Written by Carissa Abazia
Navigating the real estate market is tough. As a first-time homebuyer, it’s only natural to make missteps and ask dozens of questions.
With that in mind, I surveyed several industry professionals and asked them to share with me the common misconceptions first-time homebuyers have. So what do you need to know? Read on to find out.
Not meeting the lender first
A common mistake is that first-time homebuyers do not meet with a lender right away. Local is best so you can meet in person if needed. I believe a lot of people worry about ‘wasting’ the lender’s time, especially if they aren’t ready to buy immediately. I encounter this daily with buyers, mostly first-timers. I try and counsel clients to understand that the earlier they consult with their lender, or me, the better. Sometimes it takes a long time for people to qualify for a loan and that’s okay. Prospetive buyers can think of us almost like free financial advisors and can help buyers develop a plan to meet their goals.
Buying more house than you can afford
Buyers make the mistake of not taking account the costs that are not immediate. It’s important to talk to your lender about your financial health and be open about future goals. For example, do you plan on having children? Do you want to fix the roof sooner than later? Do you need AC or water heater? And so it goes. The mortgage is not the only cost (let’s not forget about other debts you have). Maybe you paid down your credit cards to qualify for the home loan; however, it may not be realistic to keep credit card balances at zero after the loan closes.
For buyers who will be financing their purchase, which is about half in my market, the first step they want to take is to look at homes. In fact, the best first step is to be preapproved for a mortgage. Then they are clear about what they can afford and how much wiggle room they will have for extra costs.
Don’t be afraid to ask questions
Most of us feel nervous about asking a “dumb” question. There are NO dumb questions when it comes to buying a home, especially a first home. It’s so much better to seek knowledge than feeling like you don’t understand what’s going on. Real estate agents and lenders welcome questions because we want our clients to feel confident and informed.
Asking questions about buying a home is one of the smartest things you can do for yourself.
Make sure you budget and plan for transitional costs
It’s smart to have a plan, whether it involves paying movers or saving for an extra rent check or selling furniture that won’t fit your new space, to avoid unnecessary financial headaches on top of such a big investment. You may have to cover both a new mortgage and previous rent for a month.
Do not go on a ‘shopping spree’ after (or right before) applying for a mortgage
Many buyers, after their offer has been accepted, go furniture shopping or buy that new car they’ve been eyeing. Do not spend money or charge your credit card during the loan process. It’s a huge mistake because it hurts your chances of getting a mortgage. Going on a shopping spree will create a new debt to income ratio if those purchases are financed, potentially causing your mortgage application to be denied. Moreover, even if you do not finance these purchases and pay cash, it will diminish your cash reserves, which may hurt your chances of covering the down payment, closing costs, prepaids and reserves.
The lesson: Unless you are Oprah Winfrey, it’s crucial to keep your finances as steady as possible during the underwriting process.
The Basics
As you get ready to start hunting for your first home, you may wonder what the process looks like from start to finish. Here is a quick snapshot so you have a better grasp on how things work.
A mortgage is a loan that enables you to cover the cost of a home. You pay back the loan over a set period of time. It’s essentially a huge IOU.
Total Monthly Payment = Principal (balance of loan) + Interest (cost to have a loan) + Property Taxes + Hazard Insurance = “PITI”
Two types of costs: “Prepaids” and “Closing Costs”
“Pre-paid items” are fees that you pay in advance and on an ongoing basis, such as homeowners’ insurance, interest, property taxes and in some cases mortgage insurance (MI). Some borrowers prefer to make these payments on a monthly basis. That is called an “impound” or “escrow” account.
“Closing costs” are the actual cost of doing business. These are your “hard costs” and are determined in part by the purchase price and/or your loan amount. They include lender fees, appraisal, credit report, title and escrow fees, recording fees as well as other miscellaneous fees.
Lenders use the “5 C’s system” to gauge a borrower’s creditworthiness or ability repay a loan
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Credit: Credit history and score between 400 and 850; Lenders evaluate if you have a good track record, pay your bills on time, and use credit wisely
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Conditions: Lenders want to know how you are going to use the money
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Collateral: The value of your collateral (i.e. cars, real estate, etc.) will be evaluated, and any existing debt secured by that collateral will be subtracted from the value
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Capacity: Lenders analyze your income and employment history to determine if you have the ability to repay your mortgage
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Capital: Capital represents the savings, investments, and other assets that can help repay the loan
Steps
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Preapproval – a very important step!
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Write Offers
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Loan Application
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File to Processing
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Disclosures sent
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File to Underwriting
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Gather Conditions
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Draw Final Docs
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Sign Docs
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Fund & Record
Documents to Gather
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Copy of Driver’s License
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For any property owned: mortgage statements, tax bill and insurance
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Paycheck stubs for last 30-day period
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Last two years of W2s and/or 1099s
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Last two years of federal tax returns (all schedules)
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Two months of complete asset statements (checking, savings, 401k, disability, pension, etc.)
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If you own 25% or more of a company, last two years of partnership/corporate tax returns (include K-1s and all worksheets)
The Do’s and Don’ts
Do’s:
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Notify your lender if you plan to receive gift funds
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Notify your lender of any employment changes
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Stay employed
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Make timely payments on all current debt obligations
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Keep your agent and lender involved in the process
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Respond to emails and document requests immediately
Don’ts:
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Close or open any accounts; don’t transfer funds between accounts
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Change jobs or quit
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Deposit large sums of monies outside of your payroll, etc.
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Make major purchases (i.e. new car)
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Change your legal name
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Advance any cash from credit cards
Happy House Hunting!
Thanks for reading!
Carissa Abazia
@CarissaMortgage