First-Time Homebuyer? Monitor Your Financial Health First
| By Peggy Crowe |
I am a realtor, not a lender and unqualified to give advice on mortgages. You deserve the perspective of a realtor along with the sage advice from lenders and other reputable resources.The majority of potential buyers I talk to are hyper-focused on searching online for their dream home. That’s the end result but it’s critical that you don’t start there. Being on top of your finances in order to be approved for a loan is the only way to make that dream come true.
Where do I start?
Your credit history will be the most important piece of being approved for a mortgage. Did you know that you have free access to your credit reports once annually and why it’s important? I know that when I first checked mine, I ran into credit reporting companies that charge you a monthly fee which you didn’t realize until the first bill showed up on your credit card.
The only official website specifically directed by Federal Law is www.annualcreditreport.com. There are three credit reporting agencies: Equifax, Experian and TransUnion who have similar credit profiles but don’t always have the same data. Get the entire report for each agency and search every line item, including your contact information. It’s not uncommon to find credit errors, some of which could be damaging towards getting a home.
The good news is that due to the Fair Credit Reporting Act, credit agencies are required to look into any filed disputes and must respond within 30-45 days. Be prepared to have full documentation to back up your claim. You can clean up errors but it will take awhile. These are not quick fixes.
The free credit reports do not include your credit score however, which is the bottom line of what lenders are looking for. You can go to www.creditkarma.com, which is also free. (Again, there are many look-alikes that will charge you a monthly fee.) When I just pulled mine up two of the three agencies had their score. There was also a credit simulator to give you an idea of how to improve your score. Remember that these are just guesses but they were enlightening to me.
If you have had credit problems in the past, now is the time for immediate action. A lender looks at your credit score as a strong indicator of your ability to repay a mortgage. If your score is too low due to existing yet correctable problems, that home you fell in love with yesterday may never be yours. Time is of the essence.
Donna King, Branch Manager for Cunningham Company Mortgage Bankers has a mantra that she lives by as a lender. She stresses that as a potential borrower you must: 1) know your credit, 2) manage your credit, and 3) understand what affects your credit. Donna notes, “Your credit score affects your interest rate and insurance, just to name a few, and can cost you thousands of dollars on your loan.”
If your credit is less than stellar, we are lucky to have a well-respected local resource to help you with all of Donna’s points. OnTrack Financial Education and Counseling – www.ontrackwnc.org – covers all of Western North Carolina. Their agency description says they are “a private non-profit, community-supported, United Way agency.” If you discover that your credit is not what you had hoped for, they will work closely with you to show you how to rebuild your credit, which gives you the confidence to move from problems to solutions.
OnTrack also has an extensive Homebuyer Program which includes education, either online or in person, for a small fee. Once that is completed, you will receive your three credit reports and scores. The counselor will help you understand your mortgage options or create an action plan towards improving your credit. The last step is free homebuyer counseling which helps you understand what you can afford, create a personal home-buying plan and understand which down payment assistance plans are available.
My credit is fine so do I need to do anything?
Interestingly enough, first-time homebuyers are classified as anyone who hasn’t owned a home in three years. Whether you have been renting, living with your parents or have had a free place to live, the true costs of owning a home can be more extensive than you might imagine.
When you are renting you know exactly how much you will be paying each month and if anything breaks, your landlords will repair it at no cost to you. You also have more time since you aren’t responsible for the upkeep; that changes quickly once you become a homeowner.
You must adequately assess how much time and money you are capable and willing to spend on your home. It’s easy to forget that now you will be buying a lawnmower, all manner of tools and furnishings. A home can deteriorate quickly if it is neglected, especially older homes. Then you are losing money on your investment and once you do fix it, the cost will be much more than standard maintenance.
I was taking a class and the instructor asked if anyone knew about the NC Appliance Law. No one did – because there isn’t one. The gist was that if there are appliances, they will need to be replaced or repaired. You can count on that.
Have you created a budget? Many of us have not, but now is the time to take a hard look at your income and where that money is going each month. Have you been saving? Do you have low balances on your credit cards? What are your standard costs, such as a car payment or student loan, and what are your variable costs, such as credit cards? Do you have money left over each month or do you piddle it away? Or are you “credit invisible” with limited to no credit? Those are the hardest to finance.
Knowing your income and expenses (both necessary and play) will give you a better idea of where you are now. Have you been putting aside money for a down payment? Do you have a cushion for what it will cost you up front to even put in a contract? There will be checks to be written upon acceptance of the contract, which will run several thousand dollars. There are inspections that can run from $300 – $800 depending on the property; appraisals are paid up front and generally are around $600 and a survey can start at $500 for a house with a small lot. It can add up quickly.
What are lenders looking for?
According to Marie Sladky, a long-term lender at PNC Bank, they assess a potential buyer’s financial status. These include your credit details and scores, liquid (cash) assets, financial help from family, job security and the length of time on the job in a similar field. Marie so aptly puts it, “You need to be able to weather the storm when the unforeseen happens such as the furnace going out or losing your job in an economic downturn.”
If you are a solopreneur 1099 earner (those who don’t get a regular paycheck), it makes it harder to get qualified. There are many creative people in the Asheville area, which often doesn’t translate into being a savvy businessperson. Donna King notes that the self-employed, whether you are an LLC or a sole proprieter, will be asked to submit at least two years of tax returns where the amount that you qualify for is based on your net (after tax) income, NOT your gross (total) income. All of that cash that you didn’t report will now come back to bite you. You may have grossed $60,000 but if your business expenses and lack of accounting for cash sales brought your taxable amount down to $20,000, then that is all the buying power you have. You might also be asked for a Profit and Loss and Balance Sheet, which most individuals don’t have.
The long and the short of it is…
Get your financial house in order before you start looking at tangible ones. You will be glad that you did when you are able to fully enjoy the house you are purchasing without being “house poor.”
Peggy Crowe is a REALTOR® with Coldwell Banker King who wants to make sure that all of her buyers are well-educated before they start. If you have any questions about the process please don’t hesitate to call her at 828-318-4423 or email at email@example.com.