Stated-Income

How Much do Student Loans Affect Buying a House?

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Lenders put a lot of focus on your debt ratio. They want to know that you can afford the new mortgage beyond a reasonable doubt. Without proper proof, you run the risk of default, which can hurt a lender. Even if you’ve kept yourself out of credit card debt, you may still have another debt that can damage your chances of loan approval – student loans.

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This isn’t to say that anyone with student loans cannot get a mortgage, because they can. What it depends on is your debt ratio, not only now, but in the future too. This means that even if you have deferred student loans, it will still affect your loan approval.

Keep reading to see what you can expect if you have student loans.

Using Your Student Loan Payment

If you have student loan debt that you currently pay, chances are your credit report shows the same payment that you make each month. This is what lenders will use to determine your debt ratio. If you aren’t making payments right now, though, things can get a little trickier. Lenders can’t just overlook the impending debt, because you’ll have to pay it someday. Instead, they must include some type of payment when they determine your debt ratio.

Figuring Out Your Payment

If you aren’t making payments right now, you’ll need to know what payment lenders will use to qualify you for a loan. What you should know is that the more proof that you provide of your upcoming payment, the better your chances of approval.

If a lender can’t find sufficient proof of your upcoming payment, they must use 1% of the outstanding balance. That could amount to a very large payment that would probably throw your debt ratio way off where it needs to be. On a $20,000 loan, you’d have a payment of $2,000 used in the calculation. Unless you make a lot of money every month, this wouldn’t leave much room for a new mortgage payment.

If you are in a formal deferment plan, show the lender the paperwork for this plan. It should say somewhere in there how much you are expected to pay once the deferment period ends. If your paperwork doesn’t specify a payment, you can contact your servicing lender to get official proof of the upcoming payment. If you are in a loan forgiveness plan, make sure you have proper proof of when the balance will get forgiven, so the lender can take that into consideration as well.

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If you don’t have paperwork showing an exact payment, but you have proof that the term will be 20 years when you come out of deferment, the lender can do the calculations. They will determine your payment based on the interest rate you have and a 20-year term. This usually comes out much better than the 1% of the balance calculation.

How High can Your Debts Be?

Just how much debt you can have compared to your gross monthly income depends on the chosen loan program. For instance, conforming loans have the toughest requirements. You must have a total debt ratio less than or equal to 36% to qualify. You may find some lenders willing to go a little higher than that if you have compensating factors, though.

FHA and USDA loans allow a maximum DTI of 41% on the back-end and VA loans allow as much as a 43% back-end ratio. The back-end ratio is the total of all of your debts including the new mortgage. It includes things like your minimum credit card payments, installment loan payments, student loan payments, and personal loan payments.

The lower you can get your back-end DTI, the better your chances of loan approval become. But, as we said above, you may be able to get by with a higher DTI if you have compensating factors.

What are Compensating Factors?

Lenders look at the big picture when determining if you qualify for a loan. They don’t look just at your credit score or just at your debt ratio and either approve or deny your loan request. Instead, they look at everything. For example, if you have a high credit score, but also have a high DTI, they still may approve you because of your high credit score. If you had a low credit score and a high DTI, your chances of approval are much smaller.

Aside from credit scores and DTIs, lenders also look at your stability in other areas of your life. Take employment for example. If you have a steady employment history, lenders may use that as a compensating factor for a slightly elevated DTI. If you have steadily increasing income, that could also serve as a compensating factor as it proves that you continually improve your income, which lowers your DTI.

Of course, lenders look at your credit score and DTI the most, but they aren’t the only deciding factors. Make all aspects of your loan application look as attractive as possible in order to get the loan approval that you need. If you do have student loans, make sure that you get as much proof as possible of their impending payment so that you can get qualified for the mortgage you need.

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Can a Seller Back out of a Contingent Offer?

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As the seller of a home, you have very few ways to back out of a signed, sealed, and delivered purchase contract. Once both parties sign the contract, it becomes legally binding. While buyers often have contingencies that give them a way out of the sale under certain circumstances, sellers don’t have that same luxury.

