We recently embarked on the path to owning our own home. If you’ve been around here for awhile and followed the Simplify Money webinar series that I hosted back in 2013, you know that we’ve been through our share of financial turmoil; so choosing to buy a home wasn’t a decision that was taken lightly.
The good news is that a rocky financial past doesn’t mean you are out of luck on owning a home.
The bad news is that it most certainly is not an easy path. Really, it’s more like a roller coaster.
If you think you’re ready to buy a home, I’ve got a bit of advice for you…
1. Take a really good look at your financial history. – Pull your credit reports and scored for both you and your spouse (or, you know, just you if that’s all there is). Remember that the first scored you see are not the ones that a loan officer were pull. I prefer pulling my scores straight from FICO so they are as accurate as can be. Other vendors often pull “generic” scores, so I skip over the free ones like that. Review the reports and make sure that everything is reporting correctly. No rogue accounts, balances and payment history are correct, statuses are up to date. If you have any derogatory marks on your report, see what you can do to remedy them: are they near their seven year fall off date, can you settle, pay for delete or flat pay them off? Disputes and payment updates can take up to 30 days to resolve, so be sure to start this process with plenty of lead time. It’s better to have a clear picture of where you are early in the process so you have plenty of time to correct it. Lenders will take your middle score into account, and assume that the score they will see is at least 20 points lower than what you see (not always the case, but pretty normal).
2. Take a look at your current finances. – How much current debt do you have? Are there any balances you can pay down, small loans you can pay off? Do you have enough wiggle room to have savings/reserves? How much house can you afford? The general rule of thumb is to look for houses in the price range of 2.5x your annual salary. But be sure to think that through…are you hoping to stay home with your kids in the near future? Change jobs? Can you afford the payment+taxes+insurance for a mortgage that size? Lenders will take all of this into account and your debt-to-income ratio plays a huge part in how much you’ll be pre-approved for. Check out the handy affordability calculator in the Capital One Home Loans Online Neighborhood.
3. Get your finances in great shape. – You should have, at an absolute bare minimum, 12 months of absolutely everything paid on time. Unless you have NO credit, don’t open up any new lines of credit while preparing for a mortgage. Reduce your debt payments wherever you can. Save up for your downpayment and closing costs (and ernest money, too, if necessary).
4. Know what type of loan you’re interested in. – This is where things start getting complicated. There are so many types of loans now and it very quickly gets all blurred together. And yes, you want to know this BEFORE you ever set foot in a potential home. Are you eligible for a VA loan? Looking in an area that allows for USDA loans? FHA? Conventional? I love the Capital One Home Loans Online Neighborhood for walking you through this if you’re new to all the terms that define loans. We’re going for a 30 year fixed rate VA loan, but were open to a USDA loan if the property allowed for it. As you start looking at homes, some will only be an option for certain types of financing because of the conditions and requirements for each one. There were some lovely neighborhoods that we decided weren’t a good fit purely because they wouldn’t work with a VA loan.
5. Get your paperwork in order. – Hopefully as you work through this process you get in the habit of placing important paperwork in a special place so you have it. Documentation for anything you had to have fixed on your credit report, loan payoff documents, anything related to a paid judgment, documentation for any large amount of money going into your bank account that’s not an employer’s direct deposit, two years’ worth of W2s, the most recent two months’ worth of bank statements, proof of any other income or assets (401k statements, investment statements, disability award letters, etc), proof of a year or two of on-time rent payments, and employment verification. I collected all of ours and have it in a neat little accordion file so I know right where something is. I also keep copies in Evernote for a quick file to email to our loan officer as necessary. PS – There’s a handy list inside the Capital One Home Loans Online Neighborhood, too!
6. Brush up on home loan terminology. – It’s hard to know what to ask or follow-up on when you don’t quite understand what your potential loan officer is referring to. Escrow? ARM or APR? Good faith? Points?
7. Get prequalified. – Reach out to your loan officer and get the process started to get a prequalification and then a pre approval. They’ll take your basic info and give you a pre-qualification. Then they’ll dig deeper, look at your reports, ask for some of that paperwork I mentioned collecting earlier and give you a more firm pre-approval letter. You can look at homes prior to this, but I highly recommend waiting. I speak from experience that it sucks to find *that house* only to find that you need one piece of paper you can’t quite get your hands on and it slips through your fingers to another buyer.
8. With pre-approval in hand, go forth and find the home of your dreams! With everything else under control, you can focus on finding that home without the added stress of wondering what will happen when you are ready to put in an offer. Having that pre-approval means you can put in a strong offer as soon as you make your decision and be confident that there’s little room for something to fall through last minute on your end.
We did this in a totally different order, and I really wish we’d done in the right way. So far our journey has been much more stressful than it needed to be. I can say that I’m glad I have organized our paperwork as we’ve gone along, but I sincerely wish that we’d taken the time early on to get that all squared away. Instead we’ve looked at way too many houses that we had no hopes of putting an offer in on because of lender requirements we weren’t aware of, and things hiding on our credit report that we’ve had to chase down documentation for. I promise this process is a big enough roller coaster without making it harder on yourself! We’ve learned as we went, but having the Capital One Home Loans Online Neighborhood in the beginning would have saved us a lot of time and headaches!
Have any advice for first-time home buyers? Or questions about being one? Let us know!
I was selected for this opportunity as a member of Clever Girls and the content and opinions expressed here are all my own.