A Crash Course in Preparing to Buy a Home
Today, we are thrilled to have our first guest blogger, Corey Tutewohl, a realtor with Keller Williams Preferred Realty talking about some of the critical first steps young professioanls can take when looking to buy a new home.
Whether you are just starting to consider the purchase of a home, seriously looking to get started or in between I’d like to congratulate you. No matter what kind of home, or where it is, buying a home is an opportunity to invest in your future wealth and financial security. It is one of the only assets that you can truly enjoy in your everyday life and knowing how to prepare yourself for this journey can make all the difference.
Getting Started Buying a Home
The first thing I recommend doing, if you don’t already have one, is to create a budget. Look at what you are spending on rent, utilities, groceries, gas, clothes, going out for dinner, entertainment, anything you spend money on. This will help you understand where your money is going and help you figure out what you realistically want to spend on a home while still enjoying the lifestyle you want.
While you’re doing this it is important to think long term. The National Association of Realtors recent homeowner survey showed most homeowners stay in their home an average of seven years. Once you have your budget you can use this for a baseline to think about what fits into your lifestyle when it comes to your new home. Keep in mind, that the amount you spend on utilities and insurance may go up while expenses like laundry and parking may go down. Owning a home can also save you a considerable amount when it comes to your taxes.
Buying a home is an extremely large decision in your life and it will have an immense impact on your future. That’s why it is extremely important to know the facts and use professionals with a good reputation and track record to help you along the way. Once you’ve thought about what you can realistically afford the next step is figuring out how you’re going to pay for a home.
Determining How to Pay for a Home
If you happen to be in a position to pay cash for a home, which is rare for young professionals, you can skip ahead. For everyone else you will most likely be making a down payment. One misconception is that you have to put 20% down on your home, however, it is important to note that you do not have to put 20% of the purchase price down for a payment.
This is one of the largest myths that everyone hears when they talk about buying a home. Having 20% to put down on a house is oftentimes beneficial in the long run, but it is not required. Also, keep in mind that if you do not put down 20% on your home you will likely be required to pay mortgage insurance.
It’s important to keep in mind that there are a variety of mortgage types available for young professionals. The most common are FHA (Federal Housing Administration), Conventional, USDA/Rural Housing and DVA (Department of Veterans Affairs). There are also first time homebuyer programs through organizations such as MHFA (Minnesota Housing Finance Agency). Many mortgage lenders have access to all of these programs, yet each one has their own set of qualification requirements, interest rates and required down payment amounts.
Choosing a Mortgage Lender and the Steps to Getting Started
Getting a mortgage isn’t rocket science, but it is an important step in achieving homeownership. The takeaway? Get a second opinion. When you talk to a mortgage lender get a quote from them, in writing, so you can compare apples to apples and ensure you are getting a fair rate and fair fees. A good mortgage lender should always be focused on finding the best program for you.
There are three steps to getting set up for a mortgage when talking with a mortgage lender.
- Pre-Qualification: The lender has spoken with you about your income, outstanding debt and the down payment you have saved and gives you a ballpark figure of what you could get pre-approved for. Keep in mind that nothing is binding and the estimate of what you might qualify for is just that, an estimate.
- Pre-Approval: This process tends to be much more involved than getting pre-qualified. The lender has done the same thing as the pre-qualification, however, they have also received documentation to verify everything and to formalize what you are approved for. See more below.
- Full Commitment: This is going above and beyond in my experience dealing with mortgage lenders as not everyone does it. The Full Commitment is the lender pre-approving you and then submitting your file to “preliminary underwriting”. This is when an underwriter for the mortgage lender combs through your information to ensure there are no red flags and it can help prevent delays once you do have a home under contract.
Once you have decided who you plan on working with when it comes to your mortgage they are going to need to review a lot of your information so be prepared. Here is what the lender is going to want to review:
- 2 years of tax returns
- 2 months of pay stubs
- 2 months of bank statements
- 2 months of statements from any retirement or investment accounts
- They will also run a credit report to check your credit score with all three credit bureaus (Note: they use the median score for pre-approval purposes).
Once the lender has reviewed all of your documentation they will be able to pre-approve you for your mortgage. A lot of times the lender will also help you by taking your budget into consideration to make sure you are staying within your means. Sometimes though mortgage lenders will pre-approve you for the maximum amount you can be pre-approved for and it is critical to keep in mind that you do not need to spend all of it!
Making sure you think about these things and have been through the pre-approval process is truly the first step on the path to homeownership. This will help ensure you are looking at homes you can afford and aren’t falling in love with something that isn’t financially viable. The next step in finding that perfect home is meeting with a real estate professional, like a Realtor, to help you understand the rest of the process, current market conditions and to understand what you are looking for so they can help you find that perfect home.
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