Before Looking for a Home
Buying a house can be a new and exciting process; it can also be very confusing and stressful. Becoming educated about the house buying process and being prepared can reduce a lot of this stress and confusion. Anyone buying a home should take the following steps before they even step out to look at a house.
Check your Credit History
The moment you decide that you are ready to buy a house is the moment you need to get a credit report. When pulling your credit report, be sure to use a service that provides you with copies of your credit history and score from all three credit bureaus: Experian, Equifax, and TransUnion. Not all credit information is reported to each bureau, and lenders do not all check the same credit bureaus to determine your credit score so it is important that you get a copy from each bureau.
Obtaining a credit report early on in the home buying process is important because if there are discrepancies on your reports you must write to the bureaus and request that they are corrected. Depending upon how busy the bureaus are, this process can take up to months. Fixing errors on your credit history can result in a higher credit score and improvements in your credit score may qualify you for a lower interest rate. A loan with even a .25% lower interest rate can save you thousands of dollars over the course of your loan.
It is also important to note that pulling your own credit report will not lower your credit score in any way, this only happens when companies, like banks pull your history in attempt to approve you for items such as loans and credit cards.
Research Potential Loan Programs and Lenders
A house loan is often the largest and longest term of a loan that many individuals will ever receive in their lifetimes. Therefore, time should be taken to review potential lenders and loan programs that you may qualify for. For example, if you have a not so perfect credit history or need a low down payment you might want to see if you qualify for a FHA loan. If you are a veteran you may qualify for a Veteran’s Administration loan, which among other things allows individuals to put no money down without having to pay Private Mortgage Insurance. Some lenders offer special rebates, promotions, and programs for home buyers that ease the expenses involved with buying a home. Individual lenders vary in the interest rate they charge and the fees involved in the loan process. Even the nonrefundable application fee for some banks is upwards to $500, so it is important to research a bank and become satisfied with the loan programs they offer before you apply.
There is a big difference between getting prequalified and preapproved for a loan. When you get prequalified for a loan there are generally no fees involved and the bank gives you a rough estimate as to what they would give you for a loan based on the information you’ve provided them. It is not completely accurate and many sellers will not accept offers from buyers who are only prequalified. When you get preapproved for a loan you will have to provide more documentation and pay an application fee. When you are preapproved the bank generally states that you are eligible for the exact amount of your preapproved amount, granted that all the information you have provided to them is accurate.
If you’ve decided that you are ready to buy a house one of the very first steps you should take is to get prequalified for a loan. Before going out to look at houses that may potentially be out of your price range, get prequalified for a loan so you know what houses you should be looking at. If after getting prequalified you find that you qualify for a lot less than you anticipated for, ask the lender what you could do to qualify for a larger loan. You may discover that your debt to income ratio is too high or that the length of your credit history is too short. You may then decide to reduce some of your debt or if you are satisfied with the amount you may decide to get preapproved for a loan.
Determine How Much you Can and Want to Spend
Now that you have checked your credit history, and have gotten prequalified or preapproved for a loan you must determine how much you can really afford to spend. Do not blindly assume that you will be able to afford the payments your lender says you can. Keep in mind that lenders often push the limits of your loan to the outer boundaries, in order to get you the biggest loan possible and to make more money. If the mortgage payment you qualify for is a lot more than your current mortgage or rent payments look at the new value realistically. Can you REALLY afford that payment? Can you live comfortably with that much less money per month? If you are used to renting, keep in mind that you will now be responsible for repairs, yard work, insurance, and taxes. Do not tell yourself that you will give up certain activities or change your lifestyle in order to afford your new payment.
House buying should be an exciting and stress free process. If you educate yourself about lending processes and take the steps above you will be more prepared than many other home buyers.