Home is where the mortgage is
Anyone at almost any age can buy a home — assuming there’s money for a down payment, a high-enough credit score, not more than moderate debt and so on.
Purchasing a home is not to be taken lightly, especially if the applicant is a first-time buyer.
Experian, “the leading global information services company, providing data and analytical tools,” brought together a group of experts to talk about the home-buying process.
Ilyce Glink is a real estate and financial wellness expert and author of “100 Questions Every First-Time Home Buyer Should Ask.”
Lauren Bowling is a money and travel blogger at Financial Best Life and author of “The Millennial Homeowner: A Guide to Successfully Navigating Your First Home Purchase.”
A young age is the perfect time to get your financial house in order and keep it that way so you can enjoy a lifetime of low interest rates and potentially shorter mortgages — saving thousands of dollars for better lifestyles and retirement.
Sall gave his criterion for purchasing:
- Put at least 10 percent down.
- Have a three- to six-month emergency fund besides the down-payment. Things will go wrong with the house — maybe even immediately.
- If you might move inside of five years, don’t even consider buying. It’s too expensive with the closing costs, realtor fees, etc.
“You have to understand the difference between what you want in a home and what you can’t live without,” Glink said. “In my book I talk about a wish list and reality check as a way to discern between the two.
“The only thing you can’t change about your house is the neighborhood,” she said. “Find the right neighborhood first. Then start looking at homes you can afford.”
The little things about home ownership turn out to be not so little.
“Keep in mind that buying a home means maintenance, upkeep and yard work,” Bowling said. “So many forget this. I know I did.”
Getting pre-qualified for a loan will show you potential mortgage payments. Then you can take a hard look at what numbers best fit your budget.
“Playing around with a calculator is the best way,” Glink said. “I like these from Bankrate. Also consider taxes, yard work and additional furniture. It all adds up.
“Guessing is the wrong way to go,” she said. “Seriously, you can use my online calculators, or just multiply your gross monthly income by .28. Mortgage lenders will let you spend up to 28 percent of your gross monthly income on mortgage, taxes and insurance.”
Sall has his own approach to the qualification numbers.
“The easiest way to know how much house you can afford is to use this formula,” he said. “Your annual salary times two — always on a 15-year mortgage. In other words, if you make $100,000, you can afford a $200,000 house on a 15-year mortgage.”
To make sure your finances are in order for your big purchase practice good financial hygiene. Don’t carry credit card balances. Don’t spend more than you earn. Save a portion of your net pay in an emergency fund. Develop those habits before taking bigger steps.
“It’s really about improving your credit to get the best rate possible and trying to save up as large of a down payment as you can,” Bowling said.
Hold a job
Employment is a big factor.
“Be sure you have had a solid job for three years — or if self-employed, have revenue proof for three years,” Sall said. “Have your down-payment in the bank untouched for a few months. They get suspicious if you suddenly have money while you’ve been poor for years.”
On her Think Glink website, Glink has posts that talk about the dozens of closing costs people face. This includes an item about buying a home and another about costs. The most complete list is in her book.
Experian’s study found that 77 percent of millennials with a mortgage have a 661 VantageScore — a consumer-scoring model — or greater with an average score of 716 and 16 trades on file.
Address credit issues as soon as you know of them. The longer you let them fester, the harder they will be to cure.
“The biggest rule in pre-purchase credit is to not make any other big purchases,” Bowling said. “This will affect your debt-to-income ratio and possibly your credit score if you financed and rate shopped.”
Sall advises pulling your own credit via Credit Karma.
“It’s free and will give you a good read of where you’re at,” he said. “If there are accounts on there that aren’t yours, call the company and fight it immediately.
“Use credit cards,” he said. “Keep balances low to build credit further.”
Don’t wait until the last minute to prepare.
“Check your credit six months in advance of when you’re ready to start the home-buying process,” Glink said. “Go to Annual Credit Report.com and pull a free copy of your credit report. Fix mistakes. Buy a credit score online. Know your score before you apply for a mortgage.”
According to Experian, before approving your request for a home loan, mortgage lenders will review your credit reports from at least two of the three major credit bureaus. This will give them a complete look at your credit history.
The Ask Experian blog explains what lenders look for in credit reports.
