Ending the Rental Rat-Race in Whitefish, Montana

    Interest rates are at historic lows, a huge array of flexible low-cost loan programs are available, and there are several home-ownership assistance programs that can help just about everyone experience the joy of homeownership.  There couldn’t be a better time than now to consider buying your first home and getting out of the “rent rat-race.”

     However, if you been a renter for quite a while, you may not be aware of the steps involved in acquiring a home mortgage. This report will give you some important tips to make the purchase of your first home a much more pleasant and successful experience.

1) Clean Up Your Credit Rating First

     During the pre-qualification process, you’ll learn if there are any potential problems in your credit history.  This, of course, assumes that you are truthful with the mortgage professional.   telling fibs or leaving out important facts isn’t smart.  You may sneak something past during a pre-qualification, but everything will come out before you get to closing.  So, if your credit isn’t spotless, be honest about it.   Your mortgage professional may be able to help you clear up the problem or, at least, deal with it up-front rather than later at the final mortgage application when suspicious eyes will wonder why it wasn’t disclosed at the outset.

     Review your credit report carefully with your mortgage professional.  It is not unusual for non-payments to be listed that are not even yours.  Your mortgage professional can help you address problems up on the credit report. Sometimes, just a simple letter to the creditor explaining the circumstances will rectify the situation.  But, credit repair can also take months, so start early.  To learn more about your “credit score,” be sure to also read our article entitled What is My Credit Rating.

2) Get to Know a Realtor® You Can Trust

     As a first-time homebuyer, the biggest mistake you can make is believing that you can save money by not using a Realtor.  Buying a “For Sale by Owner,” home, known in the trade as a FSBO, seldom gets you the best price or the best protection regardless of the claims made by the Seller.  Many FSBOs are selling it themselves because no Realtor®: would list the home at the price the Seller thinks its worth.  The Listing Agent for a home may tell you that he or she can represent both you and the seller fairly (that means really representing neither of you).   While that can be true, its generally better to be safe rather than sorry. Consider using a Realtor® who agrees to represent you and you alone, as “your Buyer’s Agent.”  Particularly on your first home purchase, you want all the representation on your side that you can get.  You may also want to read our article entitled Should I Use a Buyer’s Agent.

3) Estimate How Long You Might Own the Home

      Probably the worst thing that can happen after buying a home is to find out that you need to sell it again within a year or two.  If you must sell a home before its value has had a chance to appreciate enough or cover selling costs and commissions, you can put your yourself and your family in a bind.  This is especially true if you buy a home with a down payment was less than 10% of the purchase price.

      Your selling real estate commission may average about 6% and other closing costs can add another 1.5% to 2%.  So, unless the home appreciated in value by more than at least 8 – 10% while you owned it, you may lose all or a portion of your down payment or worse, you may need to “write a check” to close on the sale.  To be safe, make sure your plans include staying in your new home close to 5 years before you’ll need or want to sell it.

4) Know Your Rights Regarding a Mortgage Application

      There is a federal law called RESPA, which stands for Real Estate Settlement Procedures Act which gives you certain rights that you ought to know about.  RESPA requires all lenders to disclose information to potential customers throughout the mortgage process, by doing so, RESPA protects you as a borrower from abuses by lending institutions.  RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.   For more information on RESPA, go to the RESPA website or call (800) 569-4287 for a local RESPA counseling referral.  Your Realtor® will also be able to help you understand rights under RESPA.

5) Shop Around for A Mortgage Professional

     Like most other areas, the quality of mortgage professionals and the program they offer varies significantly.  Dont immediately settle on the first lender you talk to.   Shop around at least as much as you would if you were buying a car.  Don’t settle on one until you feel you can completely trust the professional and the company he or she represents.

6) Get Pre-qualified for a Mortgage Before You Start Looking

     Before you even think about looking for a home, get pre-qualified by a mortgage professional.  Pre-qualification is free.  It’s simple, and it gives you a definite advantage in the buying process.  Sellers like to know they’re negotiating with a party that can go through with a deal once it’s agreed to.  They’ll often accept a little lower offer when they know the buyer is pre-qualified.  Further, the pre-qualification process will clarify your financial situation, and give you a good indication of how much home you can afford.  This will help you avoid wasting time and the aggravation that comes from looking at homes you cannot afford.

7) Compare More Than Just Interest Rates

     While interest rates are certainly a significant factor, compare the total cost of the transaction you are planning. Different firms charge fee for different things leading to very different total costs when you get to your closing.  Demand to see a full accounting of all the fees you will pay at closing.  Ask how long the pre-qualification is good for.  You don’t want to go to the pre-qualification process only to have it expire before you find the home of your dreams

8) Know What “Kind” of Mortgage You Want

     There are several different kinds of mortgages:

  • Fixed Rate – where the interest rate will stay the same for the life of the mortgage.
  • Adjustable Rate – where the interest rate will be adjusted periodically to the “market rate.”
  • Two-Tier Rate – where the interest rate may be low for the first several years and then convert to either a fixed or variable rate at later point in time.
  • Hybrid of Special Programs – a variety of programs generally designed to help first-time homebuyers or special local or national circumstances

There is nothing particularly good or bad about any of these.   You just need to understand them and see how they fit with your situation.

9) Decide what features you “need” and those you just “want.”

     You are going to see a lot of homes before you find the one that’s right for you and each one will be different.  To avoid being “swept away” by all the features and amenities there are in some homes, do yourself and your Realtor®: a favor.  Make a list of the items that are “must haves” and another of “wish list” items and give it to your real estate agent.  It will help him or her identify homes to show you.   You can change the list as you go along, but just having it in writing in front of you will help keep you focused and on-course to finding the right home for you and your family.

10) Keep Everything Stable While Looking for a Home

     Don’t make big purchases or move money around before applying for a mortgage.  Approval of your mortgage depends, in part, on the ratio of your income to current debt.  Buying a new car or a home theater system could put your debt ratio over the limit.  Similarly, during the approval process, the mortgage broker will review your “sources of funds.”  It helps if your checking, savings and investment accounts remain stable and in the same place while you’re getting a mortgage commitment and searching for a home.

     Following the steps above and enlisting the assistance of a professional Realtor® will make buying the “home of your dreams” and ending the “rent rat-race” a much more pleasant and rewarding experience.

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