This is the latest article in our "Preparing to Buy a Home" 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. With the same downpayment, 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. With less than 20 percent down, the lower credit score will also see higher costs for Private Mortgage Insurance, too.
You can get your credit report for free from AnnualCreditReport.com, and it's a good idea to pay the nominal fee to get your FICO credit score as well. Your FICO 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 qualification 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 mortgage rates on HSH.com; you'll see that 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 Loan Estimate disclosures (formerly called the "Good Faith Estimate of Closing Costs"), 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 score, give that information to lenders when shopping for a loan. Be cautious when providing your Social Security numbers and other personal data; some lenders may ask for these things in order to verify your credit score, but if you're not actually applying, they should be able to provide basic data about the loan to you based on the verbal information you provide. If you do allow lenders to pull your credit report, it's a good idea to do this only while you are actively shopping for your loan; multiple inquiries within a short time frame won't hurt your credit score, but spreading inquiries out over a number of months may.
Do: Get Pre-Approved for Your Purchase
Getting pre-approved for your mortgage -- a process where you actually start a mortgage application with a lender and receive a conditional commitment for a mortgage (usually pending only a satisfactory appraisal on a home you want to buy) -- is vital in active and competitive housing markets. 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 Loan Estimate disclosure tells you what the most important features of your loan are -- the interest rate, any potential adjustments or prepayment penalties and what the loan costs are expected to be. This form also 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, and keep them handy throughout the loan process -- you'll want to compare these up-front estimates with the final costs of your loan which will be detailed in the Closing Disclosure you'll receive three days before the loan will close.
Don't: Cave In to Pressure
Finally, don't sign anything you don't understand or feel uncomfortable with. Ask questions and expect answers -- and if you don't understand them, ask for better explanations. 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 loan closing costs which could total about 3% of the home's purchase price. There are also other items, such as the first year of homeowner's insurance or funding escrow accounts for property taxes that will eat up available cash. Then there are also reserve requirements -- many lenders require borrowers to have enough in the bank to pay their mortgage for at least two months if they had an interruption in income. Furthermore, getting into your new home may seen you needing to make deposits to utilities and cable companies and the like to start services, and your home's maintenance clock is always running, too, so there could be cash outlays sooner than you think.
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.
Do: Get Your Financial Paperwork in Order
When you apply for your mortgage, the loan application will be reviewed with a fine-toothed comb. Anything you claim on the application will be verified and must be documented, including your income, any assets you are using for your downpayment and closing costs and those for reserves. You'll need recent pay stubs, checking, bank and brokerage account statements, possibly tax returns and more -- and if the source of your downpayment is a gift from family or others, you'll need a gift letter from the donors (preferably notarized).