This is the latest article in our Preparing to Buy series. This article focuses on what you should and should not do prior to buying and financing a home.
Do: Check Your Credit
Many credit reports contain erroneous data. If one exists, it can lower your credit score and cost you thousands of dollars, or even keep you from getting a loan. Check out Fannie Mae's Loan Level Pricing Adjustment matrix. A mortgage with a 679 FICO score can cost a full point more than the same loan with a 680 score. That's an extra $3,000 for a $300,000 loan. You can get your credit report for free from www.annualcreditreport.com, and pay the nominal fee to get your credit score as well. Your score will give you a better idea of how mortgage lenders will evaluate you, and you may be able to correct errors and raise your score a few points before applying for your home loan.
Do: Use a Mortgage Calculator
Your lender can tell you how much home you qualify to buy, but only you know what payment you can comfortably afford. It's rarely a good idea to leverage your income to the maximum since it leaves no room for error or any change in plans or income stream. A comfortable payment, rather than a maximum one, might allow you to cut your income, go back to school, start a family, retire early or keep taking expensive vacations. A mortgage calculator can show you how a comfortable payment translates to a home purchase price. Then, you can refine your search to affordable properties that won't break your budget.
Do: Shop for Your Mortgage
Take a quick look at average mortgage rates on HSH.com. Lender offers can differ on a 30-year fixed rate mortgage by nearly half a point. Yet checking online interest rates is just the beginning. You will need to actually contact lenders and get Good Faith Estimate (GFE) disclosures, which are actual interest rate and fee commitments from lenders that they must honor. Finally, don't forget to ask questions: is the advertised rate available to someone with my credit score, down payment and type of property I'm purchasing? What will that rate cost?
Don't: Give Everyone Your Social Security Number
Once you have your credit scores, give that information to lenders when shopping for a loan. There is no reason to provide personal data like Social Security numbers until you decide on a lender. There's no reason to compromise your identity, and having your credit report pulled indiscriminately by loads of lenders over several weeks can drop your scores (and cost you money!).
Do: Get Pre-Approved for Your Purchase
Not only does pre-approval make closing faster and easier, but it tells sellers that you're serious and able to buy. This can put you in a stronger bargaining position than your competition for a desirable home.
Do: Read Your Mortgage Disclosures
Your GFE tells you what the most important features of your loan are -- the interest rate, any potential adjustments or prepayment penalties and what the costs are. Your Truth-in-Lending form shows you your annual percentage rate and the cost of financing over the life of your loan. Federal law requires that you get these forms to make shopping for your mortgage easier. Be sure to read them very carefully.
Don't: Cave In to Pressure
Finally, don't sign anything you don't understand or feel uncomfortable with. Don't let a real estate agent, lender or anyone else who stands to make money from your purchase push you into anything. It's you who will be living in and paying for that home for a long time to come.
Do: Save More than You Think You'll Need
You need a downpayment, which can range from as little as nothing (for a USDA or VA loan) to 10% or 20% for conventional financing. But that's not all. You'll still have to pay closing costs which could total about 3% of your purchase price. And then there are reserve requirements -- many lenders prefer borrowers to have enough in the bank to pay their mortgage for at least two months if they had an interruption in income. These funds are called reserves. Furthermore, home ownership costs money -- plan on spending at least 1% of your home's value each year on repairs and maintenance.
Don't: Make Big Changes
Don't change jobs before you buy your home (unless you're getting a raise) and don't move money around. We know a story of one homebuyer who almost lost his home because he had stated on his application that the down payment was coming from a mutual fund account. Then, two days before closing, he decided to sell a baseball card collection instead. The loan had to be underwritten all over, his ownership of the collection, its value and its sale had to be verified, the closing was delayed and the fees increased. The same goes for making large purchases before buying, especially if you're financing them. It can blow your debt-to-income ratios and drop your credit score, jeopardizing your approval.