by Ina Fernandez
photo by Mark Moz
Contrary to popular belief, millennials are gradually succumbing to the siren’s call of home ownership. And why not? Mortgage rates are still at historic lows, home prices are inching up, and job growth is steady. Meanwhile, rents are rising. As my daughter put it, “I want something to show for all those checks I am writing.”
If you have already made the decision to buy, congratulations! From a financial standpoint, first-time homebuyers have a few things to work on.
Credit Score: The better your credit score, the easier it is to get a mortgage at better rates. So get your finances in shape so your credit score is the best it can be. Pay your bills on time, pay down credit card debt, and avoid making big purchases or opening new lines of credit. Cancel cards you seldom use, as those count against you, regardless of whether you use them or not. You are entitled to a free credit report once a year from each of the three credit bureaus; details are at www.annualcreditreport.com or 1.877.322.8228. So check your credit before and after you have taken measures to improve it, to make sure you are ready to face the lenders.
Get Pre-qualified: Lenders can quickly tell you how much you are able to borrow based on your income, debt, and assets. You can do this for free online or by phone. It is an opportunity for lenders to discuss the various options available to you based on your finances. Word of caution: don’t get carried away with finding a home at the top of your prequalified range. You don’t want every extra penny you earn going towards the home, leaving little for emergencies or savings.
Select a Lender or Broker: The advantage of going with a broker is that, for a fee, they will do the legwork of contacting a variety of lenders to provide you with a list to choose from. Some brokers have access to lenders who may not work directly with borrowers. On the other hand, some lenders do not work through brokers, and it may be hard to determine if an entity is a direct lender or broker, so you should ask. Confused? The answer is to browse for the lowest rate and best terms regardless of whether it is a lender or broker. The Federal Trade Commission (FTC) has helpful information on its website for consumers, including a handy checklist that identifies the items to consider when comparing different lenders: www.consumer.ftc.gov/articles/pdf-0104-mortgage-shopping-worksheet.pdf.
Mortgage Rates and Terms: The variety of rates and terms available will make your head spin. In trying to decide what is right for you, keep two principles in mind:
You should match your mortgage term to the amount of time you plan to own your home. Rates are still very low, so if you are unsure how long you will be in the home, locking it in for longer periods is okay.
You should be sure you are rewarded for the risks you take on a home mortgage. For example, the very low initial rates offered through Adjustable Rate Mortgages (ARMs) are tempting. However, you need to check the details closely, to make sure you can afford to stay in the home if rates continue to rise after the initial period.
Get Pre-Approved: Once you have selected a lender, and have determined the amount of home you want to buy, you should seek “Pre-Approval.” For an application fee, a lender will give you a conditional commitment in writing for the maximum loan amount you will be able to borrow. This step is exhaustive, requiring you to provide documentation (like tax returns, bank statements, and pay stubs) to support your income and expenses. Your credit score is important here. The advantage to getting pre-approved is that once you find your dream home, you can move quickly to closing. Sellers prefer dealing with buyers who are pre-approved, as it significantly reduces the timeline to closing.
Bottom Line: Shopping for a home is exciting, whereas getting a loan can be a long and tedious process. It helps to remind yourself that buying a home is likely the most important financial decision you will make. A little more effort now can save you thousands of dollars over the life of the loan. And your home-to-be is worth it. To quote Maya Angelou “The ache for home lives in all of us, the safe place where we can go as we are and not be questioned.”
Ina Fernandez is President and Founder of Fern Capital Inc. and a Michigan-based independent Registered Investment Advisor (RIA).