Before you buy a home, you should make sure you run through a checklist. What checklist? Why, a checklist of “to-dos” for new homeowners, of course. Here’s what you need to know to make a smart home buying decision.
Order Your Credit Reports
Before you do anything, check your credit. Fortunately, this is pretty easy to do. Just go to annualcreditreport.com and order your free credit report. Everyone is entitled to one free one each year.
Once you see what’s inside, you might be shocked. It’s common for lenders and credit card companies and medical billing departments to make mistakes or report credit issues in a way that’s not favorable to you. Mistakes like marking payments late that were on time or marking a paid off loan as “settled as agreed” instead of “paid as agreed” can make a dramatic difference in your credit score and perceived trustworthiness.
It’s easy to fix these things though – all you have to do is contact the credit bureau and explain that there’s been a mistake. Provide proof of the error (usually in written form), and they have to correct it.
Another tactic used by mortgage lenders is something called Rapid Rescoring. Rapid Rescore is an unofficial updating of your credit file. The lender will find errors for you and dispute them much faster than you could yourself. When you go it alone, the bureaus have 30 days to investigate the issue and get back to you. With Rapid Rescore, the errors are removed within days.
This process sometimes gets confused for credit repair. It’s not the same thing. With some credit repair firms, a company will try to sell you on the idea of fixing errors on your credit report. What they sometimes end up doing is fighting to remove legitimate negative or derogatory remarks.
When rescoring costs between $25 and $30 per updated account, a credit repair firm may try to charge you several hundred or several thousand dollars. Rescoring isn’t magic, but it may help boost your score by several points which may be enough to get the rate you need.
Organize All Of Your Documents
Lenders need documents to proceed with the loan application. But, before you fill out an application, there are several legal stages you should go through, including a property conveyance or survey. The survey will tell you about potential issues with the land and building structure or structures on the property.
This is different from a mortgage valuation where the bank tries to assess whether the property is a worthy risk. Mortgage lenders do want their money back, so they will assess the property, and most homeowners mistakenly believe that if it’s good enough for the bank it must be good enough for them. Wrong.
You see, the bank doesn’t just rely on the home to secure the loan. The lender also relies on the buyer’s creditworthiness. That’s you. The bank isn’t afraid to come after you for the money if you don’t pay.
As a last resort, they will foreclose on the house, but since that’s expensive, they will always try to get the money from you – you’re responsible for the home. And, in many cases, banks make you pick up private mortgage insurance, so even if you don’t pay, they still get paid, and the condition of the home becomes a secondary concern.
You, on the other hand, can’t get out from under your loan quite as easily. And, you have to live there – the lender doesn’t. You are responsible for repairs. The lender isn’t. Bottom line: it pays to get a survey done.
Other documents you might need include your pay stubs for the bank (or a copy of last year’s tax return), proof of income or savings, including bank accounts, and investment accounts. You may also be required to show 12 months of on-time rent checks if you’re a renter now.
If you’re divorced, you will need to show the divorce decree, proof of a child’s age if you pay child support or receive it (as income), and any bankruptcy discharge papers if you’ve filed bankruptcy in the past. Lenders will also require letters explaining any negative or derogatory items on your credit report.
Make A Budget
Make a budget that includes your mortgage payment, along with your other expenses, homeowner’s insurance, and maintenance fund – yes, set aside money for property maintenance. You will definitely need it. Analyze it and make sure you can really afford a home.
Consider Where You Want To Live
There are a lot of places you can live, and price swings dramatically depending on location. You’ve probably heard this before. Real estate agents love to harp on it, but usually they frame it in terms of your return on investment in the house.
If you need to live near a school, or you have special considerations (like you enjoy country life or city life), make sure your real estate agent understand these things.
Start saving up for your home. Ideally, you’ll put 20 percent down to avoid private mortgage insurance, but it’s rare for homeowners to do this. Just save up as much as you can, and be relentless with the bank when negotiating your mortgage rate.
Lucas Coleman is a real estate associate. He loves to share his experiences on the web. His posts appear mainly on real estate and financial sites.