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Does this mean that sellers can get out of a contract? There are ways, you just have to know how to go about them.

The One Contingency That Favors Sellers

There is one contingency that buyers can put in place that actually favors the seller. It’s the financing contingency. Buyers that need mortgage financing to buy the home make the purchase contingent on their ability to secure financing. Typically, buyers get 30 days to get a ‘clear to close’ on their mortgage. If they can’t secure the ‘clear to close’ in that time, they can back out of the contract without losing their earnest money.

The coin flips both ways, though. Sometimes a buyer may not want to back out of the contract, especially if they know they are close to getting a clear approval from their mortgage company. The seller, on the other hand, may want to cancel the deal, though. This happens when a seller knows there are other potential buyers waiting in the wings or when the seller just gets too nervous to wait for your financing. In this case, the seller could cancel the contract because of a lack of financing and move onto another buyer willing to bid on the home.

The Inspection Contingency May Help Too

One other contingency that may help sellers, but it’s not always the case, is the inspection contingency. This contingency gives buyers a way out of the contract if the inspector finds major things wrong with the home. Actually, the buyer has two choices – walk away from the sale or ask the seller to fix the issues. Typically, sellers don’t want to put any more money into the home, which could leave them with the ability to walk away from the sale.

While sellers don’t want to lose a bid on a home, the inspection contingency could be helpful again, if there are bidders waiting in the wings. Many buyers won’t bid on a home that is ‘under contract,’ but will still watch closely to see if it falls through.

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If the contract does end, new bidders can compete for the home. Of course, there is always the risk that the new bidders will ask for the same issues that the inspector found to be fixed or ask for a credit for the cost of the repairs, assuming it will pass an appraisal for financing purposes.

Paying to Back out of a Contract

If you don’t have an ‘easy way out’ like discussed above, you may face financial consequences of backing out of a contract as the seller. This doesn’t mean that you can’t back out; you just need to be aware of what it might cost you.

First, you’ll probably have to return the earnest money, as it’s only fair. You may also have to cover any damages the buyer incurs, such as any costs the buyer paid for the inspection or appraisal; any costs the buyer incurs to find temporary housing; any legal costs the buyer incurs.

The Seller Contingencies

In some cases, sellers do put their own contingencies on a purchase contract. While it’s not common, there are ways you can protect yourself if your attorney thinks it’s a good idea. A few of the most common seller contingencies include:

  • Inability to get signatures from other family members that have a stake in the home (common with inherited homes)
  • The seller’s inability to find another place to live
  • Unique circumstances, such as health concerns, that cause the seller to be unable to follow through on the sale

It’s best if you talk to an attorney about your ability to back out of a sale. In general, the buyer has the say in backing out while the seller must adhere to the contract or face financial consequences. Your attorney may have ways that you can get out of the contract though, if you find that it is necessary to do so.

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What to Do if You’re Rejected for a Home Loan

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Applying for and being rejected for a home loan isn’t a good feeling, but it doesn’t have to be the end of the road for your potential home-ownership. If you take the right steps, you can try again in the near future.

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Follow these steps if you find yourself in this situation.

Get Information

If a bank or lender turns you down for a loan, they have to give you a reason. If you don’t understand the reason provided, ask for more specifics. If it has anything to do with your credit, they have to send you a letter stating the reasons for the denial. If it was to do with anything besides your credit, most loan officers will happily walk you through the reasons that you were denied.

Once you have the reasons, it’s time to take action. You are armed with information on what is wrong with your application, now you can take the steps to fix those issues.

