Buying your very first home can be a daunting task, but it doesn't have to be. In fact, despite what a lot of people might say, it can still be a very enjoyable and rewarding process.
The earlier you start the home buying process the better, and the first step should always be to get pre-approved. In order to get pre-approved it is extremely important to find the right Loan Officer (LO) to help you navigate the mortgage process. I strongly recommend getting a referral from someone who has had a positive experience with the LO. There are a lot of fly by night shops out there and it is extremely important to get an experienced LO to help you through this process.
Here are the 5 most important things to know when starting the home buying process:
- Start Early - When it comes to saving money and improving your credit score, nothing helps more than time. Starting early will allow you to work with your LO and make sure your credit is where it needs to be in order to secure the lowest possible interest. The more money you have for a down payment, the more options you have. Once home buyers start the home buying process it becomes a little easier to save money now that they have a goal to reach. For many clients family members are more than happy to help out and give gift money. Starting early allows family members to get their finances in order so they are able to assist.
- Down Payment - Don't listen to the pundits out there that say you need 20% in order to buy a home. There are many programs out there with down payment options below 5%. FHA requires 3.5% down, Conventional requires 3% down and VA requires 0% down. There are even some conventional loan programs available for 1% down with the lender covering the other required 2%. Don't be fooled by the 1% down payment program as your interest will increase substantially to do the 1% down program. In addition, for FHA loans Mortgage Insurance is always required and for VA loans mortgage insurance is never required. For Conventional loans mortgage insurance is required for loans with a down payment less than 20%.
- Credit Score - A good credit score is essential in getting the best available interest rates. If your credit score isn't perfect, there are a lot of techniques that can raise your credit score. There is no magic button to do this, so don't fall for any gimmicks out there for increasing your score, but there are things that can be done to help. All of these things need a little time, some more than others. If you are looking to buy a house tomorrow, it's too late to start working on your credit score. If you are looking in a few months, now we're talking. Some of the easiest ways to bring up your score are paying down balances to revolving credit accounts to <30% of the limit, paying any past due amounts, paying off collections or charge offs. Another easy way to bring down the utilization to limit ratio is simply calling the creditor and asking for an increased balance. Many LOs out there are really good at analyzing credit reports and guiding clients on how to bring up their scores. Increasing your credit score just a few points can result in a lower interest rate.
- Mortgage Insurance - Don't be afraid of mortgage insurance (MI). Yeah, it sucks to have to pay for insurance when it isn't even used to protect you, but at least it gets you out of Mom and Dad's basement. MI is required on all FHA loans and on conventional loans if you put down less than 20%. MI is required by lenders, from borrowers, and it protects the lender against losses. MI on Conventional loans is obtained by lenders from insurance companies and if you were to default on your loan, the insurance kicks in and the lender can recoup some of the losses from the insurance companies that wrote the policy. While it is great to avoid MI if possible, I would not let paying MI stop you from home ownership. In addition, just because you saved up 20%, it isn't always in your best interest to put every last penny into your home. Having an emergency fund is highly recommended and that might mean you put down 15% and have MI instead of putting down 20%.
- Loan Officer - The most important part of the entire process is picking the right Loan Officer. Once you decide it's time to start the home buying process, start asking people in your circle if they have someone they have used and recommend. If you already have a Realtor, ask them who they would recommend. One of the biggest mistakes people make when looking for a LO is only asking about interest rates and closing costs. While this is important, there are too many LOs out there who will offer an extremely low interest today, knowing the rate won't be locked in and they can increase it once you go to lock 3 months later.
This blogger graduated from Goldman Sachs' 10,000 Small Businesses program. Goldman Sachs is a partner of the What Is Working: Small Businesses section.