One excellent way to improve your financial profile is to buy a home of your own. But we won’t lie: It’s a long and potentially incredibly stressful process, especially when it comes to the dollars and cents of securing a mortgage loan.
So how do you navigate the stress of the journey in order to reach Destination Homeowner? There’s a lot that’s within your control to help ease some of that stress and make the whole thing a little bit easier. If you take a few steps upfront to manage the financial details early, you’ll thank yourself on moving day.
Get pre-approved for a mortgage
Getting your mortgage loan is arguably the most labor-intensive aspect of buying a home. You’ll have to submit documents that show your income and expenses, including tax returns, bank statements, paystubs, and more. A mortgage pre-approval is much more involved than its lighter cousin, the mortgage pre-qualification.
But a pre-approval will help you understand exactly how your new home will fit into your finances and whether you can even afford the house you’re currently touring. Some buyers make the mistake of getting pre-qualified for a mortgage, making an offer on a house they love -- and then discovering once they submit all their paperwork that they can’t actually get a loan for that amount.
Sound stressful? It is. Avoid that all-too-common scenario by taking care of the hard part early: Talk to a mortgage lender and get your pre-approval lined up so that when you do find a home that you could call your own, you can place an offer on it then and there without needing to wait for approval from a bank.
Pick the best mortgage for your situation
All mortgages will help you buy a home, but not all mortgages are created equal when it comes to your own personal financial profile.
If you know you’re only going to be in your current city for two or three more years before pursuing a career change elsewhere, for example, then maybe a 30-year fixed-rate mortgage is the wrong choice for you. You could build more equity in a shorter period of time with a 15-year mortgage, and an adjustable-rate mortgage might give you a more competitive rate for the time you’ll be in the home.
Conversely, if you are planning on digging in and staying for a while, then a 30-year fixed-rate mortgage might be exactly what you need.
If you’re a veteran or a first-time homebuyer, then you might be able to access loans from a government-sponsored entity (GSE) like the Federal Housing Administration or Veterans Administration, both of which offer loans that don’t require a full 20-percent down payment. And that might mean you can become a homeowner a lot sooner than you thought!
A mortgage broker can walk you through your options and help you choose the mortgage that will work best for your current situation.
Save as much as you can
Even if you’re securing a low-down-payment or no-down-payment mortgage, you should still expect some out-of-pocket costs that you’ll have to shoulder before you can start paying a mortgage instead of rent.
Depending on the sales contract, buyers will likely have to pay for the appraiser and the inspector to look at the house and (respectively) appraise and inspect it. A seller might request earnest money in order to accept an offer, so buyers will have to provide that. Necessary repairs to the house might be taken on by the buyer in order to expedite the sale, so that’s another possible expense to consider. There are closing costs that need to be paid to the title company upon closing, and if a buyer wants to purchase title insurance to protect the sale, that’s an additional expense, too. And don’t forget about the cost of moving -- you’ll need time off work and a truck at minimum, or to hire your own movers. Then once you move in, you might need to pick up some new furniture or other items for your new space.
If you’re starting to get the idea that there’s no such thing as saving too much before you embark on your home sales journey, then you have the correct impression. Don’t let those costs sneak up on you; be aware of them and budget for them so you’re not worried about how you’re going to get it all done.
Research before you bid
If you’ve found a home that could be yours and you’re ready to make a bid, stop and think before you decide on a number.
You might think that offering the seller’s asking price is a perfectly safe move to make (and it might be), but how will you feel when you learn that most sellers in the area are negotiating down from their listing price? (Here’s how you’ll feel: Like you left several thousand perfectly good dollars on the table that could have been yours.)
And offering less than asking price could also be considered a safe move in some markets, but in others, you might have priced yourself out of consideration from the opening bid.
A good real estate agent can explain your local market trends and help you come up with a bid that works with your budget and will be seen as serious and competitive by the seller. Agents can show you whether houses in the area have been selling for below or above the asking price and can help you find that sweet spot where both you and the seller are happy with the deal.
Have your paperwork in order
One of the main reasons financing is delayed is because a borrower wasn't able to give the lender some piece of financial information in a timely fashion. From the very first conversation with a lender, you're going to be asked to produce a litany of financial documents, ranging from tax returns, social security numbers, pay stubs, etc. You may also be asked to provide some of these things at least twice. Be prepared for this! Have your tax returns from the past two years on hand, and keep an updates envelope with your most recent pay stubs, bank statements, etc, so that when your lender says jump, you say ‘How high?’
If you can follow these five suggestions, your home purchase process will be a relative breeze -- and your stress levels will stay under control. You’ll be glad you took the steps to smooth your path a little bit once you’ve finished the journey.