Things to do when buying a home

In many markets across the country it is cheaper to buy than rent, but buying a home requires a certain amount of preparation before you take the plunge. As very few people wake up one morning and decide they would buy a home that day, you may want to make sure you are well prepared for the process. The things you need to put in place are included in the following list if you don’t already own a home.

• down payment (unless you are a veteran)
• income
• credit
• an attentive realtor

Let’s examine the importance of each item in greater detail.

Down Payment

You can make as large a down payment on your home as you can afford but the average buyer is expected to have at least three and a half percent of the loan amount available for a FHA loan. You may source down payments from savings, your 401K, grant sources, gift funds from relatives or a nice tax refund check. Most conventional loan programs require you make a five percent down payment, but whichever program you choose, be aware that you may need additional funds for closing costs.

If your realtor is a good negotiator, they may be able to convince the seller to contribute a percentage of the closing costs, so make sure they ask.

Income

Provable income is the pivotal item here. You must be able to provide proof of adequate income to cover your mortgage payment (including escrows) and your monthly debt obligations such as credit cards, car notes and student loans. Some borrowers are disappointed to learn that although they make adequate income, if their tax returns show large write-offs for things like business losses or unreimbursed employee expense, their calculated net income could preclude them from buying the ideal home for their needs. You can’t say on one hand “I’m making a lot of money” and on the other, “Please don’t tax me too much, I have a lot of expenses.”

Credit

Your credit score largely determines what type of loan you will qualify for and what rate you are likely to pay. It’s always a good idea to get a copy of your credit report at least six months prior to your buying date. Make sure the items on your credit report are accurate and up to date. A collection item wrongly attributed to you could cost you as many as 60 points on your credit score.

On the other hand, no credit at all means you have no track record and a very low credit score. One or two small credit cards, carefully used and promptly paid can have enormous positive effects on your score. And credit card or personal loan usage indicates to a lender how careful you are in making regular payments.

An attentive Realtor

The aforementioned realtor can be crucial in negotiating the right price for you and should always ask for a contribution to closing costs from the seller. Of equal importance, they should be able to respond quickly if the lender needs clarification or amendments on a sales contract. Your realtor will want to ensure you have a pre-qualification letter from your lender prior to looking at houses, and you should want to get some idea of the price range you are likely to qualify for long in advance of starting a search.

photo courtesy of Grant Source, Creative Common License 2.0, modified from the original 640x420 to 640x360.