Home Buying 101 or Three Reasons to Get Pre-qualified

A young couple wants to buy their first home together. They call a Realtor (r) only to be told they need to be pre-qualified at a minimum. But they haven't even seen the first home. What gives?

First things first. Most people think the answer is finding the home. Truly I recommend that be the last step. Prior steps in the process are speaking to a lender, choosing an agent, and, making a wants and needs list.

A good place to start is a home buyers course ... What? School? Are you kidding? Not every one needs this step. But for 1st time buyers or credit challenged buyers a class conducted by a debt management organization, can be a big help. It will give you a neutral starting point and help you get your "ducks in a row". It also helps get FHA approval.
Why find a lender first... three basic concepts to deal with here:

1. What can you afford?
2. How much will you need out of pocket?
3. What terms will be included in the offer?

Question 1: How much can you afford? Getting a pre-qualification will help you discover exactly how much the bank is will to loan. I have seen couple disappointed after finding the perfect house only to be told it was more than they could qualify for. Banks will require certain debt to income (DTI) ratios or loan to value ratios (LTV). Some loan officers (the good ones) will even let you do a pre-approval. In this scenario, you will actually complete the mortgage application before you go out to look.

If you are limited to homes that qualify for a traditional FHA loan, there will be homes that do not meet the FHA specs, you can avoid. Or, if you find a great value in a wonderful neighborhood, you'll know if you can afford a 203 K mortgage that will allow you to buy a home that normally wouldn't qualify for FHA and will include renovation costs in your mortgage.

Question 2: How much will you need out of pocket? That is a question I am asked often. The answer is, "it depends." At a minimum, you should count on a down payment of 3.5% if the house qualifies for FHA. If you are getting a conventional loan it will be between 5 & 20% depending on the lender and the program. This information will also help you determine the closing costs, and other expenses you might need to pay ... Once done, you will know how much of the inheritance you have just received will be left over for furniture.

Question 3: What terms will be included in the offer? In IL and IN we include mortgage terms in the offer. When you submit the offer, it is contingent upon loan approval under certain terms. Things you will need to know are: What interest rate? What LTV % you need? What the length of the loan term will be. (A side note here: if you can afford the higher monthly payment of a 10 or 15 year fixed rate mortgage, it will yield a tremendous savings over the course of the mortgage. If you haven't looked at the options check out good

mortgage calculator. Be sure you look at the amortization schedule to see your total investment in your home.) If you cannot find a home under the terms in the agreed upon contract, you will be able to terminate the contract without penalty.

Now that you know the answers to the three questions, it's time to take the next step: finding the right agent. Will help you with some tips, next time. For more information, check out the helpful HUD guide or this one from the National Association of Realtors.