Want to buy your first home? You probably have some cash saved for a down payment and recommendations for realty agents from savvy friends. But have you cleared your credit report, hired a tax adviser, or weighed FHA financing, compared with a conventional mortgage?
Kasara Williams, 31, has taken all three steps in a yearlong quest to buy her first home. ‘‘This whole experience has taught me that it’s important to have your financial act in order,’’ said Williams, of Arlington, Va.
Not every first-time buyer needs a tax adviser, as Williams did to withdraw part of her IRA without being penalized. But everyone should prepare early with orderly finances, information, and plenty of patience for a long, complicated process.
Mortgage lenders and home sellers have become more demanding in the documentation they require. And with the market heating up, you should think through the contingencies and prepare your balance sheet to compete with other buyers. Here’s a primer:
Credit and Savings
Request a free copy of your credit report from the three major credit bureaus atwww.annualcreditreport.com. To avoid scams, use only this link. If you see accounts you don’t recognize or negative marks on your credit report, clear them up now.
‘‘You’d be surprised. Your parents might be on there, your cousins,’’ said Mary Malgoire, founder of Family Firm, a financial advisory firm. ‘‘It’s really important to clean it up before you start this whole process.’’
Williams learned that her father was still a joint holder on her checking account, so she asked him to write a letter certifying that all the funds were hers. She also noticed a negative item about an old dispute with Verizon over a land line that had never functioned.
‘‘I had to call them multiple times until I could talk to someone who was sympathetic and would get it removed,’’ she said.
If you see old credit cards that you no longer use, consider closing some, starting with the newest, low-limit cards that are unused. Lenders prefer a low ratio of debt to credit limit, so it’s good to have more credit available than you use. They also like to see longstanding relationships, so don’t close your oldest account. And if you close too many credit cards in a short period, that raises a red flag, as well.
Create or revise your monthly budget so you’re setting aside the money you would pay as a homeowner that you don’t pay as a renter. This includes the mortgage, mortgage insurance, property taxes, condo or homeowner association fees, home furnishings, maintenance, cleaning, and any utilities or fees your landlord pays.
Living within this budget will teach you what you truly can afford and help you pay off credit card debt or add to the savings you should have amassed for a down payment.
Bank and credit card statements will probably be requested later by lenders. Start keeping financial statements and pay stubs in a file, where you’ll put new documents as they arrive so everything remains current.
This is an opportunity for a reality check, said Kate Fries, a certified financial planner at Family Firm. Will you stay in the area for at least five years, and do you have enough saved beyond the down payment for moving costs, maintenance, and repairs?
‘‘A lot of people jump into homeownership before they should. They get excited — their friends are doing it, the rates are really low, and the idea that you should own a home. That’s not always a good starting point,” Fries said. Review your plans to see whether you might move to another city for work or add to your household through marriage or childbirth, both of which have implications for your income, location, and size of your home, said Carter Ferrington, at Vogel Realty.
Not only can your real estate agent advise you on neighborhoods and listings, that person is
your advocate. Ask friends, family, and colleagues for recommendations for an agent with expertise in your target market.
‘‘The one thing I have that you won’t have if you’re a buyer is objectivity,’’ real estate broker Donna Evers said. ‘‘You’ll fall in love with some charming front porch. I’m going to be the little angel at your elbow saying, ‘Can you borrow that much?’ ”
Your agent can help craft a strategy for being a competitive bidder. For instance, sellers prefer a buyer with no inspection or appraisal contingency, but you’ll need to think through your comfort level with paying for an inspection ahead of your offer being accepted and with buying a home that appraises for less than the sale price.
After Reese Goldsmith and Larry Mosley had two purchase offers rejected, they began to question their agent’s strategy. Even when the couple bid $5,000 higher than the next offer, they lost to buyers with conventional mortgages. Sellers knew their FHA financing would take longer to close and had a higher likelihood of bumps along the way. ‘‘We were getting pretty frustrated,’’ said Goldsmith, 25. ‘‘We needed someone who could rethink our search for us and be a bit more proactive.’’
They changed agents, began looking in more affordable neighborhoods, and switched to conventional financing. Even though a conventional mortgage requires a higher down payment, the lower cost of the house made the arrangement workable. Moreover, they avoided paying private mortgage insurance of $500 to $800 a month.
Your agent is a terrific source for the other important professional for home buyers: a mortgage lender. Whether you work with a specific lender or a mortgage broker who can connect you with many lenders, interview several before choosing. But don’t let anyone run your credit until you’ve decided, as several inquiries could raise a red flag and lower your credit score.
You don’t want to let a quarter-point-lower rate tempt you into an Internet-based lender, then be unable to reach the underwriter when you’re in a fast-moving bidding war. ‘‘Get preapproved,’’ Evers said. ‘‘This is going to be so necessary this year because we are looking at an extremely competitive situation coming down the pike.’’
Your lender can walk you through financing options and give you a realistic view of how much you can borrow. Ask the lender to run a hypothetical scenario so you have a written estimate of the monthly principal and interest payments, closing costs, insurance fees, and property taxes.
Your lender can also walk through your credit report with you and give advice on improving your score.
Make sure you understand in what circumstances you’ll be required to buy the home — or will forfeit your earnest money — even if your loan application is ultimately denied.
All that remains now is to look at properties and be ready to make an offer quickly. That means keeping your finances spiffy. ‘‘Please don’t go out and buy a big car between now and settlement, or incur any new debt,’’ Evers said.
When you find a property you want, call utilities for usage history and check on condo or homeowner fees and property taxes. Don’t let the beautiful home sway you if the expenses will push you over your limit.
‘‘You always run into this thing where someone’s trying to push your budget . . . You need to have the money to take care of the home as well,’’ Goldsmith said.
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