Deciding to buy a home is a big step. Most people who start searching for homes online eventually want to start touring in person. When this happens, they are often faced with the dreaded question, “Do you have a pre-approval letter?”. Oftentimes, it leaves potential buyers feeling overwhelmed. They don’t want their credit pulled. They don’t know who to call. Here are some things to consider and the pre-approval letter is not the first step. These are 5 steps to homeownership.
1. KNOW YOUR CREDIT SCORE
One of the best and FREE places to start is to know your credit score. You are entitled to one FREE credit report each year by these three companies – Equifax, TransUnion and Experian. Visit the website, plug in the information and then read through to see where your weak points are. If, for example, you score is low due to high credit card debt, then you can start by putting money toward paying down those debts. Most lenders recommend a score of 620 or higher though there are loan programs available for lower credit scores. Don’t be discouraged. The sooner you know your credit score, the sooner you can take steps to improving it. The advantage to a higher credit score is a better interest rate on your mortgage.
2. SAVE CASH
As soon as you start thinking of buying a home, it’s time to start saving on a down payment and closing costs. Granted, there are mortgage options that do not require a down payment. If you can, this will lead to a lower mortgage interest rate. The higher down payment, the lower the rate. Also, cash can be used to buy down point on your interest rate. For example, if a lender says you qualify for a mortgage that would purchase a $500,000 home at a 5% rate. You can use 1% of your sale price, which is $5,000, to buy a point (totaling 0.25% of a percentage point). This would take your interest on this mortgage from 5% to 4.75%. On a 30 year fixed conventional loan with 20% down, the monthly payment would go from $2,814 per month to $2,754 per month. The $60 savings per month may not sound like a lot but over the length of the loan, it amounts to over $21,000 in savings.
3. CONTACT A REAL ESTATE SPECIALIST
The next important step in the process is contacting a real estate specialist to help you along the journey. Licensed agents are critical in the home buying process. He/she will spend time asking questions to find out how best to serve you. They will often suggest that you then contact a mortgage lender to find out the price of home you can afford depending on your monthly expenses and how much you are willing to pay on a mortgage. Once you have a realistic budget, an agent will set you up on a search of homes, provide private tours of properties, help you find out the details of homes you are interested in, help you submit an offer on a home, negotiate on your behalf and help you through the homebuying process. This a one of the most critical steps to homeownership.
4. FIND A MORTGAGE LENDER
A mortgage lender is going to assist you in determining your budget for buying a home. They will need information on your monthly income and expenses and review your credit score to let you know how much of a mortgage you qualify for and an estimate of you monthly expenses with taxes and interest included. From there, it’s up to you to decide how much of a monthly payment you are comfortable with and set your budget. It is suggested that you talk to at least two lenders to see who offers you a better program and who you are most comfortable working with.
Submitting an application with a second lender and getting your credit pulled again will not affect your credit score. The hard pull on your credit by lenders is usually valid for anywhere from 90 to 120 days. This means that you can have your credit pulled as many times during this time without it affecting your credit score. The lender will provide a pre-approval or pre-qualification letter once you have identified a home you are interested in. This is another critical step to homeownership.
5. HOMEBUYING PROCESS
The homebuying process refers to the purchase of your home from the time you start looking at homes to when you submit an offer on a home you like right through to closing. There are many steps in the process. Here are just some of them you may have heard of before. Submitting an offer; negotiating the contract; getting a ratified contract, delivering the earnest money deposit, conducting a home inspection, waiting for the appraisal result, getting your financing fully approved; and finally, closing on your new home.
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There is a lot you can start doing now to buy your home. These steps to homeownership will help guide you on the path.
Questions/Concerns? Please contact me.
Also feel free to compare this update with last month’s Market Update – July 2022