1. Don’t buy too much house
Many homeowners decide what they can afford based on what a mortgage lender says according to a debt-to-income ratio. But this usually is not the best gauge. Just because you can afford a bigger mortgage doesn’t mean you should take the plunge. Decide what to spend based on a real budget. “Use a calendar quarter worth of checking and/or credit account statements to figure out actual fixed and variable expenses,” says Taylor Thomas, a certified financial planner with Round Table Services in Westfield. He recommends a trial run, depositing the mortgage payment and additional expenses into a savings account affect a few months. See how the higher costs affect your cash flow to determine how much home you really can afford.
2. Check your credit
Your credit report and credit score will dictate what kinds of mortgage offers you’ll get when you shop around. Be proactive. Check your credit report now, so you have time to correct inaccuracies that may have a negative impact on your credit history, says Richard DiTaranto, of Northern Advisory Group in Fairfield. You can get free copies of your credit reports from the three major credit bureaus once a year at annualcreditreport.com. Once you know your history is correct, you can start talking to lenders about pre-qualifications and pre-approvals. Keep in mind that pre-approvals are worth more because they require more documentation on income, assests and debt. They are a more powerful indicator to the seller that you will receive the mortgage you eventually ask for, says Taylor Thomas. “It is not smart, however, to use the pre-approval as guidance for how much mortgage you can afford,” he says. You’ll want to make sure you can realistically afford the payments. So be sure to balance those payments with your other financial obligations.
3. Cash matters, especially after you buy
One of the biggest mistakes homebuyers make is using all their liquid assets for the down payment, keeping behind only a small cushion. That’s bad news, says Michael Cocco, a certified financial planner with AXA Advisors in Nutley. #8220;Once they are in their home, additional projects come up,” he says. “All of a sudden, that emergency cushion is dwindled or non-existent.” Cocco recommends homebuyers be conservative when planning for emergency funds, otherwise you might be tempted to dip into retirement accounts or take on credit card debt to meet expenses.
4. Watch the fees
Mortgages are historically cheap, but that doesn’t mean every cheap interest rate will lead you to the right mortgage. Consider working with a mortgage professional familiar to your friends and family, says DiTaranto. That can help eliminate surprises. Even if you get a recommendation, you should still shop around. Thomas suggests you make sure the lender tells you the annual percentage yield (APY), in addition to the annual percentage rate (APR). “You can use the APY to compare interest rates between different lenders. This rate is the actual rate you will pay and takes into account the compounding method of the lender,” he says. The lender also should provide a good faith estimate (GFE), which outlines the fees and expenses you can expect at closing. Ask questions and don’t be afraid to negotiate. Remember, you will need to pay some up-front taxes and insurance costs that may go into escrow, plus title insurance, too.
5. Get it all in writing
Perhaps the sellers promised to leave the backyard swing set or maybe they’ve promised to pay a portion of your closing costs. Whatever it is, get it in writing. You don’t want to find out, after two hours of signing paperwork at your closing, that something about the numbers isn’t right. “A simple rule applies: Anything you think has even a remote ability to cause financial harm to you in the future should be discussed and agreed upon in writing,” says Thomas. Also be sure to have a home inspection, so you will know additional work the home needs.
6. Who says you have to buy?
Renting has been described as “throwing money out the window.” That’s not true for everyone. “If someone is only planning to be in a home for a couple years, renting is more often the way to go,” Cocco says. “Throwing money out the window” can really mean paying unnecessary closing costs on a mortgage or making capital improvements that you may not recoup when you sell after owning the home for a short time.