Things to Do and Things to Consider
- Check your credit report and know that score! This is no place to guess. Your credit score often determines the interest rate on your loan or if you can get a loan at all. Check with all three credit houses – Experian, Transunion, and Equifax. You must have a credit score of at least 625 for almost all lenders. It can take as long as 18 months to bring up a bad score especially if there are broken leases or foreclosures in your past. If you need help, do not wait to get it. Many lenders can steer you in the right direction and suggest reputable credit repair companies get you in better shape.
- Get Pre-Approved. Most sellers will not even accept an offer without one, and you need to know your loan limits before you get your heart on something you cannot afford.
- Budget for buyer’s closing costs. Expect between 4% and 6% of the home value for pre-paid and lender/title costs… this is in ADDITION to the Down Payment. Be prepared to put down as much as you can. 20% is ideal, but FHA is now offering 3%. The closer you get to that 20%, the better off you are in the long run. If nothing else, 20% will save you from paying private mortgage insurance which in some cases will last the life of the loan.
- “PITI” should become your new favorite word: Principle, Interest, Taxes, and Insurance
- Principle – the mortgage or the amount the bank loans you
- Interest – the cost the bank charges to lend you money which is collected largely at the front end of the loan life
- Taxes – In Houston, property taxes are shockingly high and vary markedly by neighborhood and area.
- Insurance — much like taxes, insurance can run shockingly high and many areas of Houston may require flood insurance as well.
- HOA – It isn’t usually escrowed but as a buyer, you should budget for it. Some Hoa dues can be as high as $1500 a year; Condos and Townhomes often have monthly dues of $200+ AND yearly assessments for things like a new roof or painting.
Many people forget how high the extras like insurance and taxes can run, focusing instead on the mortgage and interest spit out by mortgage calculators. In Texas – Houston in particular – those two little pieces can be as much or more than the mortgage itself. ALWAYS check the tax rate for any neighborhood before adding it to your must-see list.
5. Beware the Rental Shock. If you are renting, make sure your new note does not vary too much from your current one. This is what lenders refer to as “rental shock,” and can be very frustrating to home buyers. Normally this is more of a problem for first time home buyers whom lenders assume are unaware of the hidden costs of homeownership, but it can affect any home buyer. And it makes sense. Doubling your mortgage overnight can be quite shocking. It’s not uncommon for a lender to require to move up buyers to show reserves if they are dramatically increasing their mortgage.
6. Recognize the art of compromise. No home is perfect. Decide where you are willing to compromise. Usually one of the big three need to change in order to make the numbers work – location, size, or amenities. At the very least, be willing to overlook easy to change things such as paint color, appliances, or wallpaper.
7. ALWAYS get an inspection. Enough said.
8. Avoid ANYTHING that will change your credit. Unless you are prepared to spend a few days explaining that change. Many a deal has died because a would-be homeowner went out and bought a new car or a furniture suit right before close. Just as bad is opening a new credit card just to save 20%. The deal isn’t done until the ink is dry and you have keys in hand.
9. Consider resale value. You may be able to live with a freeway in your backyard but how many other buyers would? And yes, right now, this seems like your forever home, but circumstances change. Ask the guy who ended up with surprise quadruplets – in addition to his two other children.
10. USE A REALTOR. This is a huge error many people make. We often assume that going it alone will save money. In Texas, the seller normally covers all realtor costs with few exceptions. A good realtor can even help you with new builds where you are often at the mercy of the sales agent without one. In almost all cases, buyers agency commission has already been factored in which means the listing agent or sales agent in the case of new builds cannot negotiate it away if you act as your own agent. You wouldn’t try and perform surgery on yourself or handle your own legal affairs. This is likely to be one of the largest purchases you ever make. You owe it to yourself to consult the experts.