Buying a home? First thing is first!
Home sales are rising, and for good reason. Mortgage rates remain near 4 percent, rents are rising nationwide, and home values have climbed month-after-month.
There’s no rush to buy a home, but the longer that you wait, the more your home may cost you. By 2016, home affordability is expected to be worse.
If you plan to buy a home this year, then, be sure to do your homework and don’t make any assumptions.
1. Talk to a mortgage lender before shopping for a home.
Some people think that they should contact a real estate agent first but they will be the first to tell you that you must get pre-approved before you look at houses and begin to work with them. It is easy to get caught up in home shopping excitement. A few clicks and taps, and suddenly, you’re “touring” homes on Zillow, Trulia and Realtor.com for the homes you may want to look at.
The reality, though, is that you can’t know with certainty whether the homes you’re searching for are the homes you can get approved for.
This is why real estate agents will typically require you to speak with a lender before they’ll start showing you homes — they want to make sure you can buy the homes you want to see and know what your budget is.
There is a big advantage to getting pre-approved prior to your home search — you’ll know for certain how much home you can afford without wasting too much time.
Understanding how much home you can afford is different from knowing how much home you can be qualified to purchase.
A lender may tell you that, based on your income, assets, and credit, you can qualify to purchase a home for, say, $300,000. However, you want to always be sure you know what that payment will be and if you are comfortable with that.
What could be worse than finding your dream home, only to discover that you can’t get approved for it?
With a mortgage pre-approval, you can work with your real estate agent and lender closely to know which homes you can buy.
2. Budget for property taxes and home owners insurance
In the excitement of shopping for a home, buyers sometimes find an online mortgage calculator, punch in a few numbers, and boom– think they’ve determined what it will cost to live in a home monthly.
The unfortunate truth is that mortgage calculators often tell just part of the story and are often inaccurate.
You need to know more than the principal + interest payment that comes from knowing your purchase price, down payment amount, and mortgage rates. You need to know what taxes and insurance will cost you, too.
Your complete payment is known as your PITI — principal, interest, taxes, and insurance — and PITI is what you pay to your lender monthly.
For each property, taxes and insurance will vary. Be sure to have good estimates of what your costs will be.
I can help you with these figures and it’s important to know where the taxes are higher depending on what the county tax rate may be for your area of choice. Prince Georges County, and Baltimore County are higher than say Anne Arundel, or Calvert Counties.
3. Know your mortgage credit score
Your mortgage credit scores help determine your ultimate interest rate, so it’s important to know your scores.
If you prefer to do you own due diligence with respect to credit scores, there are publicly available services such as annualcreditreport.com which can help you access your scores. In general, scores of 740 or better are considered excellent with most lenders requiring a minimum 620 in order to get approved.
You may not want to pay for your credit scores via a third-party service, though, which means you’ll need to find another means to access your score.
Thankfully, if you’ve asked a lender to pre-approve your loan, you can get access to your scores automatically — all you have to do is ask.
As a courtesy, the majority of mortgage lenders will to share your credit report and credit scores with you at no costs and, if asked, will offer advice on how to get a higher score.
4. Budget for closing costs
Of course, you’ll also want to budget for closing costs. These costs, too, can be uncovered during the mortgage pre-approval process, which is helpful.
Note that closing costs vary by state, and they sometimes add up quickly.
Origination fees, attorney fees, appraisal fees, title insurance, appraisal, transfer taxes and other charges can place a sizeable hurdle between you and your new home.
Many buyers understand that they’re required to bring down payment to closing. What many forget is that closing costs must be paid in addition to the down payment. The good news is that the sellers can contribute to these costs and lenders can offer credits as well.
5. Pay for a home inspection
Lastly, don’t ever buy a home without a home inspection. This is critical to the process.
Home inspections can be expensive. For this reason, buyers some times waive their right to an inspection. Real estate agents will tell you, that inspections are worth what they cost.
Home inspections are meant to uncover structural issues with a home and include an examination of plumbing and electric, as well as roofing, HVAC, and more.
Even a “clean” inspection is worth what you pay. You’ll have peace of mind that your home-to-be is in tip-top shape.
On the other hand, though, should your inspection turn up problems, you’ll have time to address those issues and can often “walk away” from the purchase before it becomes a money pit.
Home inspections should always be performed — even on new construction.