There are things you should do before buying a home …. and you have to start EARLY
With the condition of the economy still slumped, qualifying for a mortgage has been tougher than it was just three years ago. Lenders are tightening the reins, and prospective homeowners must save more to put more down on their mortgages.
Despite the word “mortgage’s” Old French roots meaning “dead pledge,” qualifying does not have to be a do-or-die deal if prospective owners take proactive steps to beef up their credit reports and make a serous impression on lenders.
“You definitely want to get an early start at this,” said Robert Pagliarini, author of Amazon.com’s Business and Investing Bestseller “The Six Day Financial Makeover.”
Pagliarini, also an expert on self-help Web site PeopleJam.com, suggested eight points a prospective homeowner should consider when applying for a mortgage.
1. On the top of the list: Start by checking credit reports.
“The truth of the matter is, there are three different reports and three credit scores,” Pagliarini said. “And they each have their own way of determining what your credit score is.”
Credit reports can be pulled from Equifax, Experian and Transunion, for about $10 each, Pagliarini said.
Credit scores range from 400 to 850. Above 720 is considered good, he said.
“There are only two numbers you have to think about,” said Pagliarini. “There are 720 and 719 — 720 and above, you are good, 719 and below, you need to do something.”
Make sure to check for any discrepancies. Sometimes closed accounts are listed as open and count against the credit score, or an open account may show a missed payment that was, in fact, on time.
Making corrections to credit reports can take several months to complete so it is important to start no less than six months before applying for a mortgage.
2. According to PeopleJam.com, mortgage lenders weigh eligibility on a score that does not accurately measure financial stability. The FICO, Fair Isaac Company credit model, only measures someone’s ability to repay a loan. It can be improved by paying debt on time and keeping accounts open but with a $0 balance.
3. Years ago, the rule of thumb for down payments was to pay 20 percent of the mortgage up front. When the housing market was up, down payment percentages dropped to 10 or 15 percent and some required no down payments. With the recent drop off of the economy, lenders have again raised the percentage with some requiring 30 percent down, according to Pagliarini.
“In the last nine months it has become even more difficult to get a mortgage, and you have to put even more down,” he said. “The more you put down, the less of a risk you are to the mortgage company.”
To save for a down payment Pagliarini suggest taking a loan from a 401K plan, or a personal loan from a family member.
“The best way to save for a mortgage is to set up a separate savings account or separate investment account,” he said. “Just start putting money away and every month just direct deposit it in there. Every dollar, every penny is specifically for this down payment. It sounds corny, but it really is amazing what happens. People see the money in that account and they know exactly what it is for.”
4. By increasing household income, mortgage lenders see a more realistic way for mortgage applicants to repay loans. Two-income families qualify more easily than one-income families, so PeopleJam.com suggests picking up a second job.
5. Budget mortgage payments so only 25 percent of monthly household income is put toward the mortgage. Although mortgage lenders will say more than 25 percent of monthly income is affordable, getting in too deep could lead to filing for foreclosure.
6. “They are looking at all your fixed debt payments,” Pagliarini said, which include any student loans. Try to defer student loans by taking a course at a county college. After obtaining the mortgage, start payments on the students loan.
“Once you have your mortgage, they can’t go back and change the terms of it,” he said.
Mortgage lenders only need to see current financial positions, not what is to come in the future.
“It’s just a photograph in time,” he said. “How does the person look right now? And if you look really good right now and the picture is taken, you could have the worst credit score imaginable — it doesn’t matter, you’ve got it.”
7. PeopleJam.com also suggests sticking with one employer for more than two years. Lenders like to see stability.
8. When the mortgage company sends out an appraiser to assess the house, try to negotiate the seller to a lower price, or low ball.
“Fortunately, it’s really the agent, the Realtor you have representing you, that does the negotiating. You don’t have to get too involved,” Pagliarini said. “Agents want to make a sale, they want to make purchase, they want a transaction.”
Pagliarini reminded prospective homebuyers to look out for their best interest, which requires comparing properties similar to the one that sparks an interest. Find out if the price offered is at market value, above or below.
“Often times the negotiating is between you and your own agent,” Pagliarini said. “You have to convince the agent, ‘This is the price I am willing to pay. Here’s why.’”
Low balling also will help build “instant equity.” If the property is appraised at $500,000, but the prospective buyer offers $450,000 and that price is accepted, they have earned $50,000 of instant equity. The homebuyer could turn around and sell it again for $500,000. Instant equity is the difference between the house’s value and the offered price.
“If you are thinking about buying a house, start these steps a minimum of six months before you apply. They look back six months, so give yourself that time,” Pagliarini said. “It’s almost like trying to get into shape. You want to exercise, you want to eat right.”
Doing a couple of things, he said, will still be beneficial, but heeding all eight items will help prospective homebuyers get the most bang for their buck.
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