Fix Your Credit for Your Home Loan Application

Did your loan officer tell you that your credit was the issue? Following are the most common credit issues:

  • Low credit score – If your credit score is too low, it’s time to pull your credit report and found out why. The letter your lender sends you will explain how you can receive a free copy of your credit report because you were turned down for a home loan due to a credit issue. Get a copy of your report and look for the reason for the low credit score. Was it late payments? Did you charge too much on your credit cards? Do you have too many inquiries?
  • Not enough credit – If you only have a few trade lines and they aren’t currently active, a lender may not be able to make a lending decision. You’ll need to build your credit up by applying for a few credit cards and using them. Don’t take this as permission to go out and go on a spending spree, though. Instead, charge what you normally purchase and pay cash for, then pay the bill off in full each month. This will establish good spending patterns and help you build up your credit.
  • Too many inquiries – Inquiries are a red flag for lenders because they could indicate that you have new credit out there that hasn’t reported yet. You may just have to wait it out a few months to prove that you don’t have any new credit lines (if you don’t) or let the new credit lines report on your credit report for the lender to get an accurate credit score and debt ratio calculation.
  • Negative economic events – If you recently had a bankruptcy or foreclosure, you may not have let enough time pass. Each loan program has a specific waiting period. Ask the lender how long you need to wait. In the meantime, keep improving your credit score to enhance your chances of approval the next time you apply.

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Deal With Low Income

If the lender decided you don’t make enough money, they could turn down your application. While you might think there’s no way to fix this issue, there are a few simple ways.

  • Take a side gig – Do you have a skill that you could turn into a side job? Whether you offer physical services, such as electrician work, plumbing, or painting or you do something on the internet, such as writing, crafting, or a virtual assistant, there are many ways to make money on the side. You’ll have to have the job for at least 2 years before you can use the income for qualification purposes. If that’s too long, you can use the extra money to pay down your debts and lower your debt ratio to help your chances of approval sooner.
  • Get a cosigner – If you have a willing cosigner that has good credit, they can help you get approved for a home loan. Make sure it’s someone that is willing to take the obligation of paying the mortgage should you stop paying it. This is a large risk on the cosigner’s part, so make sure there is a clear understanding between both of you.

Deal With Your Debts

Did the lender tell you that you are straddled with too many debts? It’s time to work on them before you apply for another mortgage.

  • Pay the debts down – It’s time to set up a strict budget to get your debts paid down. If you don’t have extra money lying around, take a second job or side gig to boost your income. Then use that extra money to pay your debts down.
  • Apply for a lesser loan amount – If it was the housing ratio that was the issue, it might be time to look for a less expensive home. If your credit score was fine and your income is stable, consider a lower sales price, which means a lower monthly payment.

Increase Your Down Payment on the Home Loan

Sometimes it’s just about the amount of collateral you give the lender. If you borrow a large percentage of the sales price, the lender may see it as too high of a risk. Increasing your down payment can minimize that risk. This could take time though, since you’ll have to save money. Using some of the above strategies, such as paying down your debt or taking on extra work can help you save money faster. In some cases, you may even be able to secure gift money for the down payment from family or your employer. Most loan programs allow the use of gift funds to help boost the equity you have in the home and the collateral the bank has to rely on if you default.

Getting turned down for a home loan isn’t fun, but there are ways to overcome it. Use these tips to improve your chances of approval and get the loan that you want to buy your next home.

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Do You Get Instant Equity When Buying a Distressed Property?

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Buying a distressed property can save you a lot of money. Foreclosures and short sales are the most common types of distressed homes available. The term distressed makes them seem as if they are run down. They don’t have to be, though. In fact, they may be in great condition, giving you instant equity in the home.

How Does Instant Equity Work?

Usually, when a home sells as a foreclosure or short sale, you pay less than the home is worth. In these cases, the bank is just interested in making their money back that they lost on the loan. The bank will sell the home for around the amount owed. This may be significantly less than the value of the home. The difference between what you pay and the value of the home is your equity.

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Some buyers turn around and sell the home right away. They make an instant profit on their investment because they can sell the home for more money. Others keep the home and do work to it. Their hope is that they will make even more on the sale of the home. Yet some buyers keep the property and rent it out.

What Type of Distressed Property Can You Buy?

Short sales are among the most common distressed properties. They are homes that the owner is upside down on the home. The owner wants to sell the home, but there isn’t enough value in the home to pay off the loan. Their lender agreed to accept the lower amount for the home. No seller can offer this agreement without getting lender approval first. In many cases, the home is in fine condition, it was just a casualty of a declining market.

