Congratulations, you’ve decided you want to own a home!
Hopefully you are able to give yourself some time to get organized because that can be the longest part of the process. I learned this the hard way when I decided I wanted to purchase a condo about four months before the lease was up on my apartment.
My recommendation is to save yourself the last minute scrambling and get prepared in advance. It’s so exciting to start looking at new places and think about how you will make them your own. Sometimes that need for instant gratification that’s engrained in us all is hard to deter. You may search and fall in love with a place but you don’t even know if you can afford it, if your credit will be acceptable, or if it’s even as good as it looks from the outside.
Here are a few things that you should get in order (starting as early as a year in advance, if not longer) to get you into the home you love.
Should you even buy anything right now?
While everyone -- especially those in the real estate world -- want to tell you that buying is better than renting, there are some things to consider and prepare yourself for before taking this huge step in your financial life.
Depending on your circumstances, it may be better to rent rather than own. Are you planning on moving in less than 7 years? Is your credit less than perfect? How much would an HOA fee add to a condo vs. living in a rental community with the same amenities, and is it affordable for you? This calculator can help you sort out which may be more beneficial for you.
Let’s say you are ready to go through the process of owning. Where do you start?
Get yourself in order so you can get pre-qualified.
There will be a slew of paperwork and you will hate your signature by the end of the whole ordeal. You can speed up the process if you have your current pay stubs and previous year’s taxes ready to be passed along to the lender as they try to get pre-qualified for a loan. Having your loan in place before you start looking at new homes will make the process faster and make it easier to quickly move on properties. Denver is the fastest selling market in the country , so make sure you have your ducks in a row now.
If you can, check your credit before you even start applying for a loan. There could be some items in your past that you’ve forgotten or didn’t even know about. It’s best to know what you are working with before they start asking questions.
You want to walk in with no surprises and the ability to answer any questions they have about your credit history if there are any issues. It will also help you understand why type of loan and percentage you qualify for. Also, if you have some time before starting, you might be able to remedy missteps before the bank checks it.
You are entitled to one free credit report yearly from each of the 3 major credit reporting bureaus. Check it out at annualcreditreport.com
What can I qualify for?
Even with things like a foreclosure, bankruptcy, or a poor credit score, you could be approved for an FHA loan. These loans were created for lower income buyers that have less than perfect credit. Unlike conventional loans, they are backed by the government which protects the lender from defaults and also enables them to offer better interest rates to the prospective buyers.
FHA loans are helpful when you are starting over but what you need to realize is that it limits your choices greatly. Have your lender confirm that the seller accepts this type of loan -- sometimes they are listed as such, but you can find out down the line that's not actually the case. Basically, there are a lot of different rules and options that you should discuss with your lender and it’s best not to do in a rush.
How much do I need for a down payment?
The size of the down payment required will depend on the type of loan you qualify for. For example, an FHA loan only requires a minimum 3.5% down payment. However a conventional loan may require 5-10%. If you are able to save before trying to buy a home, keep in mind that a down payment of 20% or more will help you avoid private mortgage insurance.
What is private mortgage insurance?
PMI protects the bank in cases if the loan goes into default. It’s more likely that a loan will go into default when there is a low or no down payment. Not to say that those who have put down a sizable down payment haven’t ever missed a payment or gone into default, it’s just more likely when the LTV (loan-to-value) is greater than 80%. So, if you have time, save up some cash and put down a bigger down payment. It will be cheaper in the long run.
Beware of extra expenses while under contract.
You don’t own the property yet, but you will need extra cash to pay for the appraisal and inspection. Collectively this can run you $600-800 depending on who they get to do it. You need to be prepared to pay for it before it happens, so have it ready.
You also need to be prepared to pay for other hidden issues. If the water isn’t turned on in the house or unit because it was bank owned, you may have to pay someone “authorized” to turn it back on just so your inspector can finish their job.