This is a post from staff writer April Dykman.
For many, owning a home is still “the American dream.”
According to Gallup's annual Economy and Personal Finance survey, 56 percent of Americans own a home and 25 percent plan to purchase one in the next 10 years.
But sometimes buyers fall in love with a home, only to find out that they don't qualify. Or worse, they barely manage to qualify, but at a sky-high interest rate.
That's because lots of buyers chase the dream of home-ownership without first making sure their financial situation can support it. Instead, they submit a loan application and cross their fingers that they'll get approved.
And even if that's not your story and you're in pretty good financial shape, there's still a lot to do before you apply for a mortgage. For instance, if you don't diligently monitor your credit report, there might be errors you need to dispute. Or if you're a new homeowner, you might spend most of your cash on the down payment and closing costs, not realizing how expensive houses really are. For instance, when the roof starts leaking, there's not a landlord footing paying for repairs. Now it's your problem.
Get finances in order before you house shop
So what should future borrowers do to prepare to buy a home?
Get in good fiscal shape. That means making sure you look good on paper, which makes the home-buying process far less stressful. For instance, you won't have any big surprises when your loan officer runs your credit. Also, there's a chance you'll get a better mortgage rate, which can save you lots of cash over the life of the loan.
Getting in good fiscal shape also means having a healthy savings account. You'll sleep better at night knowing that you can cover closing costs and unexpected roof repairs.
How to get fiscally prepared to buy a home
To find out what steps a future buyer should take to prepare, I spoke with Mark Hanley, a loan officer in Austin, Tex.
“My first piece of advice to any borrower is to go ahead and get a pre-approval from a mortgage person,” says Hanley. “Get some coaching. If you do that a year before you're ready to buy, you can really be ready.”
Hanley says that by going through the pre-approval process a year in advance, you'll learn where you stand. The loan officer can counsel you about what you can do in the next year so that you'll be ready when you actually apply for a loan.
When you meet with your lender, here are a few things you want to talk about.
Credit. Get a copy of your credit report from your lender. “Your lender can help you see what's holding you back and look for things that you didn't know were there,” says Hanley. “These are things you want to work on in advance of applying for a loan.” You also can get free copies of your credit report at www.annualcreditreport.com, says Hanley, but “if you need help deciphering it, talk to a mortgage person.” It's also helpful to talk to a pro because sometimes people try to fix their credit, but actually damage it instead. “People look at credit and think, ‘I need to pay off my car,' but if their car loan is their only form of credit, it actually does more damage to their creditworthiness,” says Hanley.
Loan programs. Discuss which loan program might be best for you, along with what requirements that loan program has. For instance, FHA loans require less money down than conventional loans, so that's something to keep in mind while you're saving up for a down payment.
Cash at closing. Talk about where your down payment and closing costs will come from. “If you're moving money around, a loan officer will tell you how soon the money needs to be in your account so you don't raise flags with underwriter,” says Hanley.
After you meet with a mortgage person, you should have a better idea of what you need to work on. In addition to that list, there are a few more ways you can make sure you're prepared.
Pay every bill on time. “If you are moving from one place to another, make certain that no bills slip through the cracks,” says Hanley. “I've had borrowers who didn't pay the final cable bill when they moved out of an old apartment and didn't leave a forwarding address. It ended up harming their credit.”
Stay in the black. It's an obvious no-no, even if you aren't applying for a loan. But overdraft charges are red flags to underwriters, so make sure you walk the line from here on out. (In truth, the lender will probably only want your two most recent bank statements when you actually apply for the loan, but if you can't stay in the black, you probably aren't ready to buy a home.)
Plan your job hunt. Banks don't like for you to switch jobs when you're applying for a loan. “I had one client who was offered a job that actually paid more than her current job, but the lender wouldn't let her switch jobs before the loan closed,” says Hanley. So if you're thinking of jumping ship, do so well in advance of applying for a loan. Otherwise you'll probably have to wait until after you close on the house.
Finally, start saving, and save more than you think you'll need. After talking to your lender, you should have an idea of how much house you plan to buy, as well as down payment requirements for your loan program.
Also, make sure you have a separate house fund for home repairs and maintenance, as well as new homeowner expenses that pop up when you move in. For instance, when my husband and I had just gotten the keys to our new house, my dad mentioned that we needed brand new ones.
“Have you called a locksmith?” he asked.
“Um, no,” I said. “Do I need a locksmith?”
“You need to have all your locks rekeyed,” he said. “You never know if the last owners or renters kept copies.”
Ugh, of course. Silly new homeowners, we hadn't thought of that. So, $80 later, we had new locks and keys.
And that was just the beginning — those little expenses really add up! Make sure you can cover them so your new home doesn't instantly turn into a huge source of stress.
And that's really the point here, reducing stress. It's a lot of work to get this prepared, and it requires a lot of foresight. But the American dream can quickly turn into a nightmare if you aren't financially prepared to for it.
Readers, what else can you add to this list? And if you're a homeowner, how far in advance did you get ready to apply for a loan — or did you just wing it?