Aspects in Preparing to Buy a Home
The Big Three: Preparing to Buy a Home
One of the hardest things for me to do, as a Realtor, is see how devastated clients get when they realize they aren’t ready to buy a home. Whether it’s credit, savings or employment, all three have to meet certain criteria. That’s why it’s so important to be thinking about preparing to buy a home! Let’s break these “Big Three” down to help you better understand.
After the 2007-2008 market crash, credit came into play. This is a way for lenders to ensure that a potential borrower has good repayment history. There are 3 major credit bureaus that lenders use to check your credit; Experian, TransUnion, & Equifax.
Many potential buyers hesitate to get pre-approved because they are afraid that a hard check on their credit will cause their credit score to dip. According to Experian.com, this decrease in score is usually short-lived & although it shows up on your credit report, it will drop off in two years.
If you, or your partner’s credit is not sufficient, you can ask someone to be your co-signer. A co-signer is a person, usually a family member or close friend, that has good credit & employment, and is stepping in to help you qualify for your loan. They agree to assume the mortgage payments, if for whatever reason, you are not able to. Many first time home buyers will use co-signers in order to qualify for a larger loan, or if one partner’s credit is insufficient. A word of warning – make sure that you and your partner (if not on the loan) are able to pay the monthly mortgage payment without your co-signer. They are just a cushion and not meant to help pay.
When you ask Google how much money you need to buy a home, you’ll come across a range of 5% – 25% or more. While you should definitely have some money put away, I like to break down the costs for my clients.
Down Payment: most lenders that I work with advise putting anywhere from 3%-10% down. While you can put more down, usually it’s a good idea to keep some of your savings to put towards other house-related costs! Depending on your loan program, some or all of your down payment can be a gift.
Inspections/ Appraisal: usually budget around $350-$500 for inspections & $300-$400 for the appraisal. Sometimes the appraisal comes back too low, in which case there will have to be further negotiation. When this happens, both the seller & buyer have to agree to make up the difference in cash. This can range anywhere from a couple hundred to a couple thousand dollars.
Lender Fees: typically these are 0.5 – 1% of the loan value. This means that if you purchased a $300,000 home & put $10,000 down, the fees would be based off $290,000. These will be paid at closing.
Closing Costs & Pre-Paids: these usually range from 2%-5% of the purchase price. The secret to these is that a lot of first time home buyers can have help paying these. What do I mean? When you first put an offer in, as a buyer, you can ask for closing cost credit. This means you can have up to a certain amount or all your closing costs paid for by the sellers. Pretty sweet deal as these can be a good chunk of change!
So How Much Do I Really Need Saved?
Let’s say you purchase a $300,000 home. You put 3% down, which would be $9,000. Including the average costs of inspections, appraisal (assuming no negotiation was needed), lender fees, & closing costs, at minimum you should have about $20,000 saved. Of course this is a rough number – sometimes buyers need less, other times they need more. Each transaction is different! It’s always a good idea to have a good nest egg & know where the money you’ll be using is coming from from the start.
My biggest advice is to make sure you’ll have some sort of savings left once all is said and done. Buying a house is a big responsibility – appliances fail, storms hit, & damage happens. Having help buying your home is great, but once it’s yours, you are responsible for keeping it running! Don’t become house poor – set up a financial plan to save yourself stress & money in the long run!
Obviously you need to be employed in order to qualify to purchase a home. You cannot qualify while on federal/ government aid. There are two types of employment, and they require different qualifications in lenders’ eyes.
Hourly/ Salaried Employee: if you work for a company, either on an hourly wage or salary, you are a W-2 employee. The qualifications for this is pretty straight forward. You’ll need to have worked at the company for at least 2 months (the longer, the better) & be able to show your last 2 months of pay stubs.
Self-Employed: this is a bit trickier, as you are responsible for paying yourself. As a self-employed person, you’ll have to show at least 2 years of steady income in order for your lender to qualify you for a loan. There are exceptions, where you can show 1 year of steady income if you’ve previously worked in a similar line of work for over 2 years.
Both hourly/ salaried individuals & self-employed individuals can qualify for the same loans, the employment is just verified differently. If you preparing to buy a home, start saving your pay stubs & keeping track of your income to be prepared for your lender. This will help your lender & loan process in the long run.
There are 3 big factors that come into play when preparing to buy a home; credit, savings & employment. While each of my client’s situations are different, there are ways to help plan for & work within each of these areas. If this blog is getting you curious about actually starting the conversation around getting pre-approved, take that step! I’ve had clients that try & realize they need to work on some aspects before purchasing a home, so we make a long-term plan. I also have clients who get pre-approved for the heck of it & are shocked that they are qualified!
While it may seem daunting, you’ll never know unless you try. If you’re tired of paying rent or living with friends/ family, it’s never a bad idea to start the conversation. The worst that can happen is you’re not ready & we make a long-term plan for you!
Hope this helps!