Your Financial Security Is In Your Hands
The days when lenders would hand out mortgage loans without verifying income are long gone, but that doesn’t mean a mortgage loan pre-approval equates to financial security. It’s important to go over your finances before buying a home to be absolutely sure that you can comfortably afford the house you’re looking at. If it seems tight now, there’s a good chance it will become suffocating later.
Contact me, John Conca; 530-306-3494, if you are searching for a home anywhere in El Dorado county, or if you are ready to sell your home. I’d be happy to discuss your options with you. You can find new Placerville listings here.
Let’s Look At 5 Ways to Protect Your Finances Before Buying a Home
A few months before starting your home search get copies of your credit report. Go over it with a fine-tooth comb and make sure the facts are correct and correct any inaccuracies you find. It can take 2-3 months to correct errors on credit reports, so do this before anything else.
Note: If you’ve been divorced then there’s a good chance that your ex-spouse is interwoven into your report. Any loans that began with both of you will still be on both of your credit reports until you contact the lender to remove one of you from the loan. The person keeping the responsibility of the loan in this instance may have to re-qualify for the loan on their own. If your ex spouse’s name or address appears on your credit report under any other instance, you should have that corrected.
2) Figure Out Your Down Payment
While there are a couple of ways to buy a home without a down payment, it makes things much easier on you if you have at least a 20% down payment. The more you have, the easier it will be to get a loan, the easier the payments will be for you, and the more credibility you’ll have with sellers. There are many reasons why it’s beneficial to get a down payment as well as creative ways for going about getting one listed in this post: 6 Reasons A Down Payment Is A Smart Idea. Don’t forget, you’ll need extra cash for closing costs, moving expenses and furnishing costs as well.
While this doesn’t apply to all cases, it’s been said that if you don’t have at least 20% down then you aren’t ready for a mortgage. It sounds like tough love, but this is about setting yourself up for success, not uncertainty or possible failure.
3) Get Pre-Approved
This is different from pre-qualification, which is just a quick review of your finances. This way you can make a serious, credible offer on a home where everyone involved is sure of where everyone stands. If you are not pre-approved and you make an offer, it could be easily turned down or worse; you may go into escrow and then get turned down for the loan and have to back out of escrow, possibly losing good-faith money and wasting the seller’s time. Pre-approval comes from the mortgage lender and is based on your income, debt, and credit history. This is why you will want to check your credit history months ahead of time and have a down payment ready; being prepared will get you the best rates possible.
Now that the lender has told you what they think you can afford, or what they’ll lend you, it’s time to take a conservative look at your finances. Take note of all of your expenses, debt, your income as well as possible home-owner expenses such as utility costs, homeowner’s insurance, taxes, homeowner’s association fees, home repairs.
Don’t forget lifestyle expenses; while a lot of people have to live tighter during some stages of life, are you really willing to give up restaurant dining, vacations, monthly clothes shopping and other luxuries? Be honest with yourself and figure out how much money you need each month, how much money you want each month, and figure out what you will be happy living with (or without) in your new home. It’s suggested not to spend more than 28% of your gross income on a mortgage (including interest, insurance, and taxes) in order to live comfortably. There is some wiggle room there, but only you can know for certain what that is.
This part is crucial so you don’t find yourself overspending on everyday luxuries and then not able to afford your mortgage payment that month, or falling behind on other bills just to make the mortgage payment. Lenders won’t take this into account for you, but they will expect you to make the payment month after month and aren’t too warm and fuzzy if you can’t.
5) Plan To Sit Tight And Buy Those Points At Closing
If you’re planning to stay in the house you are purchasing for more than 3-5 years then buy the points at closing to lower your interest rate. A point is 1% of the loan amount, so on a $100,000 mortgage 1 point is $1000. Points can be purchased in increments down to an eight of a point and there is usually a cap to how many points you can buy.
You’ll want to make sure you live in the house long enough to at least break even. For instance, if you have a $200,000 mortgage and buy 2 points, that’s $4000 at closing. If buying the points lowers your payment $250 a month then you’ll need to stay put for 16 months to break even (250 x 16 = 4000), then after the 16 months are over you’ll start making money. Points may be tax-deductible as well.
One of the perks to having a good realtor is knowing you can call anytime for anything. Just because you are in the credit-report-correcting stage or the finding-a-down-payment stage doesn’t mean you’re not ready to talk about buying a home.
Through my 15 years of experience serving home buyers and sellers in El Dorado County I have a lot of advice that may be useful to you at any stage and I can work with you no matter your situation. Call me, John Conca, at 530-306-3494 just to touch bases and let me know where you’re at and what you may need. I’d be happy to help any way I can.
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