Getting Ready to Buy

If you have been trying to sell your home during the last six months, you know it’s been a very difficult time. But what’s bad for the seller can be very good for the buyer. Many buyers have been waiting on the sidelines to see if real estate values will drop any further and, when they do, these folks plan to buy. If you are one of these potential buyers, you may want to consider what you can do today to make it easier to buy tomorrow.

Start by getting your credit in order. Read my blog entry, Your Credit Rating – Know the Score, to learn how to get a free credit report as well as tips to help you resolve any credit problems. It is imperative that you get your credit score as high as possible. After last year’s mortgage crisis, lenders are very leery of making loans to people with credit problems. In the past, these folks would have been offered loans at a less advantageous rate. This is known in the industry as “B paper”. But it is just these loans that are at a high risk of defaulting. So lenders have really scaled back on making “B” loans. If you have credit problems, you will have problems getting a loan, so it will be well worth your time to try and clean up your credit report before you go hunting for a loan.

Next, review your spending and savings habits. The days of 100% financing are over. You will need money for a down payment. If you don’t have the money already saved, start saving now. If someone is planning to gift you the funds, see if they would be willing to do so sooner rather than later. Why? Let’s say your parents plan to give you $10,000 towards your down payment. You find a home you love, make an offer, and the offer is accepted. You call the folks, tell them the good news, and they send you the money which you deposit into your savings account. Suddenly you get a call from your lender asking where this money came from. You will now have to go through some hoops to prove the money is, in fact, a gift and not a loan. The folks will have to sign a document stating that they never intend to have you pay back the money. Often people don’t like having their motives questioned and I’ve seen situations where this has caused a rift between parent and child. If, however, you have the funds in the bank before you apply for the loan (usually 3 months will do the trick) the lender will not question the source of the funds.

OK – you’ve cleaned up your credit and stashed away the down payment. Now you need to find a home. Before you go house-hunting you need to know your price range. Start by talking to your lender to see how much you can borrow. Add your down payment to the loan amount and you’ll have a good sense of the price range the lender thinks you can afford. But that’s only half the story. You need to do some soul-searching before you go house-searching. Let’s say the lender says you can afford monthly payments of $2,000 per month. Presently, you pay rent of $1,200 per month. That’s $800 less per month, but at the end of each month when you look at your checkbook, the balance is $0. What happened to that extra $800? If the answer is you spent it on movies, vacations, and going out to eat, you need to decide whether or not you can live without these luxuries. Remember, you are not just buying a home; you are also buying a lifestyle. If you cannot, or will not, live without these “extras” then you either need to scale back on the price of the home or keep renting.