Foreclosures are another common distressed property. In this case, the owner could not keep up with his mortgage payments. The home is no longer owned by the homeowner. The bank is the new owner. The bank now wants to get rid of the home. Oftentimes, these homes are in poor condition, but not always. Some homeowners take their frustration at losing their home out on it by causing damage or neglecting to take care of it.

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Pre-foreclosure sales are less common, but still exist. Owners of these homes are 90-days past due on their mortgage. The bank has likely started foreclosure proceedings, but they have not gone completely through yet. Getting a good deal on this home is likely and there is usually less competition for the home since fewer people know about it.

Creating Equity in a Distressed Property

Even if you do not get instant equity in a distressed property purchase, it doesn’t mean you can’t make it. If you buy a home that needs extensive work, chances are the value will increase after your work is done. Before you start making changes, consult with a professional. Find out which renovations will give you the greatest return on your investment. Don’t make the mistake of assuming every renovation will give you a dollar for dollar return on your investment. Many changes don’t impact the value much at all.

Talk to an appraiser or real estate professional. Let them tell you what changes will help you earn the equity you want. Even though it might not be instant equity, you’ll receive it soon enough after the changes are made.

Buying a distressed property can result in quite a profit right away or shortly down the road. You’ll have to do your homework regarding the right properties to buy, though. Not every property will give you a great return on your investment. Research the home itself as well as the surrounding area so you know what to expect from the investment.

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What Should You Ask Your Realtor When Buying Your First Home?

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Buying your first home is scary and exciting all at the same time. How do you know you are making the right choice? While no one can tell you for sure if the home is right for you, your realtor can definitely serve as a valuable resource during the process.

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Below we’ve compiled the top questions you should ask your real estate professional before you buy your first home.

How long has the home been listed for sale?

The longer a home is listed for sale, the higher the chance that there is something wrong with it. Of course, it could be that the market is just slow at the time, but you should know the true reason. Ask the realtor why they think it’s been on the market for so long. Realtors usually have a good idea of what is going on in any given area.

What is the fair market value of the home?

The fair market value of the home helps you avoid paying too much for the home. But it also helps you get the financing you need. Lenders will base your loan amount on the appraised value. If a real estate professional thinks the home is overpriced, he/she will tell you. Otherwise, you risk your financing falling through and the home not selling.

How many people owned the property?

It’s always a good idea to know how many people owned the property. It will give you a good idea of its character and condition. If the same owners lived there for many years, chances are that it’s a decent home that was kept in good condition. If, on the other hand, there were many different owners, you may want to dig a little deeper to find out why no one ever really stayed in the home for long.

What are the taxes and how much have they increased/decreased?

The current taxes play a role in the home’s affordability. But you also want to know the pattern of the real estate taxes. Have they increased significantly lately? If so, you may want to find out why. Is there an issue in the area that you should be aware of? If they decreased, did property values drop recently? These answers can all help you make the right decision.

Why is the seller moving?

Oftentimes, the sellers are moving due to a job relocation or they are downsizing. It doesn’t hurt to ask, though. There may be an issue in the area or even with the home that is motivating the seller to move. Knowing their reason for moving also helps you understand how quickly they will want to close on the purchase. If you have a home to sell yourself, you may want a little more time to close on the purchase, so you’ll need to know the seller’s motivation.

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What items are staying in the home?

When the seller writes up the listing for the home, they must note which items are staying and which are going with them. Ask specifically about any appliances and window treatments that you like and want to stay with the home. If the seller didn’t note that they would stay, you can include it in your negotiations when you bid on the home.

How many homes have sold in the area recently?

If there have been a large number of sales recently, you may want to see if something negative is going on in the area. If there isn’t any negative going on, at the very least you’ll want to know how much those homes sold for as they will likely serve as the comparable sales for your potential home’s value.

What are the schools like?

A licensed real estate agent that works in the area should know what the schools in the area are like. You can pull up the school’s report card online, but hearing from someone in person what they think of the school district is often worth more than what you can read online.

Is there a homeowner’s association?

Even some single-family home developments have a homeowner’s association. If there is one, you’ll need to know the bylaws that the association requires so you know what you can and cannot do to the home and the property. You’ll also want to know the cost of the association fees to make sure they are affordable.