You might be pleasantly surprised about what loan programs you qualify for. What is your debt load? Are you current on student loans? Are you on time with your other bills? The answers all factor into loan underwriting.
“In my book, I talk about the different types of loans you may want to go for, and special programs that exist,” Glink said. “Go to the Department of Housing and Urban Development’s website for Federal Housing Administration foreclosures and look for great deals there.”
This includes special programs for police, firefighters and teachers.
“Head to the bank and apply for a 15-year fixed loan,” Sall said. “If you don’t qualify for that, then you probably shouldn’t buy a house. It’s simple as that.”
Rely on a known source.
“Do your research,” Bowling said. “Work with a mortgage loan broker you trust. Definitely shop for different interest rates.”
The Ask Experian blog has helpful tips for first-time homebuyers.
Bowling cited an article to help tell the difference between getting pre-approved for a loan and getting pre-qualified.
“Pre-qualified happens first and is pretty basic,” Sall said. “Once you get into the home-buying process you’ll actually get pre-approved, which is much more involved with bank statements, paycheck stubs and so on.”
If you don’t qualify for a loan now, be patient. Keep up good financial practices, including saving for a down payment. Don’t feel pressured or rushed to buy. That was the case 10 years ago, and the whole country paid a price. That’s why lending is tougher today.
“It’s tough to be patient, but it’s the right to do,” Sall said, giving these suggestions to get a better chance of qualifying for a loan in the near-future:
- Get credit card balances down, and keep them low while using them.
- Save up money for a higher down-payment.
- Stop believing that there’s a secret company out there that can fix qualifying for you.
“Go back and work to fix your credit, but keep in mind that interest rates will only continue to go up,” Bowling said. “If your parents are open to it, having a cosigner with good credit can also help you get a better rate.”
The Ask Experian blog has tips to help you improve your credit score.
Buy a home you can afford. Pre-owned or new matters less than your bank account.
“The older the home the more upkeep, as I’ve found in my experience,” Bowling said. “Many millennials aren’t ready for it, but it really just depends on what’s available in your area and right for your family.”
However, bright shiny attractions are tempting.
“It’s nice to have everything new,” Glink said. “It’s always going to be more expensive. If you can’t afford new now, buy in a better neighborhood and renovate once you’ve saved more money.”
Sall prefers a preowned home:
- It’ll be cheaper.
- You’ll be buying in an established area.
- You’ll get burned less if you decide to move quickly.
To properly evaluate different neighborhoods to buy in, talk to people who live in and around the possible home buys. Check school ratings. Not pleasant, but you might even stop by the local police precinct. It never hurts to check.
“You have to make a priority: Is it budget, location, square footage?” Bowling said. “Stick to that. You may be able to get all three but not always.”
She wrote a guide to help buyers assess which homes are right for them.
“Check out the home value growth of nearby houses,” Sall said. “Zillow works fine for this.
“Walk the neighborhoods in the morning, during the day and at night,” he said. “This will tell you a ton about the neighborhood — noises, the people, number of kids.”
The Wise Bread website has tips for evaluating a neighborhood before buying.
“Inspections and appraisals are completely separate things,” Glink said. “A buyer will pay for the inspection upfront. The lender will charge the buyer for the appraisal as part of the closing costs in the transaction or as part of the application fee.
“Keep in mind every homebuyer should have a professional home inspection,” she said. “That takes place before you close — and preferably in the first few days after signing the contract.”
The inspections appease lenders.
“Appraisals are performed by the banks so they are assured that the house is kept up well and is worth slightly more than you’re borrowing,” Sall said. “Then they can recoup the costs if you default on the loan. Inspections are for you to know you’re not buying a poor-quality house.”
Don’t take lightly
Don’t treat home buying like a trip to the mall. Decisions and preparations made today can affect your lives for decades to come.
“Before you buy a house that’s too big and expensive for your budget, understand what it takes to become wealthy,” Sall said. “Your house has a ton to do with this. Do you spend like the rich? Or the poor?”
Glink has more than 8,000 pages of questions and answers for potential homeowners on the Think Glink website. Her free weekly newsletter showcases the latest news about home buying and selling, in addition to her weekly syndicated column.
While her book is considered a fourth edition, the first 150 pages are new, written specifically for millennials.
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