1. Take a look at your credit
This may seem like a no-brainer. However, you'd be surprised how many times people have no idea what their credit scores are. Not only do people not know what their credit scores are, they may not be aware that there are three reporting agencies with different scores. There is Equifax, Transunion, and Experian
What to do? First request a free credit report from each agency. You're entitled one free report per year per agency. If you have a credit card or some other method of obtaining a credit report then go that route. Those reports are usually quicker to obtain then the free ones. Examine your reports carefully. This will give you a clear picture of where you stand in terms of score. Go over the reports more than once. Look for any negative items that can be cleared up.
If there are any negative items, this is the time to clear them up. You want to apply for a loan with your best credit score possible. Discovering a negative item during the home loan application process can increase the interest rate that you'll be paying. A higher interest rate may prevent you from getting the home you want.
It's not about having lots of money. It's about knowing how to manage it.
2. Assess Your Financial Position
Now that you have taken a good look at your credit history it's now time to look at your overall financial position. Here are a few questions to ask yourself.
How much money do I really have to put as a down payment? Are you relying on someone to honor an obligation before you enter escrow. That means paying you back money they owe you from way back. We know that some people are not reliable. Of all your money available to you, do you want to use it all for a down payment? Do you want to keep some of it for home improvements once you're in the home?
What type of financing is available to me? I would say that this is by far the most important question on this small checklist. If you're going conventional, you'll need to put up 20% for a down payment. If you're going with a government sponsored program like F.H.A, will you be able to meet the requirements? Many people forget that they will be responsible for mortgage insurance on the loan. This can put a strain on your budget. Will you be getting a 15 or 30 year mortgage? You may be looking to pay off your mortgage sooner but will be paying more a month with a 15 year mortgage. Like I stated, this is the most important question on this checklist and should be analyzed extremely carefully. You don't want to get stuck with a program you're not happy with!
With my credit score what type of interest rate would I most likely be able to obtain? Once you have looked at available mortgage programs, you'll need to know at what interest rate you'll be paying your lender back. This makes a big difference. Increasing your rate of interest will raise payments. Of course here, the lower the rate the better. But, does your credit score warrant a lender lending to you at the best rate. I know that many people would love to have the best rate in the market but does your credit score say that you're worthy of obtaining such a rate? Being honest with yourself will avoid disappointment down the line if your lender offers you a higher rate than you expected.
Do I have money to close escrow and have enough for bank required reserves? After the down payment, will you be able to close escrow and have bank required reserves? Many people think that all they need is a down payment to purchase a home. That may be true in some cases but it's not always the case. Different loan programs require different reserves. The point here is that many people forget about this and are later surprised that they can't close because they lack capital.
3. Create a Needs & Wants Checklist
Now that you have your finances squared away, it's almost time to start looking for properties. But what kind of properties would you be looking for?
I recommend creating a realistic checklist of your needs and wants. Do you absolutely have to live in a certain area? Do you have to be close to some family member that lives in a certain town? Do you need to live close to work? Is price your biggest concern? Do you need a certain amount of rooms or square footage?
You see that these things are not as easy as they may appear on the surface. The point here is that you should take a good look of what you can afford and make concessions if need be. We would all love to live in a mansion in the hills but is that a want or a need given other constraints?
Ending Remarks
I hope that this post gave you a clearer picture of a few of the preliminary things you should do before purchasing a home. My goal is to demystify some issues. But if you still have any questions or would like to consult with me, I'm here to help.
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