These are just a sampling of the questions you should ask a realtor when buying your first home. Use these questions as a starting point to some great conversation about the home and the area. Finding the right real estate professional can be the trick to making a solid purchase.

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Can you Buy a Home Without Proof of Income?

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Signing a contract

If your income is rather sporadic or you don’t have paystubs/W-2s to prove your income, it may be hard to get a mortgage. Prior to the housing crisis, lenders were very lenient with who they lent money to for a mortgage. Today, it’s a different story. The housing crisis killed the idea of accepting any type of mortgage without proof of how you will pay for it.

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It all comes down to the Qualified Mortgage and Ability to Repay rules. The Qualified Mortgage Act requires that lenders make sure applicants meet certain requirements before they can take out a loan. The rules are strict, which means fewer borrowers will qualify. In exchange, however, lenders are protected from lawsuits should a borrower default on their loan and lose their home.

Not all lenders follow the Qualified Mortgage rules, though. They choose to take a chance and allow less stringent guidelines. However, no matter what a lender decides, they have to follow the Ability to Repay Rules. Basically, this means the lender can prove beyond a reasonable doubt that you can afford the loan. In other words, they need proof of your income.

Don’t worry, though, there are ways around it. You don’t have to be the paystub and W-2 employee to get a mortgage. There are other ways you can prove your income and still get a loan.

Use Your Tax Returns

If you are self-employed, lenders will need to see your tax returns. They’ll usually ask for two years’ worth of tax returns. This allows them to see your income over that time and take an average. It also allows them to see what expenses you write off, as they will take those expenses right off your income as well.

Your expenses are one area that your tax returns could hurt you. Even though it’s perfectly legal to write off certain expenses to lower your tax liability when you own a business, it could hurt you when you apply for a mortgage. Lenders are required to use your net income reported on your tax returns, not the gross income you claim. It’s to your advantage to hold off on writing off those expenses in the year or two before you know you will apply for a mortgage.

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Use Your Bank Statements

If your tax returns won’t yield the greatest results when you apply for a mortgage, consider using your bank statements as proof of income. This works well if you are self-employed or even if you work for someone but are paid commission or bonuses.

Your bank statements need to show consistent deposits in order for the lender to use the income as you state it. Regular deposits at the same time each week, every other week, or month will show the lender the consistency of your income. Lenders often use this money at the value of the deposits unless there is a reason to deduct unreimbursed expenses.

You’ll Need Compensating Factors

No matter which category you fall into, you’ll need to show the lender that you have compensating factors. For them to take your loan at face value without standard proof of your income is a big risk for them. In order to offset this risk, they need to know that you are a financially sound risk. You can prove this by:

  • High credit score – The higher your credit score, the financial responsibility you show the lender. Try increasing your score as much as possible during the time leading up to your mortgage application. The lower your credit card balances, and the more timely your payments, the better your score will be.
  • Low debt ratio – The lower your debt ratio, the lower risk you pose to a lender. If a lender is willing to take your alternative form of income, they want to know that you are not overextended on your debts. Staying below the program maximums will help your chances of approval.
  • Stable income – It’s hard to have stable income when you work for yourself or on commission, but making it as stable as possible is important. However, there are ways to prove stability even before you started your own business. The more experience you have in the industry you open your business in, the more reassurance it gives the lender that you are a good risk.

Proof of income is a vital component of the approval process for a loan, but there are ways around the ‘normal practices.’ You’ll need to find a subprime or alternative lender that is willing to think outside of the box, though. Your big box banks are going to have the stricter guidelines when it comes to income. It’s the smaller banks that have the ability to make their own rules because they keep the loans that will suit you best in this case.

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Why It’s a Big Mistake to Skip the Home Inspection

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Mortgage companies require many things when you get a mortgage, but one thing they don’t require is the home inspection. This part of the process is optional; however, it’s not something you should risk. The inspection is something you’ll want to have done for your own protection. If you don’t pay for one, you run several risks, many of which are financial.

