Wednesday, August 2, 2006

Adventures in First-Time Homebuying #4: Before You Begin the Homebuying Process…

Author: Nick
Category: Money

get yourself in order

So you’ve convinced yourself that you want to buy a house now instead of later. Of course you’re going to be a good little homebuyer and make sure the first thing you do is get pre-approved for a mortgage loan, right? Wrong! Congratulations, you are now banned from homeownership forever. Go sit in the corner of your rental apartment for all eternity.

Or keep reading if you want to know what you should really do first. Before you even start looking at houses, before you look for a loan pre-approval, and before you even think about how much house you can afford, you need to take some relatively simple step in preparation for your mission to purchase a home.

Steps to Take at the Very Start of the Homebuying Process

  1. Examine your credit. You should already know that your approval for a mortgage loan is highly contingent on your creditworthiness. Good credit can mean better interest rates on loans, and that can save you a small fortune over the life of the loan. Bad credit can mean sub-par, even horrible rates or possibly no loan at all for you. Pull your credit reports for free or pay for them if you did that in the last year, and also obtain your credit scores. These scores may be different from what your mortgage lender will see, but they’ll give you a good idea of where you’ll fall in the scheme of rates and qualifications.
  2. Repair credit problems. You want as little bad stuff on your credit report as possible. If you see items that are inaccurate or just plain wrong, follow the Federal Trade Commission’s guidelines for getting those nasties off your reports. And if you have late payments or other correctly present baddies lurking in your reports, you’ll just have to live with them and the problems they may bring when applying for a loan. Also remember that it can take several weeks or more following credit repair steps for the changes to reflect in your report and scores, so make sure you get this done well in advance–like right around the time you first consider looking for a home.
  3. Plan your upcoming purchases and credit events. Are you thinking about getting a car (and a loan to go with it)? Or maybe you’re going to apply for that awesome new 5% cash back credit card. You’ll want to think again about doing anything that could ding your credit score, even if it’s just a point or two. In the months leading up to your home purchase, don’t apply for any new loans or credit cards because they can nick your scores enough to make a difference in the mortgage loan interest rate you’ll receive.
  4. Pause your credit card usage. As you know, I love credit cards. I don’t carry balances from month to month, and I enjoy the free rebates and bonuses I receive for using them. And if you’re like me, you’re not going to like this next bit of advice: hold off on using your credit cards until the deal is done. Remember, higher balances on credit cards can bring down your credit score. Pay off any high balances you may have, and then keep your usage down to low or non-existent levels. Even if you pay your cards off every month like I do, their monthly balances will still hit your reports and scores. If you absolutely must use your cards for big rewards, consider paying them off the same day so the balance won’t hit your report. In the meantime, use a checkbook, cash, or the credit cards of a spouse if he or she won’t be listed on the mortgage loan. Or offer “interesting trades” for your groceries and utility bills.
  5. Count your pennies. Standard question #73 on every mortgage loan application: “How much money you got, yo?” Hopefully you use some financial tracking software like Quicken and you can just check the totals of your accounts in there; but one way or another, you’ll want to obtain current balances for all checking, savings, retirement, investment, money market, or any other accounts you have. Even if you don’t plan to use that money in your home purchase, you should still plan to report every last dime you have to the lender since they’ll want an indication that you will have reserve money left over after the sale.
  6. Ask family for a gift. Now would be a good time to ask mumsy and pop-pop for a monetary gift to help you purchase your first home. A loan won’t do you much good since you can get that from the bank; you want cash you never have to repay along with a gift letter saying just that. Don’t wait until halfway through the loan application to ask your parents for money since they can always say no.
  7. Get your paperwork together. Different lenders will want to see different forms of documentation, but here’s a list that should cover everything any of them may want:
    • Proof of income. W-2 forms for the last two years from all jobs for all people on the loan. You’ll normally need to prove a steady paycheck for two years in order for it to be counted as a source of income.
    • Paystubs. Thirty days of paystubs from all jobs for all people on the loan.
    • Account statements. You counted your pennies, now organize the paperwork that shows how many you have and where. Two months of bank statements for all money of all people on the loan.
    • Tax returns. Two years worth for all people on the loan, though W-2s may be enough. Still, if you need to request copies from the IRS, it can take two weeks for them to arrive, so order them anyway (tax transcripts are free) ahead of time to be safe.
    • Identification. A driver’s license or social security card, in case they ask you to prove who you are. You may also need proof of citizenship, but I couldn’t tell you how that works.
    • Be ready to move lots of money quickly. You may have liquid assets in various accounts, some of which you can access instantly and others which would require a few days of transfer time to get your hands on. Once you find a house and make an offer, you may quickly find yourself in need of a big chunk of that money for an earnest deposit. You may wish to move some to a checking account before you start looking for houses.

Now you’re ready to start the real fun. Stay tuned for Adventures in First-Time Homebuying #5 wherein we will discuss the mortgage loan pre-approval process in face-punchingly painful detail.

Our Progress So Far

At this point in the process, we followed the above steps closely. As only my name will appear on the mortgage loan, I pulled my credit reports and scores and everything checked out okay. I had a 0% balance transfer I was using to earn free interest, but I paid that off before the 0% period ended because it was keeping my overall balances high. I’ve been mostly using my wife’s card for regular purchases, though I charged her tuition on my Discover card for the 5% cash back and paid it off the same day.

Our families aren’t really in the position to give any serious monetary gifts (and we wouldn’t feel comfortable asking anyway), but we counted our pennies, organized our account statements (and boy do we have a lot of those!), and printed enough forms to document the destruction of a whole rainforest. We had to wait for copies of a tax return from two years ago which mysteriously disappeared, though it turned out we didn’t need it anyway. And most of our money is three days away in HSBC Direct, but we moved enough to our checking account in case we acted quickly to make an offer after pre-approval.

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