In my last piece from September 14, I wrote about determining the “best time” to buy a home. I broke down the first steps which are quite straightforward. Can you actually afford to buy a home? Do you have enough for a down payment? Do you need to put down 20% for the down payment? The next step in home buying, and the subject of my second installment on purchasing your first home, is the mortgage process. If you are following my steps, you have already determined how much you can afford to spend. Let’s jump into the next part.
Check Your Credit Score
I would hope that if you are this far along in the home-buying process, you already have a strong handle on your credit score. In the event that you do not, do this first. Nothing is more embarrassing or more shocking than going through the pre-qualification process to be told by a mortgage officer that you have terrible credit. Once you have handle on your credit score, it is time to find a mortgage officer to help you with pre-qualification.
In order to pre-qualify for a mortgage, you can contact a local mortgage officer, ask your friends who they used, or ask your financial advisor. Depending on who your financial advisor works for, he/she may be able to do this for you! Be prepared to produce some documentation in anticipation of the pre-qualification process. These documents may include tax returns, bank statements, investment accounts, and pay stubs. This is to determine that you can actually afford to buy a home. (TIP: Keep these documents organized and accessible as you will need them again during the mortgage process). The pre-qualification amount will be determined by the combination of your credit score and your income, assets and liabilities (debt). If you have a significant amount of debt (credit card, student or personal loans), this will surely make a big difference in how much you will pre-qualify for. As I mentioned in Part One of this series, debt mitigation is something you should think about way before going through the pre-qualification process.
Congrats! You were pre-qualified. Now what? First, let’s discuss what being “pre-qualified” actually means. The mortgage officer has digested most of your financials, run them through a system and has produced for you a magic number that says how much money you can now borrow from a lender. For our sake, let us assume that number is $500,000. This number should not suddenly become the target. This number represents the maximum amount that a lender would lend you. Therefore, don’t max out that number. You will regret it. Now that you know what your parameters are, you can begin the house search. Assuming you find a home for $550,000 and you are going to put down 20 percent, you will now need to borrow $440,000. Now what?
Getting The Mortgage
Ideally, you have already developed a relationship with the mortgage officer who did the pre-qualification for you. The first step is to call that person and start getting info on what your mortgage rates will look like. If you are working with a mortgage broker, he/she will be able to shop around to various lenders and come back with the best rate for you. It is my advice that you should work with a broker and also make some calls to some captive lenders. Local banks often have very competitive rates. Also, call the financial institution where you bank or where you park your investments. With regards to the actual mortgage, make sure that you are comparing apples to apples when it comes to the loan in question. Is it a 30-year fixed? A 5-year ARM? Ask your mortgage officer many questions if you are confused about the different types of mortgages. Once you have found the best rate, you can lock it in and start the real fun—the paperwork. Be prepared for this to be totally brutal. You have to corral every type of financial document that you can think of. They may even ask for a blood sample (kidding, sort of).
Shop For A Closing Agent
In the wonderful state of NJ, where I live, you will need an attorney to act as your closing agent. It varies from state to state but you will need someone to assist with the closing of the home. The closing agent helps with documentation preparation, title insurance, negotiations with the homeowner, etc. The fees for the closing agent can vary considerably from state to state. Do your homework before you buy to get a sense of what this cost will be. You can ask your real estate agent, your mortgage officer or your financial advisor for recommendations.
Do You Have Enough Cash Leftover?
One of the biggest mistakes first time homeowners make is not allowing for a cash cushion after the down payment has been paid. Remember that you need money for the closing agent, the home owners insurance, the moving costs, the unexpected expenditures (they are real!), and the huge list of random things that you will need to buy once you are in your new home. You will also need to make sure you have emergency money on hand in case there is an…emergency. Again, make sure that you factor this in at the beginning when you are determining the budget of your home.
The entire home buying process is extremely exciting, tedious, terrifying and expensive all at the same time. Remember to approach it from a place of strength—know how it works, what the steps are and make sure you have the right people helping you. And make sure there is some cash left over for decorating. That’s the fun part!
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. Views expressed are the current opinion of the author. Information obtained from sources considered reliable, but Raymond James does not guarantee the material is accurate or complete. Raymond James Financial Advisors do not solicit or offer residential mortgage products. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.
Kristin Merrick, Financial Advisor, O’Keeffe Financial Partners, LLC
Originally published in Forbes, Oct 23, 2017.