Lose Your Escrow Deposit Without a Home Inspection

One protection of the home inspection is that you won’t lose your escrow deposit assuming you have the right contingency on your contract. Your lawyer should help you put the right contingencies into place. This particular one lets you back out of the home purchase if the inspection comes back with anything you do not like.

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Let’s say for example that the inspection came back stating that there is a crack in the foundation. This is a major structural problem that would cost you thousands of dollars to rectify. If you are not comfortable taking on a responsibility like that, you could back out of the purchase and still get your escrow money back.

If you did not have the contingency, however, it would not be possible to back out of the contract. You would not have professional proof of the issues with the home which means you could not back out of the contract. If you did back out, you would lose your escrow deposit.

The Home Could Cost More

A big part of the home inspection is the financial protection it provides. If you buy a home without knowing what might be wrong with it, it could cost you a lot more down the road. If the damages cause immediate danger or need immediate repair, it could be much more costly to buy the home. Suddenly the cost of buying the home could greatly increase.

Let’s say a home inspector would be able to tell that there was a leak in the basement that caused mold growth. But, because you skipped the inspection you didn’t know this. You bought the home anyways. A month or two down the road, though, you discover the mold damage and have to hire contractors to remove the mold and fix the damage it caused. The cost could be very high, making it unaffordable to own the home right off the bat.

Lose Out on Negotiating Opportunities

Negotiating with a seller takes a lot of work. Some sellers are willing to negotiate because they are motivated sellers. Others are stubborn about the price they want for their homes and will not budge. If there’s a reason for them to budge, though, they might.

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That reason could be that there is something wrong with the home. Without a home inspection, you don’t have any reason to tell the seller there is an issue with their home. With a written report, though, you might be able to go back to the seller and try to get a lower sales price. If they know something is wrong, they may be willing to either:

  • Lower the sales price
  • Fix the issues
  • Give you a credit to do the repairs yourself

Once an inspector writes a report stating there is an issue with the home, the seller must legally disclose this to any future buyers. This is why sellers would be more motivated to negotiate if they know something is wrong with the home.

Safety Issues Arise

Finally, not having a home inspection could cause safety issues for you and your family. Unless you are a professional, it’s difficult to tell if a home is safe beyond what you can see. Wouldn’t you rather have someone let you know the home is safe and sound? It’s only a few hundred dollars for the inspection, yet it can save you a lot of heartache and money down the road.

We don’t recommend skipping the home inspection when you buy a home. Inspectors offer this service for a reason. Whether your reason is financial or for your own well-being, it’s an important step that you should not skip if you want your home purchase to be a successful one.

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The Top Ways to Learn About a Neighborhood Before Buying

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When you buy a home, you buy more than the structure itself. You are buying into a neighborhood – an area that you will spend a majority of your time. Knowing what the area is like can help you determine if you are making a good investment. No matter how much you love a home, if you don’t love the area it’s in, you can quickly learn to dislike it.

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Visit the Neighborhood at Different Times

Aside from the times that you visit the home you want to purchase, you should also visit the neighborhood. Pick different times of days and different days of the week to walk or drive through the area.

Try picking at least one weekend day and one weekend night as well as one weekday and one weeknight. This way you can get a feel for what the area is like at different times. For example, the area may be nice and quiet on a Monday night when everyone is inside preparing for work and school the following day. However, Friday and Saturday nights may be a different story.

Visiting at different times will give you an idea if you have partiers as potential neighbors. You’ll also see how many children are around and what they do. Are they running haphazardly through the streets or are they out with their parents playing nicely? These are things you’ll want to note as you figure out the type of area you’d be the most comfortable living.

Talk to Neighbors

It’s not creepy if you strike up conversation with potential neighbors. Let them know you are looking at a particular home and see what conversation they strike. You can ask particular questions, such as:

  • What’s the noise level like?
  • How is the crime in the area?
  • Do the neighbors get along?

This is just a sampling of what you could ask. You obviously know what information you need to help you make the right decision. Try talking to at least 3 different neighbors to get an idea of what the area is like. You never know when they may even have information to provide about the home you want to purchase. It could help influence your decision.

