If you are still in the market to buy a home, then let me first say congratulations. Home ownership is a wonderful thing. If you play your cards correctly, owning a home (for most people) will accumulate the greatest amount of wealth over your lifetime. Plus you will get to write off a whole boat load of tax deductions that you normally could not.
1. Why buy now? Because rates are for the most part are still at historic lows, and home values have started to stabilize or even go back up. I don't want to bore you with rates and rebates because I can talk all day about them. So the simple math is this: look at the 10YR Treasury Bond and add 1.60% to 2.25%. That will give you a very close range.
2. Where to start! First start by saving for a down payment. Depending on the mortgage product you want, 100% financing still exist if you are a Veteran (VA) or if you buy rural/farm property through the USDA. If you want an FHA product you can save as little as .500% and Finance 99.500%. That's through the CAL HFHA down payment assistance or CHDAP. For a regular FHA loan the norm is 3.5%. Please be forewarned that any FHA product, or any loan under 20% down, or greater than 80% Loan to Value LTV will require Mortgage Insurance. And that adds up. FHA requires MI for the life of the loan. The days of automatic cancellation at 78% LTV are gone. Do yourself a favor and save as much as you can. A 20% or even 30% down payment is golden.
**Important Note** If you use gift funds for your down payment any lender is going to want see where the money is coming from. For example if Mom is giving you $50,000.00 as a gift, the banks will want to see two months of seasoned funds from Moms bank account. It's called a paper trail. So make sure Mom or whoever is giving you the funds is willing to provide those statements.
3. Know your comfort level! As a loan officer I can tell you exactly how much you could afford depending on the size of the down payment, and what your debt to income ratios are. But what are you comfortable with. For example if you make $10,000.00 a month, I could qualify you easily for a $1million dollar loan amount. But if you are not comfortable with a 50% DTI, then you might want to look at a $600,000.00 home, or even less. Remember, besides principle and interest, you will also have to add property taxes, insurance, HOA dues if they apply to the monthly payment.
4. Know Your Fico Score. For optimal pricing, or to even qualify for a loan, Lenders will look at your credit scores. Most Lenders will pull from the three credit reporting bureaus, and will pick the middle score. The three bureaus are Transunion, Equifax, and Experian. It's wise to have your full credit report pulled before you start the process. If you have errors, collections or high debt, you might want to rectify or pay down those accounts before applying. By law the credit bureaus are required to provide you a free credit report with your scores once a year.
5. How stable is your job? Knowing that your income is secured is a very viable aspect, but often ignored when buying a home. You do not want to make big purchase and then two months later lose your job. So very politely and discretely, tell your boss that you are looking to buy a home, but you want to make how stable the company is, and how secure is your position. Then base some but not all of your decision on the answers you get. Just FYI, I have worked at companies that looked positive on home buying, because it shows a sign of maturity, you like where you work and want to stay, and your going to me more stable as an employee. Some company's might even offer incentives or down payment assistance to help you get in a home.
6. Pay Down Your Debt. This goes back to section 4. Despite clearing up credit and raising your FICO score the fastest way to lose your mind is to have massive debt. So pay off those credit cards. I know it will be tempting use a credit card to buy new curtains, a new sofa, some art work, and that 18 horsepower self propelled lawn mower. But what happens when you add a mortgage payment, monthly property taxes, insurance and HOA's to your now existing bloated credit card. You're over your head in debt.
7. "Build Up Those Reserves" Most advisers call this an "Emergency Fund" but it's just savings. Not everyone and myself included can put a $1000.00 a way each month in a savings account, but having six to eight months of your income stashed away in a safe haven, and penalty free from withdrawal is a good idea. One it protects your assets from employment, and financial hiccups. Secondly it is a absolute must when buying a home. I know it is difficult to save for a down payment and also for reserves, but try to be creative. Save for reserves, and ask your family, friends, and your employer for "Gift Funds" to use as a down payment.
8. Plan for the Future: I am guilty of this big time, and am paying the price. However with that said do not let home buying distract you from a solid retirement. Please contribute to your company's 401K match, then maybe add a Roth IRA to the mix. Young savers who start early will reap huge benefits as they get older. Believe me it is not fun playing catch up. My wife and I are lucky to the fact we have good equity in our home, so we could sell it when we get older and move to a trailer park in Florida.
CLEAR LENDING
Mike Brown
Mortgage Loan Officer
NMLS License 333411
Novato CA 94949
