It doesn’t matter if you are buying your first home or your fifth home, the minute you think you are ready to buy, start getting your finances together. When financing a home, sometimes something as small as a credit card purchase can interfere with your ability to buy that home.
Now that you’ve made a decision to move forward, pull your credit. Free credit reports are available from a number of websites, but our favorite is www.annualcreditreport.com and Georgia law allows 1 free credit report per year from each of the three major credit reporting bureaus. A credit report will provide a snapshot of your bills and your pay history – information a lender will require. Make sure the information is accurate and all the credit history belongs to you. If you don’t think you have credit, you might be surprised. FHA (Federal Housing Administration) doesn’t require a credit score but will require that you have 12 months of history in your name with alternate credit sources such as car insurance or rent.
Next, do not make any more purchases on credit or credit cards until after you close on a home – no cars, no furniture, and don’t even change your cell phone company as these activities affect your credit ratios. Lenders have minimum requirements for credit and ratios, and a simple purchase can mean you no longer qualify for a loan.
Before you make your first offer on a home, get fully approved for a loan from a reputable lender. Your realtor can recommend a good lender as many brokers have agreements with financial institutions they trust. For example, my broker, Atlanta Area Property, works with several lender including SunTrust and we actually have a loan officer available in my office. You’ll be required to provide the lender with all of your current financial data, including pay stubs, tax returns, retirement and stock statements, and existing loan information. The lender will pull an official credit report, determine your credit worthiness and provide you with a pre-approval letter stating the loan amount they will underwrite. When you submit an offer on a home, your Realtor will submit this document as part of the contract because it strengthens your position.
What about your down payment and closing costs? How much you have to put down will depend of the loan requirements. Make sure the money you use for the down payment is liquid and readily available. If it’s tied up in stocks or bonds, you’ll want to start liquidating it and setting the cash aside in an already established account, such as a savings account with your bank at least 90 days before applying for a loan. Make sure you have a paper trail for the stock sales and cash deposits. If someone in your family is giving you the down payment, transfer the funds as soon as possible. Your family member is not allowed to borrow the funds they give you and they will be required provide a bank statement showing the funds if the gift occurs within 90 days of your loan application.
To help prevent the dreaded “buyer’s remorse”, determine how much of a monthly payment you’ll feel comfortable paying. The general rule of thumb is a monthly payment of no more than 36% of your pre-tax income. And don’t forget to budget for costs that come with home ownership, such as repairs and renovations, higher utility bills, and lawn maintenance.
And finally, don’t be afraid to share your budget and financial situation with your Realtor, lender, and lawyer. They’ll not only keep it confidential but it will help them during the house-hunting phase, in helping you make the best deal for you, and getting the right loan product when you find a home. Just remember that these people are members of your support team during the home buying process and will provide guidance and direction. However, buying a home is a business transaction and you are responsible for the final decision.
(My disclaimer: This information is believed to be accurate but is not warranted; subject to change, errors, and omissions. Special thanks to Deborah Braich of SunTrust for her assistance).