As we approach the holidays, it’s natural to take inventory of the year behind and start preparing for the year ahead. If buying a home in 2015 is on your mind, there are several things to be aware of and better yet, take actions towards. Buying a home is one of the biggest commitments a person can make in their lifetime and thoughtful preparation is often overlooked and undervalued. When it comes to the financial side of this, understanding what really matters and doing the work ahead of time can make all the difference. It is wise to be prepared and in good financial health when it comes time to make such a big commitment.
1. Managing your credit
When getting a new mortgage, or simply securing the best rate, this is always the starting point. Yes, your score is important, but other factors such as credit history can be vital. You might be surprised how many misconceptions there are and how much of the information published is flat out wrong or doesn’t apply to mortgages.
If your credit profile is perfect, great, then feel free to move on down the list, but if your scores are not top notch (740+) and you have a few dings on your credit, getting these items cleared or re-building new and positive credit can take time. This is why it is smart to evaluate this well in advance. Given the economic events in the past 7 years, many people have short sales, foreclosures, bankruptcies, credit card charge offs (myself included) or just a few late payments. Knowing how this effects your credit profile and ability to qualify is key.
Note: While having great credit is a worthwhile pursuit, please know there are still solid financing options available for applicants with less then perfect credit or scores in the 620-660 range.
Recommended Action Item: Inquire with your financial advisor or mortgage professional (See #5 for more on this) about what services they offer for a credit check up as well as guided expertise to improve/optimize your credit profile. I recommend doing this 6-12 months before you plan to purchase the home.
2. Saving cash and paying down debt
This one is pretty straightforward, the more money you put down on a house, the lower the monthly payment will be. However, because every individual has different preferences, as well as different income earning and spending patterns, striking the right balance here is what matters and will lead to peace of mind. There is a trade off between cash in the bank and what your monthly payment will be. Some people like to keep their cash, some people want the lower payment.
With regards to paying down debt, today’s lending guidelines are very sensitive to what is “debt to income ratio”. Regardless of all other factors (downpayment/equity in property, credit profile) banks still need to see that you have the capacity from a cash flow perspective to make the payment month in and month out. The greater amount of debt you have the less you can qualify for on a monthly basis with a new mortgage/home. And of course paying high interest rates on any existing debt is simply throwing money out the window and not a good practice if one is serious about purchasing a home at today’s prices.
Recommended Action Item: First, go to work on any debts that have a moderate/high interest cost to them and then boost your cash savings. Try to get to where you have one or two credit cards, maybe an auto loan. Credit that is revolving and you pay on a monthly basis, like an Amex card, is fine and will help your scores. Then shoot for 10-20% or more on the downpayment.
3. Getting clear on your monthly budget
In planning for the financing of your home, gaining clarity on how much cash you can or want to put down and then what you can afford on a monthly basis makes everything else much easier. While the downpayment is a one time thing and creates equity in the property (that you theoretically should get back when you sell the home) the monthly payment is something you are stuck with paying for the duration. So you really want to get this part right. From my experience, it comes down to comfort level and a feeling of security. After all it is your home, not simply an investment. There will be a number that you are uncomfortable paying, this would be your max, and then there is a window of what you can and are willing to pay if you find the right home. Working to get clear on your monthly inflows and outflows is what will give you this feeling of comfort and security.
Recommended Action Item: Find a financial advisor or online management tool that you can use to determine your comfort level and what you can afford on a month to month basis.
4. Be mindful of your 2014 federal tax return
Conventional underwriting guidelines will absolutely look at your past 2 years tax returns and certain write-offs will be deducted from your income. On one hand being savvy or aggressive on taxes can save you money, but then hurt you when it comes to qualifying for a mortgage. This is something you want to consider and discuss when meeting with your accountant or whomever prepares your taxes. This is more of a factor for people that are self employed, because of the discretion allowed when it comes to expenses, but basically anyone who takes deductions on their tax return could lose qualifying power. This goes back to the debt to income rule mentioned above.
Recommended Action Item: Get pre-approved for a mortgage before filing your 2014 return. File an extension if you need to. This will tell you if you have room to take those tax deductions and still qualify or if you need to be more conservative.
5. Find and select the right mortgage professional
Doing it on your own can only take you so far. Selecting the right mortgage professional to guide you through the above steps will save you time and much hassle. Starting with #1 and then working towards a full pre-approval well before you are ready to buy or even look at homes, offers many advantages. Here is a perfect example: the credit reports that a consumer can get on their own use different scoring models than the mortgage companies and banks do. The “Fico” scoring model offers many variations and there are other models that are widely used. You may think you are golden with a 720 score only to see it come back at 687 on a real live mortgage credit report, which could mean .250% higher in rate or not being able to qualify at all. I have seen this happen time and time again.
A second example, ties in #2 and 4 in that you will need to know how these decisions effect your ability to qualify. For example, many people pay off all their debt to prepare for a mortgage but then may come up short on the downpayment needed or that gets them the optimal financing or rate. For people that have a strong income, carrying some monthly debt is just fine as long as it in proportion.
Recommended Action Item: Search Yelp in your local area and ask friends and family who they would recommend. Be aware that some mortgage professionals will be willing to put in the time to help and educate you well in advance of buying a home, and some won’t.
About the Author ~ Since 2003, Beau has been a mortgage professional and is a leading mortgage broker and lender in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage, he is truly committed to serving the needs of his clients and raising the industry standards for integrity and transparency.
Questions, Comments, or Personalized Rate Quote? Contact Beau today: 619-888-3606 or firstname.lastname@example.org