Buying a home is a major financial decision
One of the most important decisions you can make is to buy a home. It is also a major financial undertaking, and to some, it could be the biggest expense they will make in their life. It requires careful planning and preparation.
If you intend to buy a home this year, you need to be well-prepared. A little groundwork can make the home buying process smooth and satisfying.
Home prices are rising
Before you commit to the process of buying a home, you should know that home prices are rising.
A year back, the mortgage rates were enticingly low, but two months ago, the market has seen a sharp rise on the rates. Economists predict that it will continue to rise this year, which could make buying a home more financially challenging.
But don’t be disheartened. The good news is that even if the mortgage rate rises up to 5% from its present 4.32%, it will still be low compared to the market rate during the last market crisis in 2008 where rates soared to 6%.
And if your heart is really set on getting your own home this year, there are ways to offset the higher borrowing cost.
One way to do that is to ask the seller to pay the closing costs which can free more cash for your down payment. Another option is to buy down the interest rate which can be done by paying an upfront fee to your lender so you have less monthly mortgage to pay. You may also want to try the adjustable-rate mortgage system, which asks for a fixed low-interest rate for the first five to ten years and then adjusts to a higher rate.
What are the necessary preparations to buying a home?
Now that you are ready to face the housing market head on, here are some steps you can take as part of your preparation.
Number 1. Get qualified for a home mortgage loan. When you have decide to buy a home, you want to know how much you can afford. This information is crucial because it sets the terms of your budget, which plays a big role in choosing the type of home you want, and where you will be able to buy it.
To get qualified means to get a pre-approval and not just a pre-qualification. There is a big difference between the two.
Pre-qualification is a straightforward checking matter. It is an estimation of how much you can afford and how much you can get as a loan, but there is no commitment involved. It can be comparable to window shopping where you want to see the prices of items you like and checking how much money you carry in your purse.
Getting pre-approved on the other hand, means having a written commitment from either a bank or lender which states that you have received a loan approval. This only happens after you have done all the paperwork involved in it, from filling out the loan application to submitting tax returns, employment documentation, banks statements and credit report.
It also tells the seller that you are serious about buying and that there is a ready home loan to process once a price has been agreed on.
Number 2. Find out how much home you are qualified to buy. Your buying power is influenced by several factors from your end and the market’s end.
On your part, your debt-to-income ratio, along with the front-end ratio, back-end ratio, credit history and lifestyle will be assessed.
From the market’s end, the rising interest rates this year will have an effect on your possible monthly mortgage payment since the home will become more expensive.
Number 3. Don’t switch jobs right before your buy. Getting an approved mortgage does not mean things are already settled and you can switch jobs.
Remember that lenders will re-evaluate your credit just before the settlement date and will also check will if the place of employment is still the same.
Also, you should know that automated mortgage lending systems can mark job changes as a possible high-risk lender. This is because while jobs are in transition, there is no sure future income and no paperwork to offer as proof of financial stability.
Any changes may disrupt and delay the lending process, as the lender will require payslips as proof of your new work.
Number 4. Don’t apply for credit. When you get an approval for your house loan, do not apply for any type of credit. Doing so can lower your credit score and affect your rate lock and fees in closing on the home. It can also reduce your income to debt ratios which cause you to suddenly be unqualified for your loan.
Mortgage lenders may consider your a riskier borrower once they learn that you are seeking approval for another debt and may offer less attractive terms.
Number 5. Don’t buy a new car! Like applying for any credit, buying a new car should be placed on hold until you are already in the process of moving in.
Why? Because a car is a debt and it is part of the items inside debt-to-income ratio that will be checked.
Debt-to-income ratio applies to the percentage of your monthly income that goes to payment for debt which includes the current place you are now living in, your student loan, credit card loan and car payment.
Number 6. Pay your bills on time. Months before you actually make the purchase, you should be conscientiously paying your bills on time. If you can spare some extra payments for big debts, do it.
Your credit score reflects all the on-time payments you have made which usually increases your credit score. It gives a more favorable picture of your capacity to earn and pay.
Number 7. Choose the right agent to guide you. If you are preparing to buy a home, you need a good and efficient real estate agent to help you make the right home choice and to safeguard your interest.
Select an agent like me, Teresa Ryan, who has had years of experience in real estate. I can help ease some of the stress that comes from a good deal of paperwork involved in dealing with a new house.
Number 8. Save money for your down payment. When you have some savings, you borrow less, which means smaller payments.
Also, do you know that many banks do not give a mortgage until you have at least 20% of the amount you would like to loan? Saving money gives you a better chance of securing that home mortgage.
The preparations you make before you actually buy a home lays the groundwork making the actual buying process smooth and easy-flowing.
I am Teresa Ryan. Call me at 630-718-0424. I am willing to help you be better prepared to make your new home purchase.
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