The five essential rules for homebuying
The truth is that money can be difficult to talk about and many financial issues are complicated to tackle. That's why Chase and Vox Creative created the Five Essentials series, found here and distributed through the Vox Media Network, to explore financial fitness issues that are relevant to you. We're breaking it down to what's really essential to know about a topic. This month, we're taking a look at homebuying and mortgages.
Buying a home is likely one of the biggest financial choices you'll make. No wonder it's scary to many Americans, especially first-time buyers. But there are things you can do to start on the homebuying path—and take advantage of today's attractive conditions.
It's a good time to buy: The cost of paying rent keeps going up while interest rates remain near record lows, just over 3.5 percent for a 30-year, fixed-rate mortgage. One-third of mortgage borrowers want to take advantage of today's rates, according to a recent survey from JPMorgan Chase.
There's a lot of planning that goes into buying a home. When you think it's time to buy, it is not enough just to have good credit. Low debt, stable employment, and savings are all vital when it comes to being ready to make such an important and sizable purchase. Start planning at least a year before starting to look for a loan, says Andrew Poulos, a tax accountant. "That way you have time to get things in order," he says.
To help you stay on track and get ready, here are the five essential rules to homebuying.
1. Give your finances a checkup
A full 45 percent of homebuyers delayed their purchase until they could boost their credit score, according to a national survey by Experian. This is a smart move, because your credit history plays a crucial role in whether you'll be approved for a loan and what interest rate you'll be offered, says Rod Griffin, Experian's director of public education. Here's what you should do:
- Get a credit report three to six months before you start looking for mortgages. Under federal law, you're entitled to a free report each year.
- Dispute any inaccurate information, such as late payments that were really on time or even accounts that don't belong to you.
- Make sure you are paying all your bills on time: that will boost your credit score.
"It's not just about knowing your credit score, but understanding the positive and negative factors that affect it," said Pam Codispoti, president of Chase Branded Cards for JPMorgan Chase Card Services. "Knowing where you stand and taking the time to improve your credit health can give you a leg up when it comes time to applying for any loan, especially a mortgage."
2. Figure out what you can afford
Before you start house hunting, determine how much you can afford. There are plenty of home tools like this Affordability Calculator by Chase that will quickly assess what you'll be able to pay based on your monthly household income, monthly debt payments, and your planned down payment.
You'll need to show lenders where the money came from – and under your mattress doesn't cut it. "On average, consumers anticipate putting 40 percent of their savings toward a down payment," says Sean Grzebin, Head of Retail Mortgage Banking for Chase. "First-time homebuyers are taking a more disciplined approach to spending, tapping into a 401(k), and in some cases, getting help from their parents."
Lastly, don't forget about closing costs. Typically, you'll need to shell out an extra two to five percent of the purchase price to cover extra expenses like lender fees, home inspection, and homeowners' insurance, says Catchur. Federal guidelines require lenders to give you a good-faith estimate of your closing costs. If you're eyeing a house in a hot market, you may also want to leave some wiggle room in your budget in case you need to strengthen your offer, says Nela Richardson, chief economist at real estate brokerage Redfin.
Also remember that lenders love stability. “Don't make drastic life changes" in the year before you apply for a mortgage, says Poulos. Wait to buy a new car, go back to school, or change careers. In the eyes of a mortgage lender, any type of change translates to instability. Also remember that your debt payments, including those mortgage payments, should be what you can comfortably afford, says Poulos.
Lenders will look at how regularly you get paid. Mortgage broker Mary Catchur cautions that if you rely on commission or bonuses, which tend to be more unpredictable, hold on to that job for at least two years; lenders need to see consistent compensation.
3. Go shopping
For many first-timers, the most exciting part of the homebuying process is shopping around. Technology is here to help: Many homebuyers start their search online by perusing real estate listing websites or mobile apps, which can feature a comprehensive database of properties for sale. Listings come with slide shows, virtual tours, and details about the neighborhood, like nearby schools and gyms.
While you may know how many bedrooms and bathrooms you want, it's good to know your other must-haves. Do you need an open kitchen? Do you want your work commute to be less than 30 minutes? Most sites will let you customize your search so you only see homes that fit the bill, saving you time and energy. Even then, be patient: Buyers typically hunt for 10 weeks and look at 10 homes, according to the National Association of Realtors.
House hunting can quickly get complicated, so it's worth working with a real estate agent who knows the market well and can save you even more time, money, and disappointment by arming you with information and strategies to help you land your dream home. To find the right agent or broker, ask for recommendations from people you know who have recently purchased a home, or scour the internet for online reviews. It's also important to look for someone who's familiar with the neighborhood you're trying to move into; they'll be more in the know about market trends in that area, says Richardson. Lastly, make sure the agent is licensed by the state, and ask to see some recent sales.
4. Nail down your financing
Look for a lender who can work with your borrowing profile, and the first rule of finding "the one" is to not prioritize the interest rate—scoring the lowest rate doesn't guarantee you'll get approved. Instead, you want to talk to two or three loan officers and ask them what important criteria they look for. Pinpoint lenders who will favor your financial strengths. Ask for referrals from your friends, family, and co-workers, as well as your real estate agent, who could recommend a few trustworthy lenders.
Catchur says the way to get the most out of the lender relationship is to be honest and upfront about your financial situation. "If you're not being honest, you could be paying money for appraisals and find out you're not actually qualified," says Catchur. As uncomfortable as it may be, a lender who wants to get to know more about you is a good sign he or she has your best interests in mind.
5. Close the deal
When the day finally comes to get the keys to your home, do a walk-through of the house in advance to make sure it's in the same condition when you first signed the offer. Call utility companies to set up your service for the day of your closing. Bring a certified check for any remaining balance. And have your lawyer present when it's time to officially transfer ownership of the home on paper.
If you're prepared, follow these rules, and work with the right people, you'll be on your way to owning your own home.
Mai Nguyen is a freelance writer in Toronto who covers business and personal finance.