by Tolbert Rowe
So you have gotten a decent job, at least you think it is pretty decent, and you have started to save a few bucks and you are getting tired of paying someone else’s mortgage payment through monthly rent. Or, you have been lucky enough to have parents who have put up with your living with them, possibly rent free, and you are ready to join many of your friends and classmates in the realization of the American dream of owning your own home. But, you are intimidated by the process because you don’t have a clue as to how to go about it.
First you need to grasp the basic fundamentals of qualifying for a mortgage and then, once you have a good understanding of what is required, you need to evaluate which mortgage program will work best for you. Not all buyers are eligible for all of the mortgage programs that are out there, and in some cases, because of certain program limitations, you may only be eligible for one program.
The most basic requirement necessary to start the journey is that you must have a consistent and verifiable pattern of cash flow sufficient to repay the loan while at the same time allowing enough left over cash to pay all other living expenses. Basically, you need a job, and not for just a few weeks or a few months. You need at least a 2 year employment history, not necessarily with the same employer but if you do have several jobs in the last two years they should be in the same line of work.
If you were in college during the past two years and you are now employed in a line of work related to your degree field you can substitute college for work history.
Credit is the next most critical component of qualifying for a mortgage, and how your credit is ranked is determined by your credit score. If you don’t have enough credit to trigger a mortgage credit score you need to get one. For those just starting out without credit at all, the only way you can get someone to grant you credit is to put up some of your own money to do so.
You see, most creditors will make their credit decision based on how you have managed credit in the past. But, if you can’t get someone to issue you a credit card to start establishing credit, how in the world can you ever get started? A secured credit card is the answer.
A secured credit card is a major credit card, like VISA or MasterCard issued to you with a spending limit of however much you put on deposit with them. You send them $300 and they issue you a card with a limit of $300. You use it just as you would a credit card and over the period of several months you will suddenly find yourself with a credit score. To get one, just Google “secured credit card” and pick from the hundred or so entities that issue them. But, if you do get one, make sure you use it, because having one and not using it accomplishes nothing. Remember, you are trying to “establish” credit and you can’t “establish” credit if you don’t use it.
Once you satisfied these two requirements you are ready to begin to seriously focus on what you can qualify for. So for those of you with jobs and credit your next step is to call a lender, preferably me, to discuss your particular situation. Getting, and being preapproved for a mortgage will be the first recommendation any realtor will tell you to do before beginning to look at homes.
Also, be aware that someone you are related to or friends with may be interested in selling a home. Although realtors are professionals and very helpful, you do not need one to purchase a home. With the proliferation of social media it is very easy to find out when someone is interested in selling a home, and by not paying commissions, can provide a better price.
Using online websites is great for getting basic information but if you are preparing to make the biggest purchase of your life you simply cannot rely on someone in some far off state through some website you found on Google to be there with you during the entire home buying process. It could take as long as four to six months from the time you get preapproved to when you are actually at the settlement table signing to get the keys to your new home.
One of the biggest hurdles we are facing in today’s real estate market is a lack of inventory in the first time homebuyer price range that I define as homes under $200,000. And the lower the price below $200,000 the fewer decent listings you will find.
When houses are listed and they are aggressively priced they are attracting a lot of showing activity and in many cases are going under contract very quickly. Realtors are not going to show houses to potential buyers if they suspect it is overpriced and its value cannot be supported with an appraisal.
An appraisal of a property will be done for the lender, (paid for by the buyer) for the purpose of determining if the price being paid for the property is supported or “justified” by the sales of similar homes within the past six to nine months. The appraiser is not determining value; they are justifying it because true value is what a willing seller is willing to sell for and a willing buyer is willing to pay. Value in the case of a real estate transaction is the price which both the seller and buyer have agreed to.
So what good does it do for a realtor to agree to accept a listing at a price that they know cannot be supported by a lender required appraisal? Their only hope in this situation is if someone comes along who is willing to pay cash and no appraisal will be necessary.
The only variable left in getting a mortgage is the required cash investment necessary for the loan program you are eligible for. This is an area where online lenders are lacking in complete knowledge of loan programs available in our area.
The Rural Development Program (RD) does not require a down payment and you can negotiate to have the seller pay most, if not all, of the closing costs. If your income is under $96,150, or $124,500 for families of five or more, you can literally buy a house with no money, if the seller agrees to pay borrowers closing costs. Many online lenders do not participate in or are not familiar with the area where the RD program can be used. RD is limited to rural areas of which most of the Eastern Shore is, with the exception of certain areas in Salisbury.
Closing costs are those charges necessary to facilitate the transfer of ownership from one party to the other. These consist of your settlement fees to attorney or Title Company, lender charges and government transfer taxes and charges. Depending on the purchase price, these fees can run anywhere from $6,000 to $11,000.
Other loan programs require a down payment of at least 3.5% and of course conventional loan programs are there for those who do have down payments in excess of 5%.
If you are a first time homebuyer in today’s real estate market it is critical that you work with a lender you know who will be there for the multitude of questions you will have and who knows all of the mortgage programs available. Call me if you are serious about starting the home buying journey.