By Bruce Katz
The prospect of buying one’s first home is an exciting milestone! For some, it can also feel scary, intimidating or overwhelming. After all, this will likely be the largest purchase of your life and you simply don’t know what you don’t know. Being well prepared, having your questions answered and knowing what to expect is the key to a successful and smooth home-buying process. And unless you are the one in a million to hit the lottery, it’s likely you will need a mortgage loan. With advanced planning and following some basic dos and don’ts, you can eliminate stress and be a confident and well-educated home buyer.
Affordability versus qualifying
One of the most common questions I receive as a mortgage loan officer is “What can I afford?” While I can tell you what you can “qualify” for, “affordability” varies based on personal lifestyle and choices. Everyone’s spending habits and savings patterns are different. For example:
•Do you have or will you have children?
•Will the children attend public or private school?
•If you both work, will both of you continue to work if/when kids come into the picture?
•Do you have any upcoming large purchases you will be making such as a new car?
•Do you like to travel, eat out, etc.?
•Is saving money for retirement important to you?
While a lender can provide detailed estimates and run figures for qualifying, it is important for buyers to take the time to run their own numbers to determine what is comfortable and affordable. Begin with your net (take-home) pay. Create a budget and itemize expenses (both needs and wants): food, clothing, utilities and internet, along with more discretionary expenses like travel, movies, sporting events, gifts, tzedakah and savings. Be sure to include any monthly amounts you want to “pay yourself” (i.e. savings), which may be inside or outside of a retirement plan or both. After you’ve itemized expenses, the remaining amount of take-home income will provide a good sense of what will be left over for your monthly mortgage payment. Your mortgage lender can then provide you with information as to how much house this will allow you to purchase depending on a desired down payment and total cash available for the transaction. You can then “tweak” things from there. For “qualifying,” lenders use a basic monthly debt-to-income (total monthly debts divided by total “gross” monthly income). This may or may not line up with your affordability budgeted figure.
Talk to a lender BEFORE you go house hunting
There is nothing more disappointing than going out and finding your “dream home,” only to discover it’s not affordable or you are unable to qualify. Before looking at homes, schedule a meeting (in-person, by phone or on Zoom). It won’t cost anything but some of your time. You may be surprised at how much you can learn in a 30- to 45-minute session. There are a multitude of loan program options, down payment options, rates/point options, etc. Everyone’s circumstances are different. Sharing information with your loan officer will allow the loan officer to zero in on the most suitable program(s).
Not only will your Realtor want to be sure they are showing you homes that fit your budget and qualifying capability, but the seller and their agent will also require a lender’s letter confirming that you are pre-approved. Especially in the current market where inventory is tight and there are more buyers than sellers, anything you can do to position yourself as a well-qualified buyer having already been vetted by a lender will strengthen your negotiating power.
Dos and don’ts
When going through the home-buying process, there are certain things you should and should not do to help ensure a smooth mortgage loan process.
•Avoid opening any new credit cards, making a new car purchase or taking on any new debt immediately before or during the mortgage loan process. While it may be tempting to take advantage of an advertisement to “pay no interest for 12 months” to furnish your new home, this could jeopardize your ability to qualify. In addition, this would require the loan to be re-approved and potentially delay the closing…or even worse, derail your ability to qualify and close.
•Do not change jobs during the loan process, at least not without first discussing the implications of a job change with your loan officer. Doing so might impact your ability to qualify and/or delay closing.
•Where possible, avoid transferring funds between accounts or making any large deposits. And if you must move money, discuss this with your loan officer in advance and be prepared to provide supporting documentation to “paper trail” the transfer. All “non-payroll” large deposits and transfers require a detailed paper trail. This can often be the most tedious part of the loan process.
•Work with a known/reputable lender. There are a lot of online “bait-and-switch” lenders. If a deal looks too good to be true, it probably is. Rate and costs are certainly important; however, it is equally important that you are working with someone who has your best interest at heart and makes the process comfortable for you. Real estate transactions are time-sensitive and have critical contractual deadlines. Your lender should be responsive and understand “what” must happen “when” to make sure you perform per the terms of the contract. This way, you do not risk the loss of any prepaid earnest money due to failure to perform.
It’s worth noting that for first-time home-buyers, accumulating funds for the down payment and closing costs can often be a challenge. Gift funds are an eligible source of funds if they come from a family member. There are specific requirements involved with a gift so be sure to discuss this with your loan officer. If you are engaged to be married, it is becoming more common for couples to include in their registry “down payment funds for a new home.” If you plan to do this, you should establish a separate wedding gift bank account specifically earmarked to hold these funds.
Finally, not everyone may be able to buy a house right away. This could be due to credit issues, insufficient income, excessive debt or not having enough cash for the down payment and closing costs. But remember, not qualifying now doesn’t mean you won’t qualify in the future. If you find yourself in this situation, talk to your loan officer about possible actions you can take to position yourself for homeownership down the road. With the right steps, you can work toward achieving “the American dream of homeownership.”
Bruce Katz, a residential mortgage loan officer with First Horizon Bank, has been in the mortgage business for 35 years. You can reach him at 214-202-5234.