The Home Buying Process - Here Are Six Basic Steps You Should Take Before Starting
Before starting the home buying process there’s some basic steps we recommend to help you get the best rates and deals.
Applying for a home loan is important. Most Realtor's won't show you homes without a letter from a creditor showing how large a home loan you will qualify for. But ideally, you should work on your home buying project long before you actually apply for a loan and start the process of actually buying a home.
According to a survey taken by the National Association of Realtors most buyers take eight weeks to actually shop for and purchase a home. So don’t panic and think it will take months and months to find a home. It's more important for you to spend some time on your financial prep work before to ensure the best home buying experience and before you apply for a home loan.
Find Out About Any Home Buying Incentives Available To You
Tom Johnston a local Phoenix realtor advises people to start to talk to a local Realtor as much as six months ahead of time. Tom says, “Most realtors have a good handle on the programs available, and there are a lot of cool programs for the first time buyer”.
For example Johnston says some of the local city governments will offer interest rate or down payment subsidies to buyers that agree to buy a home in certain areas.
In fact, a good friend of mine purchased a home in Peoria, AZ because the city offered her a grant of $15,000 for being a first time home buyer! That translated to a lot less money per month in house payments.
Also governments or employers may subsidize teachers, fire fighters, police officers, nurses and other service professionals who have difficulty affording a home in high-priced communities. Many hospitals that are trying to recruit and retain nurses, might offer a down payment loan, which is forgiven and turned into a grant if that nurse remains employed at the hospital for several years.
So before you start the home buying process, contact your local chamber of commerce’s or talk to a Realtor to see if there are any incentives in the various cities around you, then concentrate on homes in those areas.
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Get Your Credit In Shape: Order Your Credit Reports
Before even thinking about home buying, everyone should order their credit report (from all 3 bureaus). It is imperative that you do this before you apply for a mortgage loan and begin searching for a home. You will want to check the reports for errors now.
It is reported that 79% of credit reports contain errors and it is your responsibility to find and remove these - not the company that put the erroneous ding on your credit in the first place.
If you want to see all three reports you can order them here: Credit.com
We also recommend that you protect yourself against Identity Theft. According to the FBI this is the fastest growing crime worldwide. If you know anyone who has had their credit stolen then you know the horrible time you are in for if this happens to you.
Pay Down Your Credit Cards But DO NOT Cancel Any Cards!
While paying down your credit card balances will improve your financial picture and score, this is not the time to close credit accounts because reducing the amount of credit available to you can actually lower your credit score.
Also, when applying for a home loan lenders look at longevity with a creditor as a sign of stability. In other words if you have the same cards for 10 years vs. all new credit in the last 6 months.
Jumping from credit card to credit card does not show the banks that you know how to handle "long term debt" responsibly. Don’t assume you should just get rid of your credit cards because you think you have too many. It will improve your credit picture however to pay the balances down.
Get Your Financial Paperwork Organized
Before you start the home buying process and apply for a loan collect all the financial documents that a lender will need when you submit your application. These documents will also help you put together a realistic budget and figure out your monthly payments for mortgage principal and interest, plus property taxes and insurance
Documents To Gather When Buying A Home:
- Tax returns for last two years
- W-2 income statements
- Two most recent pay stubs
- Most recent credit card statement
- Most recent bank and investment account statement
- Divorce decrees and child support statement
- Your budget
Create A Budget
There is a difference between the maximum payment a borrower can qualify for, which can be surprisingly high in some cases – and the amount you can comfortably afford. Before buying a home and applying for a home loan, figure out how much you know you can afford comfortably each month.
Home loan lenders will typically allow you 50% of your income towards a home. But do you really want to spend that much in payments? Are you leaving something for savings? What if the air conditioner goes out or your car breaks down. Budget yourself ahead of time so that you don't purchase "too much house." A good, reasonable budget is as much for your benefit as for the lender.
If you haven’t ever put together a budget we’ve provided you with a couple of simple worksheets here:
Simple 1-Month Budget Planner 12-Month Budget Planner
Don’t be intimidated, it’s actually easier than you think to create a budget and when you’re looking into home buying, it’s more important than ever to know exactly how much you’re spending each month and what you NEED vs. what you WANT.
Reference: National Association of Realtors
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Know Your Credit Score BEFORE You Start Shopping For A Mortgage Lender!