Steps to Home Ownership
Tricia Ebert, Realtor®, CSA®, ABR®, BPOR®, CDPE®
Last week, we discussed the most important terms for
you to understand when buying a house. Now let’s discuss THE most important
detail of buying a house… FINANCING!
(2) Financing, Financing, Financing: This is THE most
important step to take in determining whether or not you’re ready to buy a
home. Before you even log into Realtor.com, or my Facebook page at www.facebook.com/TriciaEbertRealtor, to look for a home, you MUST deal
with the financial aspect of your purchase FIRST.
Questions that need
to be answered include:
~ How much money
have you saved for a down payment? You don’t necessarily need 10% or
20% down. With an FHA loan, which is guaranteed by the federal government, you
can put down as little as 3.5% of the purchase price. Some credit unions offer 3% down financing also. However, the amount of
money you’ve saved for that down payment will have a direct impact on how much
house you can afford to buy.
~ How much money
do you have for closing costs? These fees can cost an additional 1.5% of the purchase price of the
house. For example, if you are buying a house for $500,000, you may have to come up with an additional $7500 for costs related to buying the house. These
costs include escrow fees (this is
to pay the company that holds your money until you’re ready to buy the house), title fees (this is to pay the company
that makes sure the seller can legally sell the house to you and insures it for
you), loan costs (charged by your
lender, such as BofA, Chase, Wells Fargo, etc.), inspection fees (paid to the home inspector who checks out the
house for you to tell you if it has any defects), appraisal fees (paid to the appraiser who makes sure the price
you’re paying for the house is in line with other prices in the area), etc.,
etc. Sometimes the seller will help pay for these costs, and sometimes they
won’t. You have to be able to pay them if necessary.
~ How good is your
credit? Your credit rating, referred to as your FICO score, will
determine what interest rate you will have to pay the bank to borrow the money
to buy your house. It’s in your best interest to pay your bills on time for at
least 6 months before applying for a mortgage. It’s also a good idea to pay off
or pay down whatever credit cards or loans you have before you apply. One
factor the bank will look at is your “debt-to-income ratio.” If you are
carrying too much debt compared to your current income, you will not be able to
get a loan.
So please, do NOT buy a new
car just before applying for a mortgage! And do NOT buy ANYTHING other than
groceries during the loan process when you are in escrow to buy a house. I have
heard horror stories from Realtors who had clients in escrow who went out and
bought a whole house full of new furniture just before closing escrow. The bank
saw all the debt they incurred (believe me, they will check your credit the day
before and the day of escrow closing). And guess who didn’t get their loan and
who didn’t buy a house?
So I repeat, do NOT
buy anything other than your normal groceries and gas for the car before and
during the escrow process. If you need to check your credit rating, you can get
your scores from the mortgage lender you go to when applying for a mortgage.
You can also get your scores for free at www.CreditSesame.com
or www.MyFICO.com. You can obtain a copy of
your credit report for free once a year at www.AnnualCreditReport.com.
I suggest you check your credit report and your FICO scores
before you even consider applying for a mortgage. If you want the lowest
interest rate possible on your mortgage, then have the best credit score
possible. The higher your score, the lower your interest rate will be. Your monthly mortgage payment will be lower
if you get a lower interest rate, so this is extremely important in determining
how much house you can afford to buy.
~ Have you met
with or spoken to a mortgage loan officer or loan broker to determine how much
house you can afford to buy? Before you look at houses or start working
with a Realtor, it’s important to know what price range you can afford. If you have no idea who to talk to, then ask
your Realtor. Most Realtors have mortgage people they work with
regularly, and they know who you can trust to get qualified for a loan. They
also know who to trust to get the loan funded for you so that escrow will close
and you will own the house you want. This is extremely important. Some loan
officers are very good at following through and getting all the paperwork in
order to fund your loan on time, and others are not. Please respect your Realtor’s opinion on who will do the best job for
you. They have years of experience and know what they’re talking about.
Also, if a Realtor requests that you get pre-approved by a direct lender (such
as BofA, Chase, Wells Fargo, etc.) rather than a mortgage broker who works with
many banks, please do so. Many real estate agents will not accept a
pre-approval letter from a mortgage broker when you submit your offer to buy a
house. They want to know one of the big banks has reviewed your financial
information and that they will give you a loan. This is to protect the seller.
If the seller accepts your offer, they want to know you are going to be able to
get a loan and complete the purchase of the house. Unfortunately, many agents
don’t trust mortgage brokers and so they require a pre-approval letter directly
from a bank.
Next week: Now that you have
your financing lined up, we’ll talk about where to find your dream home.
you next week!