NEW YORK (MainStreet) -- There’s never been a better time to purchase a home, with interest rates still very low and a real estate market that has kept home prices depressed.
Still, you shouldn’t run out and buy, which is exactly what got some people into trouble before the recession.
Take your time, assess your finances and make sure all of your financial ducks are in a row: mortgage rates are going to be spiking from historic lows abruptly, and home prices around the country remain depressed, if showing some signs of recovery.
Mainstreet talked to financial experts to gather critical tips for the prospective homebuyer to prepare financially to purchase real estate:
1. Get a copy of your credit report
Neal Frankie, a CFP and blogger at WealthPilgrim.com, says one of the most important first steps is to know what your credit report says about you. If you haven’t checked your credit report, which you can do for free, you might have errors on the report or there may be a negative rating that you can clear up. This is very important as a low credit score can impact your ability to purchase a home and your interest rate. If you do have a low score, do not fall for the many scams out there to help you “clean up” your credit, which takes us to the next piece of advice:
2. Speak to a financial advisor
“Consult with a trusted financial advisor,” says Jean Allard, vice president with Keystone Real Estate Group. “They can guide you to make the most of your investments. You can even purchase investment property using a self-directed IRA. Understand all your options.” A financial advisor can also help you budget and may be able to direct you if you have negative marks on your credit rating.
3. No big purchases
You may want to purchase a new car or even know which appliances you want, but it isn’t advisable to make big ticket purchases that will show on your credit report before you plan on buying a home.
“Mortgage lenders want to see that you are smart with your finances and that you are prepared to make this huge investment, probably the biggest purchase you will make in your life, and if there are any large purchases made during the mortgage approval process, it will send red flags to the lender and you could be cut loose,” says Andrea Woroch, who helps people save money at Kinolinc.com.
4. Know how much you can afford
This might be a no-brainer, but it’s not as easy as you may think, says Neal.
“The smaller the payments you can afford the smaller the property and/or the greater the down payment,” says Neal. A financial advisor can help you determine exactly how much you can afford as well.
5. Owning a home isn’t just about the mortgage
When determining how much you can afford, you should also be investigating the true cost of owning your home, says Neal. Things to take into consideration: Insurance, maintenance, upfront repair and renovations and property taxes.
6. Shop home prices
Neal says it’s very important that you investigate all of your options. Every area has some very attractive neighborhoods with prices to match and some less attractive options. One thing to consider is your investment. If you’re young and single, you may not be as concerned with schools as you would be if you have a family, but the next buyer might be. Be on the lookout for up and coming neighborhoods that may once have seen a decline, but may be the new “chic” place to be in the next 5-10 years or however long you plan on staying before looking to sell.
7. Save your down payment
Jim Angleton, president and real estate banker with Aegis, says you will need at least 30 percent down and six months of reserve payments.
“Forget about high leverage loans because lenders have difficulty obtaining private mortgage insurance,” says Angleton. “Unless you show savings to buy and repay the loan, your bank will deny you or offer crazy loan terms.”
Tim Burke with National Family Mortgage says if you’re borrowing your down payment, as do approximately one-third of borrows, according to the National Association of Realtors, you must leave a paper trail. “If you're borrowing down payment money from relatives it's very important to document the transaction properly to both protect relationships and avoid gift tax issues,” says Burke.
8. Shop for a real estate agent just as you would any other professional
Neal says do not rely on a recommendation or a friend to help you find the perfect home. “You have to ask certain questions to make sure the agent is going to work for you instead of trying to pressure you into buying something that isn't appropriate,” says Neal.
9. Prepare for the pain
You may have done it in order to show your mortgage company that you’re responsible, but you should keep that six months of cash flow savings handy. “Most home buyers feel a money crunch for six months or so after they buy their new home,” says Sep Niakan, real estate broker with HB Roswell Realty. “This is due to all the purchases they make to get their home feeling like home.”
10. Gather your records
Mortgage companies are much stricter than they once were with regards to financial and tax records, particularly if you’re self-employed. If you are an hourly or salaried employee then you're likely in good shape, but if your income is derived from commissions, as an independent contractor, or self-employed, you may have major problems in loan underwriting. Typically a bank will not approve the loan unless you have been receiving income of this type for at least two years according to your tax returns, says Kurt Carlton, CEO of Sherman Bridge Lending. So if you just switched jobs from salary to self-employed then your qualifying income may be zero in the eyes of a lender.