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Use the Internet

The internet can provide a wealth of information too. From blogs to newspaper articles, you can find out the details on almost anything that happened recently or in the past. Neighborhood blogs will give you the most up-to-date ‘gossip’ and information on the activities going on in the area. It may also help alert you to any issues going on in the area. You can find neighborhood information by searching the neighborhood name in Google. You can also check Facebook for groups specific to the area.

Newspaper articles will help highlight any recent crime that you may want to learn more about before making a decision. If crime seems to be an issue, there are also apps for your Smartphone that you can download that help you determine the types of crimes occurring in the area and how often they occur.

You may also want to know what the area schools are like. Greatschools.org is a great website to help you find this information. Even if you don’t have kids now, you should still determine the quality of the schools. Whether you’ll have children in the future or not, the quality of the area’s schools can make or break your home’s resale value in the future.

Check the Sex Offender Listing

Last, you may want to check the sex offender list to see if any sex offenders live in the neighborhood. This may or may not affect your decision to move into a home, but it doesn’t hurt to be informed. You can check the listing here. You can simply enter the address of the home you might buy and you’ll get a map of the proximity of any registered sex offenders.

The best way to find out about a neighborhood is to do your research. You’ll need to do some legwork and the rest online. The more research you put into an area, the more you’ll know about it. While you shouldn’t base your decision solely on the area, it should play a role. You’ll want to know what you are getting yourself into before making an investment in a home.

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Top 10 Tips for First-Time Homebuyers

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Deciding you are ready to buy a home is exciting and overwhelming at the same time. There are many new terms you must know and facts you must consider. Before you let yourself get overwhelmed, consider the following top 10 tips for first-time homebuyers.

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1) Know how much home you can afford

You should do this before you look at homes. You need to know what you can afford. This isn’t the number a lender throws at you, based on a few figures you verbally provided. This is after you sit down and look at your budget closely.

Remember, your mortgage consists of more than just principal and interest. You’ll also owe real estate taxes and homeowner’s insurance. If you put less than 20% down on the home, you’ll also pay Private Mortgage Insurance. If you have a concrete number in your head regarding what you can afford, you’ll resist the urge to take a larger mortgage.

2) Know your credit history

Knowing your credit history will help you know what type of loan and/or rate you deserve. The more information you have, the better! Pull your free credit report and look it over. Is everything accurate? If not, file a dispute.

Once you know everything is accurate, look at your history over the last 12 months. Do you have any late payments? Are your outstanding balances close to your available credit? Do you have too many credit cards? Each of these issues can negatively affect your credit score.

Aim to have no late payments in the last 12 months and have only 20% of your available credit outstanding. Also, the older your accounts are, the better it is for your credit score. When your credit is in good shape, you have a better chance of securing a good loan program.

3) Explore all of your loan options

If there’s one thing you do, shop around! Don’t let one lender tell you that you won’t find a program anywhere else. There are FHA, VA, USDA, and conventional programs to explore. Each offers its own benefits.

For example, you may qualify for a conventional loan, but if you don’t put 20% down, you’ll pay PMI. The FHA loan might provide a better option for you depending on the cost of the PMI on the conventional loan. You won’t know which loan is right until you shop around and compare.

4) Get a pre-approval before shopping for a home

Bidding on a home without a preapproval will not win you the bid. Sellers only want qualified buyers. Otherwise, they could be wasting their time on someone that can’t even afford the loan. Do yourself a favor and shop around for lenders and programs before shopping for a home. Not only does it give you the leg up on the competition, it lets you know what you can afford before you start shopping for a home.

5) Estimate high for your down payment and closing costs

You likely know how much money you have for a down payment, but don’t forget closing costs. They can cost as much as 6% of your loan amount. If you don’t have any more cash, the money may have to come from your down payment. This could affect the loan program use.

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When you determine how much you will need, estimate high. Closing costs are usually between 3-6% of the loan amount, but take the higher amount. This way you are prepared for anything when it comes time for the closing.

6) Determine if paying points makes sense.

