You dream of that amazing home with quartz countertops, a blazing gas fireplace and a master bathroom to luxuriate in after a long day. But months before you buy a home or even start looking for one, there are some smart things you should be doing to make sure everything goes efficiently and without a hitch.
“Unless you’re saving to purchase a home for all cash, one of the most important things someone can do is ensure that their credit and credit score is at its best,” says Aisha Thomas, principal and real estate broker of The Thomas Agency, LLC, in Detroit and Atlanta. “Also, it is important for prospective buyers to get educated about the process.”
Months before looking into buying a house, Thomas suggests these five steps to get your finances in order:
- Pull your credit report from all three reporting agencies.
- Check for errors
- Pay off balances or at least get your debt ratio as low as you can.
- Increase your savings for down payment.
- Take advantage of first time home buyer classes because some offer down payment assistance. Even if someone doesn’t qualify for down payment assistance, having an understanding of the process prior to speaking to a real estate agent or lender will make the experience better for everyone involved.
How can someone check their credit score?
Thomas explains that someone can check their credit score by ordering their reports and scores from one of the three credit reporting agencies: Equifax, TransUnion and Experian. There are also sites such as www.freeannualcreditreport.com or http://www.annualcreditreport.com that allow you to get your report for free but it does not include the actual score.
What information can a lender give someone even if they aren’t going to buy a home for a while?
Lenders can help a first time home buyer assess the status of their credit in regard to underwriting requirements and what a buyer can get approved for, Thomas says. This information can assist a buyer in determining what they can afford to pay for a home. This step is a prerequisite to actually working with a realtor and looking at properties.
Lenders can also educate the client on the type of mortgage products available. It’s also to a home buyer’s advantage to shop lenders and let them compete for your business.
It does not hurt a buyer’s credit if their credit is being pulled within a short time span by the same type of creditor because it reflects that a person is shopping for a loan.
What recent client have you had that took some time to get together financially?
Thomas recently had an international investor with a tenant-occupied property. The tenant wanted to purchase the home she was renting when she found it was being listed on the market. The tenant had a job, but it was with an automotive plant that had semi-annual layoffs. Plus, her savings were low.
“I suggested all of the aforementioned steps. She completed the first-time homebuyer classes and was able to qualify for a $5,000 grant for down payment,” she states.
The tenant also qualified for an FHA-loan which only requires 3% down. She also paid off some of her smaller debts. By the time the seller listed the property, she was able to make an offer and purchased the home.
What are some of the things that potential home buyers should take into consideration when deciding how much house they can afford?
Potential home buyers should not buy based on what they are pre-approved for, she explains. They should buy based on what they can afford at a micro and macro level.
Most people, not just low-income individuals, are spending 50% or more of their monthly adjusted income for housing. It is suggested that housing costs should not exceed 30% of monthly income. The home buyer should also consider their other financial responsibilities and their lifestyle.
How can maximizing their credit score help them in the long run when buying a house?
Maximizing their credit score can ensure that the home buyer qualifies for the lowest interest rate and possibly being approved for higher loan amount due their credit history.
What does “house poor” mean and have you seen people end up this way after buying a way-too expensive home?
“A large percentage of the country is technically house poor due to spending more than 50% of their income on housing,” Thomas adds.
She had one client who took four years to furnish the home because of the expensive furniture but also because so much of the family’s income went to their mortgage payment. It limits how fast they could even decorate their home to their liking.
What is your best advice to home buyers when they are figuring out how much of a house they can afford?
“Best advice to home buyers would be to purchase for where you are today, even if you know your income may increase, you can always upgrade your home,” she says. “Try your best to stick to 30% or less of your income toward housing costs.”
How important is it to also build a housing emergency fund for when you finally buy a house?
“It is imperative to have an emergency fund in addition to saving for a down payment. Even new construction homes can have an issue that may not be covered under a warranty,” Thomas explains.
In older properties, it’s not if but when will something break or need repairs. When someone becomes a homeowner, you also have to be prepared for the non-emergency costs that may not have been present prior to homeownership such as landscaping, higher utility bills and property tax increases.