDIT HISTORY
Do you know your creditworthiness? Guessing what your credit score is, or waiting to check your credit for when you are ready to put an offer in, is not savvy. Many buyers unknowingly have unpaid medical bills, speeding tickets, and numerous other issues they are unaware of. Even habitual late payments reflect negatively. Check your credit at least 6 months ahead of your purchase, in order to tackle any problems that arise. A lower FICO score equals higher interest rates. Even a small $25 collection can easily cost you $20k+ over the life of a loan.
Consulting as to your credit history, is also the best time to get pre-approved. First of all you want to know how much you can afford, which is different for how much will actually get approved for. You will want to ensure that your current income source, source for down payment and overall scenario is acceptable with current mortgage guidelines. Loan officers are there to educate you on what is needed to get the loan to work for you.
Tip#2: SHOP AROUND FOR A LENDER
Thinking that the banking institution who handles your checking and savings account will provide you the best offer, is not a savvy decision. What to do instead? Ask your agent for a referral, ask home-owning friends and co-workers for their mortgage lender referrals. Check with at least two or three additional lenders so you have an overall idea of what’s out there. In addition to the interest rate and loan terms, have each one furnish you with a breakdown of your total costs so you can compare.
Online lenders are not all reputable. Most reputable lenders do have an online presence, however, there are numerous lenders than do not keep the same standards as others. Working with an online lender that you are not familiar with, or chosen simply based on their “best rate” can become a financial nightmare. The most common mistake we see when buyers work with unknown lenders are: late closings, delayed financing, loss of Earnest Money Deposit, identity theft, calls are only answered between 10am – 4pm, asking for the same documents multiple times, and of course an overall negative experience during the process.
Finding a lender early, is helpful in establishing a relationship with them. By doing so, you’ll be able to get pre-approved, which can assist you in placing serious offers quickly. Because lenders are eager for your business, some will even offer a cash incentive for choosing them, such as $1,500 back to you at closing. In fact, if one lender is offering cash back but another one isn’t, ask the lender who’s holding out to match the offer—he may change his tune if it means earning your business.
Tip #3: LEAVING YOUR EARNEST MONEY DEPOSIT AT HOME
Is it okay to make a large cash deposit into your account before closing? Banks are required to source any large deposits into your account going 60 days back. On the spot cash is not an acceptable source for a down payment. If you have been saving a significant amount of cash at home, make sure to deposit it into your bank well ahead of time to avoid any delays. If you deposit $10,000 cash into your account 3 weeks before closing, you will not be able to use these funds.
Tip #4: DO NOT APPLY FOR NEW CREDIT SHORTLY BEFORE APPLYING FOR A MORTAGE
While applying for a mortgage, hold off on opening up a store card or applying for a car loan. When you’re applying for a mortgage, your credit is under serious scrutiny. Applying for a new credit card may cause your credit score to dip temporarily due to the application credit checks, which count as hard inquiries on your account for about 12 months. The same holds true for closing old accounts — this will reduce the amount of credit you have available, which will negatively affect your score. Just keep doing what you’ve been doing. And of course, continue making on-time payments and paying-off any debts.
Tip #5: HAVE YOUR FINANCIAL DOCUMENTS IN ORDER AHEAD OF TIME
A common mistake by those seeking loans, is to assume the lender will need your financial documents only a few days before closing. If you have followed the tips 1 – 4 above, you will already have a lender, and know what documents they require to begin processing your application. The last thing you want to encounter is looking for a missing tax return, from 2 or 3 years ago, or confirmation documents of paying-off a disputed issue on your credit report. The longer you delay, the longer your approval takes. Time is literally money, when you are banking on getting locked-in for a low interest rate. It is a mistake to give your Loan Officer everything he/she asks for 1 weeks before closing. There are typically 5 – 7 different people that have to work on every loan for it to be fully approved. Lenders need all the required documentation at least 21 days prior to your closing. Some loans require more time to process.