Paying points may sound good to get a lower interest rate, but it depends on your circumstances. If you won’t stay in the home for at least 5 years, it may not make sense. Consider your long-term plans and go from there. Calculate how long it would take you to make up the cost of the point based on the monthly savings. If it will take too long, it doesn’t make sense to pay the point. You’ll move before you ever see the benefit of the lower rate.

7) Have contingencies on your purchase contract

Unless you know without a doubt that you can get a mortgage, include a financing contingency on your purchase contract. This gives you around 2 weeks to secure financing with no conditions. If your financing falls through, you can cancel the contract and not lose any money.

8) Compare rates and closing costs

Don’t focus only on the interest rate the lender quoted. Look at the closing costs too. Sometimes a higher rate makes more sense in exchange for lower closing costs. Looking at the APR provided on the Loan Estimate will give you a better idea of the cost over the loan’s life. Choosing the lower APR will save you the most money in the end.

9) Don’t take an adjustable rate mortgage for the low rate

An adjustable rate loan may seem tempting at first. That lower teaser rate looks good, but you have to think of the long term. That teaser rate will only last between 3 and 5 years. Then what? You’ll have a higher rate and payment that you may or may not be able to afford.

Compare the fixed rate and the adjustable rate side-by-side. Then ask the lender what the payment would be on the worst-case scenario (the maximum the rate would adjust). Only then can you make the right decision.

10) Plan for what you don’t know

When it comes to a mortgage and real estate, there are no givens. Always plan for the unexpected – have more money than necessary at the closing. Respond quickly to underwriter’s requests. Work closely with the seller. This way you are always in the loop and know what is going on.

You never know when you’ll have to provide more documentation or pay for another service. Planning for the worst can help you handle the speed bumps a little easier throughout the home buying process.

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Smart Home Buying Tips: Steer Clear Of These Home Buying Mistakes

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Mistakes can happen to anyone. In home buying, making mistakes can definitely cost you a lot but it’s still possible to avoid them. A lot of home buyers can easily get overwhelmed by the entire home buying process. This is one reason why mistakes do happen in home buying.

Smart home buyers make sure that they’re prepared, not only for going through each step of the home buying process but also for them to be ready for possible mishaps that may happen.

In order for you to avoid these mishaps and problems from happening, here are some home buying mistakes you have to steer clear of.

1. Buying a home that doesn’t meet safety standards

Buying a home means you have to find the perfect home for you. It’s also important that you find a home that’s safe to live in. Otherwise, you might end up paying more for repair costs after you bought the property.

When you look for a home to purchase, make sure that it lives up to your standards and would not compromise your safety. Ask if the property meets safety standards or consider getting a home inspection on the property before you make a decision.

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2. Buying a home beyond your budget

It’s also very important to buy a home within your budget. If you get carried away and purchase a home that’s a little higher than your limit, you will end up having more to pay for in your mortgage and it could make you be at risk for delinquency or foreclosure.

One way to make sure this does not happen is for you to get a mortgage pre-approval. If you get pre-approved for a mortgage, you will get a specific budget. Once you do, this will become your basis in choosing which home to buy.

3. Not being able to save enough money for the costs

It’s always important to save a good amount of money in order for you to have accessible funds that will cover your down payment, closing costs, and other needed home buying expenses.

Save as early as you can. If possible, you can also get creative in boosting your home buying savings fund. This way, it can speed up for home buying time frame and become a homeowner before you know it.

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4. Not seeking guidance from experts and professionals

Getting help from mortgage lenders and real estate agents is one way to assure that you can have a smooth home buying process. This is especially true for first-time homebuyers.

As experts in their field, you can get some good advice on how to go through different challenges that may come along. Without them, you may not have a smooth-sailing homeownership journey.

5. Hurting your financial profile before closing

Finally, always be mindful of your credit and other financial statements if the loan has still not reached its closing. One mistake you need to avoid is to make sure you don’t hurt your credit.

Even if you’re already near the end of the process, you can still be deprived of a mortgage if you hurt your financial profile. Avoid buying big ticket items that may hurt your credit. You have to keep your eyes on the prize and that is homeownership.

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