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Maximizing your Home Loan
So, you want to buy a home?
Much of America is in dismay; with all the foreclosures, we live in an environment where we assume that one simply cannot buy a home. That is not the case. Buying a home is something that not a lot of people know anything about, particularly if you are among the first of your peers to buy a home. I was fortunate to have had the opportunity to work in the Real Estate industry, as well as having been there throughout the process of a family member purchasing a home. Currently, I have just gotten through the process of getting preapproved for a home loan. I am writing this Hub with the purpose of informing others, so they can start planning. Even if you don’t think you’ll be able to afford a home for a couple years, it is never too early to start preparing!
The benefits of purchasing your own home are endless, but first and foremost: You are investing in yourself.Rather than pay someone a couple of thousands of dollars, wouldn’t you rather pay yourself? That is essentially what a mortgage is: You are investing in yourself. Not to mention, interest rates attached to mortgages are tax deductible. You will also find it is cheaper to buy than to rent, because you won’t have to be paying for ‘extra services’ such as lawn care, maintenance, gardening, and most of all, the landlord’s personal income. With a $300,000 property, and a 30 year mortgage, your monthly mortgage will be $833! Add mortgage insurance, which is usually $150 per month (in WA), homeowner’s insurance, and monthly utilities…You can still likely make it out in under $1,200 per month! That is substantially less than a comparable rental property, at least where I live.
Steps Towards Getting a Home
1. Preapproval: How much home can you afford?
First of all, you need to know how much you can afford to buy. Online mortgage calculators can give you a ballpark estimate, but there are way too many variables to consider. You must talk to a Mortgage Broker. This process is free, and easy. Many real estate offices have banks within them, or you can get preapproval from your bank; the numbers will typically turn out to be very similar, so it really just depends on what bank you are comfortable getting a loan from. You must have proof of income and work history. Documents you will need to show the Mortgage Broker:
- Paychecks for the last 30 days; if you have direct deposit, talk to your employer for payroll records.
- Bank statements for the last 60 days, from all of your accounts.
- W-2’s for the past 2 years.
- Tax returns for the past 2 years (ALWAYS print out and keep a record of every tax return you do; these are the hardest documents.
- College Diploma or Transcripts (this is important for people who have no work history, but have been in school instead).
- The Mortgage Broker will issue a credit check. This is usually done instantly. The credit check will show your credit score and outstanding debt.
If you have a score of over 700, you will typically be approved for a conventional loan. THIS IS WHAT YOU WANT. A conventional loan has the lowest interest rate and the lowest down payment. Conventional loans are typically as little as 3% down (on a $200,000 home, you pay only $6000). If below 700, you can still get a loan, but you will likely need to put down between 10% and 20%.
This is stuff like credit card balances (your broker will factor in your minimum monthly payment), car payments, students loans, etc. My broker told me it is best to keep your credit card balance at or under 50% of the monthly credit limit. Another important thing to understand is that the more monthly payments you have (car, student loan, etc.) the less loan you can be approved for. Mortgage Brokers typically don’t approve for payments more than 40% of your monthly income, after other payments are subtracted. So; the fewer monthly payments you have, the better. Hanging onto that old car may just be a good thing, after all.
2. Find an Agent: Start Looking!
Now that you know what you can afford, it is now time to start looking. Your agent can help you come up with a price range that suites your needs; just because you got preapproved for a $300,000 loan, doesn’t mean you have to buy a home that much. Discuss with your agent your current needs, your plans for the future, and so on and so forth. The price range typically ranges to about $15,000 higher than your preapproval number.
The internet is an excellent source to find agents. Check out sites such as LinkedIn, Facebook, Twitter, as well as different real estate offices like RE/Max and Windermere. Find someone who specializes in the price range of what you are looking for, and find someone that is familiar with the area. Don’t be afraid to interview agents; they want to spend the time with you, because they want your business. Don’t be afraid to consider younger agents, too. Just because they haven’t been in real estate that long, doesn’t mean they don’t know the area!
3. Make an Offer:
Your agent can help you come up with the best offer to make. They are experienced. It is typical to offer less than is asked, simply because, in this market where home values are down, people will want to get the most, and typically ask for most they can (wouldn’t you?). If you pay attention, home prices usually start high, and then keep going down until the home receives offers. That’s why it is prudent to offer less, and the agent can definitely help with that.
4. Accepted! Home inspection:
Your home will now need to undergo inspection; this is for your safety, to make sure you are not getting ripped off! If problems are found, the contract can be adjusted, such as “furnace must be repaired prior to purchase.” Your agent will very likely know many home inspectors, and can recommend an excellent and economical one to you. If you can afford it, it is often prudent to get the opinion of more than one inspector; this is especially helpful in old and distressed properties, often sold “as is.” It is very helpful, and well worth the investment, to know what you are getting into before you pay.
Quick Tips for Ensuring a Higher Loan Amount
More Loan=More Home. Get the best home you can afford by following these tips:
- Minimize outstanding debt; think before you buy that sports car.
- Have at least 10% of the home price you want to buy in savings. I recommend 15%; you don’t know ahead of time exactly what kind of loan you will get, and you certainly do not want to run yourself dry with down payments. Also, typically expect to pay $1000 in escrow to the agent at the time of the offer (this is for the agent’s protection; contracts are the most time-consuming part of their job, and not getting paid because someone gets cold feet is unethical). With a good credit score, you can put down as little as 3% in down payments with some loaners.
- Good Credit. Don’t buy something you can’t afford; it’s that simple. I treat my credit card as a debit card, and that has kept my credit score well over 700.
- File important documents. If it’s something you receive no more than once a year, like a W-2, tax return, or college diploma… KEEP IT. It is incredibly hard to get a hold of all these documents quickly. It is a good idea to have a PDF version on your computer for these documents, as well as a printout in your file cabinet for your records. Scan any important documents into the computer; you can do this at Kinko's, and they will put them on CD for you, and you can also do it at the public library (be sure to purge the data after you're done). For your tax returns, retain at minimum the past five years. I keep paystubs for 6 months, and I keep my diploma in a frame on the wall. Always have these things at hand, because they are very important if you are trying to get someone to loan you hundreds of thousands of dollars.