We’re back with more tips for the home buyer! If you have not seen part 1, please click here!
6) Do Not Open New Lines Of Credit During Or Before Applying For A Loan
Opening another line of credit during the home buying process can make you ineligible for your current loan in several ways. Opening another line of credit means that you now have another monthly payment, which increases your debt to income ratio. If your debt to income ratio increases over the maximum allowed limit, then your loan can be denied.
Consequently, if you open another line of credit your credit score can take a temporary dip. While your score may drop a few points, this can actually push your interest rate up to a higher tier if you’re not careful. If your interest rate increase brings your calculated monthly payment too high, then your application may also be denied.
Keep in mind that any new lines of credit and any inquiries will need to be explained to the underwriter.
- 1 Minute | No Hard Credit Check
7) Get A Pre-Approval Letter Before House Hunting
In part one, we advocated that you should use a mortgage calculator to see get an idea on what you can buy. However, this is just to look at numbers to find a comfortable price point for you. Your real goal is getting pre-approved, which almost guarantees that you are able to buy that home. Your pre-approval will give you the price point that you can specifically use when looking to buy a house.
Another bonus is that sellers will pay you more attention if you bid on a house and have a pre-approval already. This will effectively give you a step up on any other offers from buyers who do not have a pre-approval. This also means that you can start the home buying process as soon as the seller accepts your offer and you negotiate the purchase contract.
8) Shop Around For Mortgage Lenders And Loan Programs
Treat mortgage lenders almost like an interviewing process. You want to bring your documents and see what offer they can give you, but you aren’t married to them. In fact, we recommend shopping multiple mortgage lenders to see who can give you the best rate. The mortgage lender who gives you the best rate and favorable pre-approval offer should be the one you choose.
There are a large variety of loan programs out there, each one fitting a specific criteria of borrower. Whether you are looking to buy a home in a rural area, or are looking for low down payment programs, there is a loan program for you. If you do not wish to put 20 percent down for a down payment, we’d recommend shopping around either for down payment assistance programs or loan programs like the FHA loan program where the down payment can be 5 percent!
9) Save Up Money That Can Be Used For Reserves
You should get into the practice of having an emergency fund and a savings account strictly for home related purposes. The cost of home ownership may be less than your rent payment if you only count monthly payments. However, there are things that can happen that can cost a lot of money to fix or replace.
And there are other things that can happen to you, like losing your job, where you’d otherwise be unable to make those monthly payments. We recommend having reserves in an account that you cannot touch that gives you at least a cushion for 3+ months of monthly payments.
And we’d also recommend that you get in the habit of adding money to an emergency fund to cover any appliances or major items needing repair or replacement. If you have family coming to stay with you in your brand new home for a few weeks during the hottest time of the year, you do not want your air conditioner to fail. And if it does, you want to be able to remedy the situation as quickly as possible!
- 1 Minute | No Hard Credit Check
10) Make Sure You Budget For All Fees and Closing Costs
The home buying process can come with quite a few fees, including paying for the appraisal report, the earnest money deposit, and closing costs. On top of all of this, you may have to also show proof that you have three or four months of reserves if the underwriter requests it.
Earnest Money Deposits are negotiated between buyer and seller, and is then added to the purchase contract. Earnest Money Deposits are good faith deposits from the buyer to the seller that the offer on the home is a serious one. Earnest Money Deposits can be $250 or more. The average earnest money deposit is around $500.
The appraisal report is required for all home purchases and is a report that determines a home’s true value based on several factors. An appraiser visits a home and takes pictures of all required locations, notes any issues they find, and determines a value using specific criteria. This appraisal report is then sent to the underwriter for review. An appraisal report usually costs around $450 depending on the appraisal management company used.
Closing costs are probably the biggest expense that the buyer will have to come up with during the home buying process. Closing costs are usually around 2 to 5 percent of the home’s purchase price. For example, if you buy a $250,000 home, you can be expected to pay from $5000 to $12,500 in closing costs.
Hopefully these tips have been helpful in helping you get prepared for the home buying process and home ownership! While the home buying process can be intimidating and stressful, it can be much easier for the knowledgeable first time home buyer who is prepared. If you are on top of saving up and budgeting for the home buying process along with getting everything you need taken care of ahead of time, the loan process can be very smooth!
