Thinking about moving in 2019?
If moving is part of your new year resolution for 2019, the first step in the process is figuring where you want to move to and then what you can afford. If you are going to rent, the two primary first steps are ensuring you have enough cash for the deposit and first month's rent plus having a good rental history or credit score. If you are going to buy, and you don't have the entire price of the house in savings, you will need a mortgage loan... and that requires a little more work.
Here are the eight steps:
- Fix credit (bills, loans, balances),
- Save for down payment & expenses,
- Research locations (owning is longer term),
- Choose a REALTOR (get good guidance!),
- Get your home's valuation done (if you own),
- Gather financial documents (lenders want proof),
- Choose a lender,
- Shop in your price range.
1) In Minnesota (and the whole US), almost all major lending decisions are based off your credit score. For a score with a range between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Lenders look for high credit scores because they can safely assume that applicants are a low risk borrower. Typically, they look for scores above 720 or higher for a mortgage loan but some will go as low as 580. Your credit score heavily influences how your mortgage payments and interest rate will be. Before you apply for a loan make sure your credit score is strong, so you can be approved for a desirable loan and terms. It takes months (sometimes years) to fix your credit score so here are the steps you should take right now.
a) Catch up on any bills or late payments. Set up auto payment to make sure you stay current.
b) Do NOT apply for any new credit lines or loans.
c) Reduce your balances on any credit cards you own.
Although having a line of credit can help your credit score, you need to keep your balance-to-credit-line ratio low.
2) Save cash for your down payment, loan expenses, moving expenses, etc. While there are low cost options for people with special benefits, like veterans and first time buyers, most people will need to cough up a large amount of cash throughout your mortgage process. While 20% is the recommended down payment for a conventional loan, there are other loans available that require applicants to put down less than 20 percent. For example, the Federal Housing Administration (FHA) loan requires people to put down as little as 3.5% but they need to have a credit score of at least 580 and you will need to pay for mortgage insurance. A good lender will explain the advantages and drawbacks of each loan you qualify to obtain.
No matter what loan you qualify for, there will be loan expenses. Most lenders will have originations/processing fees or points and if you have less than 20 percent down they will require you to fund and escrow account for taxes and insurance. There will also be other transactions fees and moving expenses in the purchase process. I suggest buyers try to save up to 4% on top of the downpayment of the purchase price for all the additional expenses.
In short, yes, financing a home requires a sufficient amount of funds, but that is why it's the American Dream. Homeownership is a sense of pride and accomplishment for most people. Start saving early so you can purchase your dream home!
3) Buying a home is a much longer term commitment than renting. Think about your 5-10 year goals. What is the best place for you to live for that long? Do your research about neighborhoods, etc. How much do homes cost in different neighborhoods?
4) Choose a REALTOR that specializes in the are you want to live to help you with your purchase. When the agent specializes in an area, they will have a deeper understanding of home values and neighborhoods that fit your budget. They may also have insight about other aspects of the community. A good REALTOR can also refer you to a few reputable lender so you can shop for the best possible mortgage.
5) If you own a home that you plan to sell, you will need a valuation done. This could be a huge piece of your puzzle so make sure you are choosing an agent that is familiar with the local market and has experience helping homeowners juggle the purchase and sale at the same time. This isn't time to hire you friend or uncle that just got their real estate license!
6) Now you have worked on your credit, you know what you want to spend and where you want to buy it's time to apply for a mortgage. When you apply for a mortgage, your lender will ask you for specific documentation and personal information. They ask for this paperwork and information, so they can accurately evaluate and approve you for tailored mortgage loan, term and rates. Make sure you have the following ready to go when you meet the lender showing your income, employment history and assets:
- last two years of tax returns
- W-2’s
- bank statements (and investment statements)
- current pay stubs
7) Talk to as many lenders as you need to until you feel fully informed of your options then meet with the lender you chose. This is often best in person if you are a visual person but this can also be done over the phone or with screen sharing and you can submit documents electronically. A mortgage is a big commitment and shouldn't be based on one 5 minute online app you did that estimated what you will qualify for when you are ready to buy.
The lender will issue you an approval letter once all your documents have been reviewed. Getting pre-approved first will help paint a clearer picture of where you financially stand and prevent you from wasting time looking at homes you can't afford. The approval letter will need to be sent with your offer because it shows sellers you are a viable buyer.
Your lenders pre-approval letter should state the dollar amount you have been approved for, the loan program, conditions that need to be met by you and often the mortgage rate.
Having this letter also signals to sellers and real estate agents you are serious about purchasing a home, which will make you an attractive client to both parties.
8) Shopping for a home in any market can be stressful. Have your REALTOR create a MUST haves list and a would be nice list. They will set up a search for you through their agent MLS but most buyers like to poke around on public websites too. Having the list upfront will keep you from getting too far down a rabbit hole online and ending up in a place you don't want to be because you saw pretty pictures.
If you follow these New Year’s resolution tips, you can find a new home in 2019!
Did you miss these great real estate articles?
Twin Cities Housing Market Shift: The economy is very strong and housing will remain healthy – however we will see a shift in the housing market, and in fact, it’s already underway!
Real Estate and Mortgage Recap 2018: Twin Cities real estate as mortgage year end review. Interest rates, inventory of homes for sale, new construction, Are we in a bubble? And more!
How Do Interest Rates Affect My Mortgage Payment?: What happens when Interest rates rise a half percent? How about one percent? Does it make a difference?
Coming Soon Status: Looking for an edge in your home sale or home search? Ever wonder where to find those homes for sale that have an agent helping them get ready to sell but not on public websites yet?
