Credit Scores, Mortgages and Bills, Oh My! 5 Things To Know Before Buying a House
Many people want to buy a home, but until they start the process, all they have is just that — the desire to do so. Here are some basic fundamentals you need to know before you even begin the process of searching for a home.
Your credit score is one of the most important, and really one of the only, factors banks have to determine how much of a lending risk you are. If you have years of good payment history under your belt, and good credit utilization, a bank will see you as a low risk and will probably be more willing to lend you money. You need to boost your credit score before you even think of buying a house because credit scores take time to build.
An easy way to do this is to lower your credit utilization by paying down debt as much as possible and not using more than 15% of your credit limit during any one cycle. Another tip is to take out both a Mastercard and a Visa credit card, showing that other lenders already consider you a low-risk borrower. Disputing any strange or bad marks on your credit score can also be helpful, and is a good place to start.
Post. Purchase. Liquidity.
People rarely speak about this because once the momentum begins to buy a home, there is rarely anything else on the buyer’s mind. Getting a mortgage now though is much more difficult than it was 10 years ago and a big thing legitimate banks look at when considering if you can actually afford a mortgage is post-purchase liquidity — or how much money you will have in cash after you actually buy the home. Many people think they save to buy a home and deplete all of their savings upon closing — but therein lies the difference between purchasing something and affording it.
If you empty out your savings account to pay a down payment and pay closing costs, chances are you can’t afford the purchase. Make sure you give yourself time, meaning an extra 1 or 2 years, to save up money so that you’re not one emergency away from having to borrow even more money just to get by. Banks will also favor those with greater post-purchase liquidity for obvious reasons.
A preapproval is one of the greatest tools in a buyer’s arsenal. It shows the seller you’re serious and gives the bank an idea of what they’re looking at in terms of risk. A good tip — always get preapproved for a higher amount than what you think you need. This will give you wiggle room in the future and take the stress off when you’re not bound by any particular price level.
Understand ALL the Costs
Buying a home is more than a purchase — it is the single most expensive thing you will ever do in your life and in reality, it’s a money drain. You will need a down payment, closing costs, homeowner’s insurance and post-purchase liquidity just to get your foot in the door. Then, on day one, you will start having to pay property taxes in ADDITION to your mortgage, utilities, repairs and insurance each month just to keep the lights on. A realistic budget of what it will actually cost to have and maintain a home is almost more important than having the money to be able to purchase it.
Think about it like this: anyone can purchase something expensive one time, but can you keep doling out money for years to come? Keep in mind monthly costs before jumping in with both feet.
Coffee’s For Closers
The famous line immortalized by Glengarry Glen Ross rings true in any sales environment, especially real estate — the people selling you homes and mortgages are trained sales professionals trying to make a profit off of you, and you need to remember that. These sales professionals even have an edge over other salespeople like stockbrokers and investment bankers. Traders and bankers sell things that are perplexing to the average Joe, and mostly operate in their own world. Real estate professionals though have the advantage of selling you the dream, and they know it. They’ll talk about the nursery, the walk-in closet and how you should have the right to have a home for your family — these are sales ploys.
Homeownership is part of the American dream, and post-World War 2 culture lent itself well to families using military subsidies to migrate to newly-built suburbs that were transferred to future generations. Times have changed, and owning a home is a privilege and something very serious. Don’t allow a real estate professional to assuage any fears you may have about making such a serious purchase. Go into any conversation with a salesperson on the defensive, and always keep in the back of your mind that these people will profit from you and usually work on commission.
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