7 Things A First Time Home Buyer Needs To Know
If your an apartment dweller and your sick and tired of the rental game you have probably been thinking about buying a house. It can be very confusing to actually get started on the process without expert guidance. You will initially find everyone you talk to is an expert. From realtors to loan officers everyone has a so called expert opinion. I’m certain many are right but not all. I am an ex-realtor and currently still licensed and I can’t count the times I’ve been lied to. Straight out lied to. Some lies are for profit, others (most) are just to keep you from shopping your loan. It’s sad but true. The worst part is if a deal is based on a lie eventually everyone gets their time and money wasted. Everyone, the buyer, seller, agents, inspectors everyone. It happens more than you think. Being prepared will help you steer clear of the B.S. and spot an unrealistic promise when you hear one. Loan officers love to say “no money down”. If you have bought a home with a traditional loan on a single family, owner occupied home as a first time buyer and put no money down let me know. I’ve never seen it happen. Technically “no money down” refers to no principle down. That being said taxes, insurance, points, escrow, title fees, appraisals and much more will still have to be paid at or before closing. You might pay $5000, $7000 or more on a “no money down loan” I estimate the average is more like $1500-$3000.
What the hell is principle? Simple, it is the amount you pay for the home. $100,000 selling price plus $5,000 in fees together equals $105,000. On a “no money down” loan your not required to put any money down on the $100,000. The $5000 in fees is still your problem. This is a very simple example. The real fee amounts can be much worse but if at all possible putting money down is a great idea. 100% of it goes to the principle which in turn shortens your loan or lowers your payments depending on the loan. Either way it is the best place to put your money in the whole deal. In essence you have added instant equity to the home so really the money is still yours.
What the hell is equity? Equity is the difference between what you borrowed and what you owe.
If you borrowed $100,000 and you put $20,000 down (on the principle) you only owe $80,000 on a $100,000 home. You could cash out ( or borrow back) the $20,000 with an equity loan or if you sold the property you would have that $20,000 coming too you along with any profit over the payoff. Equity is a good thing. 100% equity is the same as “paid off”.
What if I don’t have $20,000 to put down? You will need a balance of credit, time on job, and cash.
Here’s how loan requirements break down.
1. Your ”time on job”. Lenders like to see at least two years at the same employer. Sometimes they will accept different employers as long as it’s the same trade. Sometimes not. If you don’t have at least 18 months time on job I’d think about waiting. Chances are your going to get slapped down with extra fees if you do get a loan. It might look worth it at the time but all those fees (if added to the loan) will result in thousands of wasted money in the long run.
If you own a business it’s basically the same deal. You’ll need two years of income verification such as a tax return, the two years will then be averaged. Beware! Lenders base your income on the final income after deductions. If you have done some creative tax work to get your net down you can’t use the income above the net tax return number. Example: You took in $100,000 you deducted $80,000 you earned $20,000 to the bank. Your homes price range will be based on the payment that $20,000 qualifies you for. Same with commission based income.
2. Debt to income ratio. This is crucial, if you earn $1000 a month but pay out $800 in monthly debts your income to debt ratio is %80 Lenders rarely lend to people with a 41% or higher ratio. It happens but it’s rare. So you better pay off any debt you can (30 days) before applying.
3. Down payment. We have already touched on the meaning and importance of this. Put down as much as you can, you’ll get a better rate and a better deal. Cash is still king.
4. Credit score. Ooh baby that’s the tough one. Credit scoring companies (Equifax, Trans Union and Experian) are mysterious in what affects your score and how much. There is a wealth of info out there to help you improve your score. You can fix it, I’ve done it and it takes time. Lots of time. My report took two years to get to a decent level. It’s too lengthy to get into here but you can do it all yourself. Don’t be fooled by companies offering to “wipe out” bad credit totally or some other such crap. They have to take the exact same action you will. Sometimes erasing credit entries can be bad even if they are delinquent. Read a book and take your time. If you do it yourself you will have an excellent understanding of it all and the lenders won’t be as able to pull any tricks with the old “your credit has some blemishes and that’s why your rate is higher then I quoted you.”. It’s a good learning experience anyway.
Here’s a breakdown of the credit score values.
499 or under = Forget about it. Start fixing your credit and taking out small secured bank loans.
500-579= Doubtful unless you have serious money to put down, like 25% and up.
580 -619= you might get a loan (maybe even FHA ) but it’s going to depend on the other factors especially down payment and you better have some real time on the job.
620-659= Now were getting somewhere, your considered entry level to many lenders. You will get a high rate but you have more flexibility on the other criteria.
660-680= The low end of good credit. You could get a good loan but at a slightly higher rate.
680-719= Your in like Flynn. Better than average score. You can shop and get a great deal.
720+ Your calling the shots now. Any lender would freak out if a 720+ customer said “thanks but no thanks” to their offer and walked. 720+ people are rare, banks will do what they have to do to be competitive. In fact, some area lenders don’t even require an appraisal at 740!
5. The purpose of the loan. 4+ units are commercial loan only. These loans require 20% down minimum. Same with a single family investment property. Single family owner occupied can get 100% loans, not so on investments. Single family loans can use FHA or other options as well.
6. Organize your records! Not the 70’s vinyls either. You will need 2 years W-2’s or tax statements, last 2 months pay stubs, all utility bills for past 2 months, total of all monthly debts (and copies of them), bank statements, and any other pertinent info (stocks, c.d’s., etc.). Trust me.
7. After applying for a loan you need to get the rate, fees and costs in writing. Before you commit to anything shop at least three lenders. Compare the numbers especially the fees. It might be rare but some lenders try to pass off ridiculous fees to people they think won’t know better. My parents have a great score, 70+ years on job combined, and good income to debt ratio. Still Wells Fargo tried to pull off a $16,000 “points fee”! On top of that after they found a “good” loan the title was held up at closing because Wells Fargo had already filed a mortgage at the court. Even though nothing was signed and the loan was never processed! We had words with the manager and his attitude was basically “Whatever, we’ll take off the mortgage when we get a chance” kind of thing. Shocking behavior for a company so old. Moral of the story is... check your math, if your in doubt ask questions! If you don’t get a straight answer there’s a reason why.
CREDIT REPORTS: www.experian.com www.transunion.com www.equifax.com
CREDIT REPAIR: The No Nonsense Credit Manual author Shaun Aghili ($1.99 @ amazon.com)
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