Buying a Home? Take This One Step to Put Yourself Ahead of the Game

If you’re in the market for a new home, before you see a single property you should get preapproved for a loan. This will save you from delays that could put your dream home out of reach, or from dropping to the bottom of the list of prospective buyers when more than one offer is on the table.

When reviewing your application for a home loan, lenders consider many factors: your time on the job, your time in the industry, the likelihood of your continued employment, your income now and whether it is likely to remain at that level. All of this information is compared to your financial obligations.

Financial obligations mostly refer to debt in the form of other loan payments like car payments, credit card debt, student loans, and other real estate loans. They might also include judgment debts—which you should take care of immediately if you want a home loan with the best possible terms.

Judgment debt is typically a debt owed to someone for an unpaid bill or a liability you incurred, perhaps in an accident. The fact that you have a judgment debt should not be a surprise to you, but its amount might be. For a judgment to come into existence, someone went to court and convinced a judge that you owed them money. And what may have been an insignificant charge that you didn’t feel obligated to pay can mushroom with attorneys’ fees and court costs into an unreasonably large sum.

If you have any other ongoing financial obligations like spousal or child support, a lender will also consider those in determining your loan. If you can’t think of what your ongoing obligations are, review your check register—who do you pay each month?

After reviewing your whole financial picture, your lender will determine the monthly payment you can support. Because this has become a legal requirement for lenders, your assurances of, “But I can afford more! I’ve been paying more in rent already!” will fall on deaf ears.

Now that the lender has determined how much you can afford, he or she will attempt to determine the likelihood of whether you will make those payments. To do this, they’ll use a credit score; the most common of which is the Fair Isaac and Company score (FICO). A FICO score considers a huge amount of credit history, including the number of real estate loans and car loans. It also reviews credit card information: outstanding balances, whether you pay them off each month, and how close they are to the maximum credit limit. The score also reviews how recently and frequently your credit check has been run, and whether closed accounts were closed based on customer requests or vendor requests.

Once all this data is compiled, you will receive a FICO score between 350 – 820: the higher the score, the more likely you’ll make payments on time. Good scores are usually above 680, but lower scores can be acceptable. If your score comes in below 450, plan to borrow from your mother, because she’s the only one who will loan you any money.

If you think your credit score is wrong, be prepared to explain why and prove it. If you’ve had a short sale, foreclosure or bankruptcy, talk to your lender to determine how long it will remain on the credit report and what the lender’s policy is for disregarding it.

The bottom line is this: you’ll save time and hassle getting preapproved for a loan, and if you start the process early, you’ll have time to address any blemishes long before they come between you and your dream home.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Buying Versus Renting

Like I mentioned last week, the market continues to be good for buyers. It’s so good, in fact, that I thought I’d dedicate a column to explaining why renters should consider buying right now. While I know numbers can turn a lot of people off, I think it’s important to use an example so you really know what I’m talking about.

Let’s say you’re a first time homebuyer who’d like to purchase a $200,000 home. You don’t have money for a down payment, but you have a job and good credit. Here’s how this could work:

Estimated monthly expenses

Loan                        $ 950

Taxes                      $ 200

Insurance              $   75

$1225/month

 

“But what about other expenses?” you ask. “If I own my home, I can’t call a landlord to fix things.” That’s true. At some point, you’ll need to paint your home inside and out, put a new roof on, replace the water heater, etc. So, let’s estimate about 1.5 percent of the purchase price for upkeep each year (about $250), since that’s usually about what it costs.

But wait, there’s good news to balance the maintenance expense. You get to write off some of the mortgage payment. Let’s say your household income puts you in the 25 percent tax bracket. Some of your mortgage payment is tax deductible: about $867 ($667 is the interest on your loan and it’s deductible, as is the $200 homeowner’s tax). So, multiply $667 by 25 percent, and you will get back about $217 per month.

Mortgage payment                $1225

Maintenance/upkeep          $  250

Tax benefits                            $ -217

$1258/month

 

So, like with anything in life, restrictions apply, but they aren’t too bad. First, you need to have good credit (a credit score in the mid 600s). Next, you need reportable income. It’s time to claim that babysitting money or those waitressing tips as income, because if your income isn’t reportable, you’ll have a tough time getting a loan. For this particular loan that I’ve used as an example, there are minimum and maximum income restrictions based on formulas that have to do with the number of people in your household, the number of children you have, and other factors. The final requirement is job stability. You need to have been in your job for at least a year, and it needs to appear that you will remain in that job for the foreseeable future.

Owning your own home has benefits that go beyond financial. Pounding a nail wherever you want doesn’t require anyone else’s permission. Where to plant trees is your choice. Choosing which paint color to use is your spouse’s choice. And, your elbow grease benefits YOU. If you think you might be able to purchase a home, and you’d like to learn more, call your local real estate agent and they can help you figure it out.

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Qualifying for a Loan

 

The market continues to be good for buyers. Home prices are low (but starting to climb), and rates remain incredibly low compared to historic norms. While there’s not a lot on the market, spring and summer are traditionally times when more inventory becomes available, so we may see an upswing in houses listed for sale.

However, while it may be a buyer’s market as far as housing prices and rates, there’s not much for sale so seller’s can be choosy. How can you be the buyer that gets the home you want? One of the best ways is to demonstrate that you’re qualified to buy that home.

There are basically two levels of loan qualification – “pre-qualified” and “pre-approved.” Pre-qualified consists of sitting down with a Real Estate agent and doing some simple calculations. Getting pre-qualified allows you to figure out what you can afford so you can narrow your search. An agent will ask you about your income and how much debt you carry (car payments, insurance payments, tuition payments, etc.), and whether you have any savings for a down payment. Being pre-qualified is much better then not being pre-qualified, but it’s not as good as being pre-approved.

To become “pre-approved” for a loan is more involved, but it’s a GREAT way to increase the chances of getting the property you want. Becoming pre-approved means working with your agent to find a loan broker who will review all your assets, liabilities, tax returns, W-2s, credit history, and any other relevant financial information to begin the process of applying for a loan. Basically, the only difference between being pre-approved and applying for a loan is that when you’re pre-approved, you haven’t found your property yet.

Getting pre-approved increases the chances of having your offer accepted, and it puts you ahead of your competition, if you have any. Because loans are so much more difficult to get than they used to be, a buyer who is pre-approved gives sellers piece of mind. Sellers won’t have to go through the frustrating experience of starting an escrow, only to have it fall through because the buyer can’t get a loan.

So how do you get pre-approved? Work with your agent to find a local loan broker. In this case, local matters. The incentive to provide excellent service and solid results is greater when your loan broker knows he may run into you in town. But that’s not the only reason local loan brokers are better than, say, someone on the Internet.

Internet brokers are playing a numbers game. If it takes months to find a type of loan that you may qualify for, that’s fine with them. They have hundreds, maybe thousands, of customers and so there’s no great rush to get you what you need.

Loan brokers who work in Ukiah only have the local population to work with, so it’s not efficient for them to throw a bunch of spaghetti at the wall to see what sticks. Basically, they make a living by being efficient and doing their homework so they can find you the best loan as quickly as possible. It takes more work up front, but it pays off for them and it pays off for you. Once they’ve found a loan that will work, the next incredibly compelling reason to find a local loan broker is so you can take advantage of their business relationships. Local brokers know people with whom they can work, people like title officers, escrow officers, pest and fungus inspectors, and insurance agents.

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