If you’re looking for your dream home the first step that you must take is to speak to a mortgage banker or broker. There are very few consumers out there that are lucky enough to buy for cash. Even if you have the cash, your accountant may advise you to get a mortgage to use the interest as a tax advantage. However, for the average buyer it’s important to know how much you can afford to pay when looking for a house.
When you get a Pre-Approval it doesn’t lock you into anything. It is a rough idea of what the bank will advance you based on your down payment, your credit history, and your debt to income ratio. You may think that you and your spouse have great jobs with great salaries, but the banks will examine your debts with a fine tooth comb. Are you paying car loans, student loans, credit card debt, tuition or day care, medical bills, and insurance for cars, health, life, etc. and IRS taxes. These are large chunks that come out of your paychecks after taxes. They will then figure out how much is left over to pay for a mortgage, real estate taxes, and home owner’s insurance. Too many couples are often shocked to discover that they didn’t have the buying power for the kind of house they want.
I recently had a young couple with absolutely no credit history. They had good jobs and paid all their bills with checks or a debit card. They had no outstanding debt. They also had a 25% liquid down payment. The mortgage companies refused to offer them a mortgage. This was after they found the house they wanted to buy. The broker told them to apply for a few of the major credit cards and to charge everything on them from groceries to their car lease and to pay the bills every month before the due date. He told them to wait six months before applying for a mortgage. Needless to say they rented a house and were quite disappointed that the rent money couldn’t go towards paying down a mortgage.
Another realtor recently told me that his client had a $500,000 down payment for a $2 million home. He was turned down for a mortgage because of a sloppy payment history which resulted in a low credit score. His wealthy client walked away very despondent.
Doing your homework beforehand can save aggravation. Before you apply anywhere get your own credit report. Check it thoroughly and see if you find any mistakes. If you do, you should contact the credit agencies and try to eliminate the errors. This will raise your credit score when the time comes.
The banks are tight with their money these days. They are offering low interest rates, but, those low rates usually are offered to those with the higher credit scores.
It’s also important to know that the banks are requiring you to put three months of taxes in escrow. This is a large chunk of money, in addition to the other closing costs. You also need to set aside money for the actual move to your new home.
When you get all the paperwork together it will be easier for you to look for a home in a price range that you can afford. There are some banks that will allow a co-signer for a mortgage when the numbers don’t look too good for the buyer. Don’t rely on the fact that your parents will be happy to co-sign for you. I have seen too many disappointed buyer’s when they couldn’t get their parents to commit. Another step in the process is to get a gift from family members for the difference you need in order to buy the house. This gift will be recorded with your mortgage.
These suggestions are meant to help you ease the process of buying your dream home and help you look for that home secure in the knowledge that you can afford it.
By Martha (Malkie) Aaron