TIP #6: KNOW HOW CREDIT CARDS CAN HELP OR HARM
Most novice borrowers believe, that using a credit card often and making minimum balance payments will helps their credit score. While using credit cards may help your credit, the best ways to ensure your credit score remains high are:
a. Pay everything on time or ahead of time, no late payments, EVER.
b. Make sure credit cards stay below 30% of the maximum allowed at all times (ex. If your credit card max is $500, don’t go over $150)
c. Do not open new credit cards or close credit cards within 6 months of settlement; this will affect your FICO score.
d. Credit cards with a longer history tend to help your score. Newly opened credit cards under 12 months tend to hurt it.
e. Student loans and mortgages typically help your score as they are considered “investments.” Too many department store and consumer credit cards are actually detrimental to your score.
TIP #7: DO NOT SKIP THE PRE-APPROVAL PROCESS
Pre-approval means basically going through a mortgage application process with a lender—filling out their paperwork, verifying your income— all with the end goal to be pre-approved for a loan of a specific size, even before you’ve found a house to bid on. It’s a great way to find out how much house a lender thinks you can take on, and it will give you some real specifics to work with—including an interest rate—while you’re house hunting. Although a lender can suggest your maximum qualifying loan amount, keep in mind, it is always best to stay under that amount when shopping for your new property. Plus, getting pre-approved is the best way to tell a potential seller that you’re serious when putting in an offer.
Simply tell your mortgage lender you’d like to get pre-approved. You’ll have to provide paperwork, which can include pay stubs, W-2s, bank statements, tax returns, and other existing relevant loan documents. Once you’ve had an offer accepted on a house, you’ll merely have to give the lender the address and details of the offer to move forward with the mortgage process. This can literally save you weeks of time.
But choose your lender wisely, and know all the specifics of the loan they are offering. If you decide you don’t like that lender and want to go with a different mortgage lender after the initial pre-approval. You’ll have to go through all the paperwork again and it will require another hard credit check. Which brings to mind Savvy Tips #2 & #4 in this post.
TIP #8: TAKING ON A LOAN THAT IS TOO BIG
It may seem like you’re comparing apples to apples when you trade rent for a mortgage payment. But there are different expenses to consider when you buy a home, and you have to make sure you can afford to pay for them all. The base loan payment is not all there is. If you have a car loan, you know the base loan is not the only expense to consider in your monthly car expense budget. Add to this, the interest on the loan, the full coverage premium the auto insurance company will require, the yearly property tax, registration, etc. Home mortages are similar. If you rented before, you will now have to have homeowners insurance. There is also interest on your loan, and taxes on the property. This is what is typically described as PITI = Principle, Interest, Taxes, Insurance.
If you bite off more loan than you can chew, you may find yourself eventually facing the sale of your home (or foreclosure) when you cant make the payments. If you don’t have enough money for a good down payment, don’t leap into a house before you’re ready, just because interest rates are low.
TIP #9: SIGNING LOAN DOCUMENTS YOU DO NOT UNDERSTAND
Ask questions, and continue to ask them until you are certain you are clear on what you are committing to. Walking into a title office and signing-off on a 30 year mortgage is not like buying a sofa at the furniture store. A mortgage is about more than just the monthly payment. It’s about how much you’ll pay over the life of the loan and what your interest rate will be throughout. For instance, the monthly payment will be lower on a 3/1 adjustable rate mortgage, a common loan in which the first three years of payments are fixed and for the remainder of the loan the interest rate adjusts annually. Annual changes to your interest rate can means your interest rate could go down or up in three years—and so could your monthly payment. If you are on a fixed budget, fluctuating interest can be detrimental to someone’s economy, if they had not planned for it. Is there a balloon payment in 20-30 years? Meaning a lump sum due at a certain time? Are their penalities for paying-off the mortgage too soon? Do you need mortgage insurance? Will you need flood insurance for the flood zone your new home is in?
What to do instead? Make sure you understand what kind of loan you’re getting, what the payments will be from beginning to end, how much interest you’re paying, and whether you’ll have a fixed interest rate, or whether it will be fixed for a limited time before becoming variable. Also, do you know how much money you’ll have to bring to the closing table with you? If you qualify for only 80% of the value of the house you want to buy, that means you are expected to have the other 20% at closing. Many lenders require you to pay property taxes and insurance up front, and it could mean a big check from you is expected. These are fees people don’t think about until they get to closing. Leaving you with numbers on the closing statement document that look very different from what they looked a few weeks before.
Thank you to Sebastian Rivera at MVB Mortgage for contributing your advise on this post.