A week or two ago I had some friends visit from out of town for my birthday. Sunday morning we went out to brunch; I was casually enjoying some waffles and bacon when my recently engaged friend (CONGRATS! by the way 🙂 ) asked me if I could write a blog about how to buy a house and apply for a mortgage.
With a mortgage.
With her fiance.
We are NOT. OLD. ENOUGH. FOR. THAT.
A Barbie Dreamhouse is the only home I am interested in mortgaging (especially if it’s the one with the elevator) in the near future, though I think a lot of girls my age probably outgrew those a long time ago. At 25 my friend and I definitely fit into the “First-Time Home-Buyer” category and are probably ready for homes we can actually live in.
Once I calmed down enough to actually think about writing this post, I realized how complex of a question she was asking. How the heck do you buy a house? I have shown many a member into our mortgage officer’s office since I started working at the credit union. But other than the fact that he eats a lot of Ramen Noodles while listening to Justin Timberlake, I know absolutely nothing about what our mortgage expert Erik does or how he gets people into their new homes. So he and I chatted and he gave me these tips for first-time home-buyers.
First things first, you should be familiar with the 4 C’s of Credit. These are the main factors that will determine your ability to get a loan. When you go to a credit union, bank, or mortgage company to get approved for a home loan, these are the things they will consider.
CAPACITY – What is your ability to repay the loan? Do you have a job or another income source? Do you have other debts? Lenders love when you are a Steady Freddy in terms of your income. They are looking to give loans to people who have had the same job for at least 2 years, who are likely to see an increase (even if it’s small, incremental raises) over the next few years, and who are therefore likely to continually be able to make payments. I know I personally have had 3 different jobs in the last 2.5 years, which isn’t unusual for someone my age, but which doesn’t make me seem very reliable to lenders. Experimenting with jobs to find your passion is great, but it might mean that your income is inconsistent, you might have to relocate frequently, and it might even mean that some day you won’t be able to make your mortgage payment. Lenders don’t want to stop you from finding your dream job, they just want you to do that before you find your dream home.
CHARACTER – Will you repay the loan? Have you used credit before? Do you pay your bills on time? The Catch-22 of credit is, you have to use it to have it. If you’ve never had a credit card or made a loan payment in your life, you have no credit history and therefore won’t be able to get a loan on your own. Having student loans, car loans, credit card balances, etc. only weigh you down if you have trouble consistently paying off balances and making payments. If you religiously pay-off your credit card balance each month and make loan payments in full, you are probably in really good shape because you can prove to lenders that you can be depended on to make payments.
COLLATERAL – If you fail to repay your loan, is there something of value that you agree to forfeit? No one wants you to default on your mortgage loan (aka not be able to pay it), especially not your lender. If this unfortunate event were to occur, they want to know that lending you money isn’t a total loss, meaning you have something of value that they can take in place of you paying back the loan. In the case of a mortgage loan, the collateral would be your home.
CAPITAL – What are you worth? Do you have other assets, such as a savings account, car, or certificate of deposit that could be used to repay the debt? Even if you are able to get 100% financing for your mortgage (which means the loan would include 100% of the cost of your home), you will still need a solid nest egg before you are able to buy. Having money in savings means that you have access to funds to pay your mortgage if your income were to become unstable. It also means that you will able to pay for closing costs (fees for processing the paperwork of your home purchase) and other unexpected expenses in the process of buying your home. Lastly, it shows that if you were to default on your loan and not make a payment, you have something of value that the lender could use as collateral.
Now that you’re familiar with the general way in which lenders will assess your credit, figure out the specifics. Visit https://www.annualcreditreport.com for your free annual copy of your credit report. You won’t get your actual credit score number (that costs money) but you will get your credit history from the 3 major reporters: Experian, Transunion, and Equifax. This way you will be able to check the information on your report, dispute any errors, and try to reconcile any unpaid debts you were unaware of. If your credit needs help, you will know before you look to get pre-approved to buy a home and you can give yourself time to improve your credit. Need help understanding the information on your credit report? Visit your financial institution. Here at our credit union we are more than happy to spend a few minutes helping you look through your credit report. Or, check out the “What To Look For” section on annualcreditreport.com. They give some good advice, too.
Last minute check! If I haven’t scared you away from every buying a home with all of my financial mumbo-jumbo, you might just be committed enough to make the big purchase. Here are 2 final questions to ask yourself before you start the actual home-buying process?
1. Why do I want to own my own home? The cliche answer is: because it’s an investment. We all know that renting is a pure expense; you can pay your rent for years but you never actually own the home you live in. Home-ownership is great because there’s an end in sight. Once you pay-off your mortgage, you OWN the house. But why is that important to you? Is it more important than being able to travel abroad a couple times a year? Is it more important than being able to strike out on your own and start a new business any time you get a good idea? We don’t live in the 17th century any more when you had to be a land-owner to be able to vote or do anything cool. Erik said he often gets people in his office applying for a mortgage loan just because they think it’s the “next step after marriage.” Don’t let peer pressure get to you – if you’re happy in your rental that’s ok! If you’re young but dream of leaving your small one-bedroom for a place of your own even though none of your friends are home-owners, that’s fine too! Just be sure you’re buying a home because YOU want to, not because you think it’s what you should be doing.
2. Can you pay for everything going on inside your home?
Once you stop renting, YOU become the landlord. Can you pay to clean your furnace, get new tiling in the bathroom, repair a light fixture, etc. Can you pay to furnish all of your rooms? Your old hand-me-down furniture from your apartment might not look right in your brand new home, but can you pay to get a new couch, kitchen table, beds, bedding, light fixtures, kitchen supplies, chairs, and more all at once? Buying the actual house is one expense, making it liveable is another. If you don’t want to spend a chunk of your paycheck every month at Lowe’s, reconsidering owning your own place might be a good idea. If you’re Mr. Fix-It and can’t wait to decorate, you’re ready for the next step in the home-buying process.
Coming to the KelseyatCascoFCU Blog soon . . . I’m ready to buy a house – WHAT NOW?! In my next blog I will give simple steps and tips for how to get pre-approved for a mortgage loan, how to shop smart, and what to expect at a closing.