Sometimes, a little advice from the right source goes a long way. Take it from our mortgage team at Plains Commerce Bank. There is an easy way to buy a home, and, well, a not-so-easy way. The easy route starts with planning ahead!
We’ve outlined steps you can take to make the process move along with minimal hiccups.
If you see homeownership in your near future, take a gander. Advice like this will help you get into your new home when the time is right—even if that’s two years from now.
1. Get organized.
If you have saved every tax return and pay stub since your first job, then you’re in a good spot. If not, start gathering these important documents. You don’t need to go back to the beginning, but a mortgage banker will need your:
- Most recent pay stubs (30 days worth)
- Most recent checking and savings account statements (2 months worth)
- Most recent tax returns, including schedules (3 years worth)
- Most recent W-2s (3 years worth)
You won’t need these items until you make an appointment with a mortgage banker to secure a home loan. You probably won’t need them during your initial consultation, but you should prepare now. Keep these items in a secure place—don’t toss them! Keeping track of these documents now, versus later, will help ensure you can apply for a home loan when you want.
You may also need other items to obtain a home loan. Simply check with your mortgage banker.
Getting organized also includes budgeting. If you already do this, great! If not, create a simple budget, at minimum, before you start house hunting. (For help, read How to Budget for a Mortgage.)
Sometimes the bank will qualify you for a higher amount than you may be comfortable with. Think about it this way. If you currently pay $900 in rent, consider how much more you can afford each month. The bank may qualify you for a loan that equates to $1,300 a month. Is that too much? Then take note, and don’t buy a home that you cannot afford.
When the mortgage banker enters all of your information into the computer, it gets close to determining what you can afford. However, it doesn’t know about all the miscellaneous items in your life, like eating out, new shoes or daycare.
You will ultimately have to determine a reasonable house payment.
2. Save your pennies and then some.
Start setting money aside in a savings account today. Make it your dedicated house fund. When you buy a home, you’ll need at least something saved up for your:
- earnest money deposit
- house emergency fund
- house inspection
You may also need money for a down payment. The amount depends on the program you decide to use. For example, the South Dakota Housing and Development Authority’s First-Time Homebuyer program actually works with financial institutions to help you pay your down payment. The up to 3% gift they provide is yours to keep and does not need to be repayed. Despite the required amount, remember that the less you put down, the more you’ll pay in interest and private mortgage insurance (required for down payments less than 20%) over time. You’ll also have a higher monthly payment.
When budgeting, keep in mind that it’s always good to have an emergency fund. You don’t want to think about your water heater breaking right after you move in, but you do have to plan for the worst. Then hope for the best. Rule of thumb: save the equivalent of two months rent for unexpected expenses.
3. Be boring... for a while.
We don’t mean be a boring person, but you may have to get creative as you work to tighten your spending and stay put for a while. If you’re going to be applying for a mortgage soon, don’t:
- Buy a car or other big-ticket item
- Get a new loan or credit card
- Make large cash transfers or unusual deposits
- Quit your job
- Leave town for an extended time
These actions can prevent you from qualifying for a home loan for a period of time. There’s always time to rectify mistakes or hasty decisions, but if you want to buy soon, keep this list of don'ts in mind.
4. Be strategic about exiting your current lease.
“My lease isn’t up until, well, forever it seems!” If this is you, and your lease doesn’t expire for a while, you may still be able to house hunt and buy without paying double rent. How you ask?
When you decide it’s time to own versus rent, first contact your landlord to check the terms of your lease and be aware of the notice required to leave.
If that doesn’t work, have cordial open communication with your landlord about your plans. Sometimes, they’ll still be willing to help you exit early. You don't want to pay rent and mortgage at the same time, after all. Note that you may not have to make your first mortgage payment for a month or so after you close. Consider this when planning how to go from renting to owning. Maybe having one month of overlap in housing payments won’t matter if this timing works out for you. Then you can take your time moving into your new home!
5. If you’re buying within the next 2 years, talk to a mortgage banker today!
If you’re buying in the next 90 days, you’ll want to get prequalified for a home loan. This allows you to determine how much the bank is willing to lend you. It also proves to home sellers that you can make a serious offer. (Plus, it’s usually free to get prequalified, so why wouldn’t you?)
Even if you’re not buying a house in that timeframe, but within the next year or two, it’s still a good idea to talk with a loan officer sooner rather than later. Why?
They can help you pinpoint future roadblocks and tell you how to fix them now. Some issues, like poor credit, can take years to fix, so it’s best to identify and start working toward solving problems now.
Also, they can help you determine the best time to buy a home based on events happening in your life. You just have to ask.
If you want to talk with a mortgage expert, our team is here to help. Get in touch!
Source: Plains Commerce Bank Mortgage Team
All credit and loan products are subject to credit approval. Loan programs subject to qualification.