Searching for a home is a very exciting time, especially if it’s your first home. When you are ready to start looking, check off these 5 things before beginning your search. It will ensure you are prepared to buy the home, get a loan approved with the best terms, and have a smooth closing process.
Know and understand your credit score. One of the most important factors to a loan approval is the credit score. It will determine the rate you get, what programs you qualify for and down payment requirements. The lower the score the less favorable terms you will be offered. While some loan programs offer a 580 minimum score, this often requires higher fees and/or a larger down payment. A score of 640 or higher will provide a better choice of loan programs and lower down payment options. A 750 score or higher will land you the best rates available.
Pull the credit report and credit score for all loan applicants. Review the report with a fine tooth comb and dispute any errors. If there are unpaid debts on the report take care of them before applying and be sure to save the payoff letter for the lender. These steps will help secure the best rates and terms possible when you are ready to apply. Other recommendations include not applying for new credit in the months before buying a home and ensuring that all payments are made on time for the previous 12 months.
Review your budget and find a payment you are comfortable with. It is no fun being house poor. Look over the expenses and any new expenses that will be coming up in the next 2 to 5 years. Will you be purchasing a new car, expanding your family, or putting money away for retirement? Consider anything that will impact finances. If you are buying a home after your residency, there may be other financial obligations you want to take on. Add these to the budget before locking into a higher mortgage payment.
It is recommended that you estimate the new monthly payment, add in the taxes and insurance costs and then subtract that from what you are currently paying. Add this amount to a savings account for several months. This will help you save more for the new home along with giving you a trial run for the new payment. If you are purchasing just out of residency, or even while you are a resident, your current budget may not permit this. Doing the same exercise on paper will help you see what the numbers will look like.
Prepare for the down payment and closing costs. The down payment can range from 0% to 20%. Meeting with a lender early and reviewing options will help you manage the amount needed at closing. If you are buying a home even slightly under its market value, you may be able to get the seller to pay for some or all of the closing costs. However, you will not know that until you make an offer. The closing costs generally add 2% to 3% of the loan amount to what you need at closing. Saving this amount, plus the anticipated down payment will eliminate surprises that could kill the deal on a great home.
Get a preapproval. After you have reviewed your credit, and before you decide to pay your debt down with your down payment money, meet with a lender who understands the needs of physicians and is familiar with physician’s loans. They can help you evaluate loan programs and determine if you are ready to buy. Once you get the green light from the lender of your choice, get the loan pre-approved. If possible have an underwriter review the loan, along with a review of debts, income and any other factors the bank is looking at. Doing this ahead of time can speed up the closing process and offer an advantage if more than one offer is made on the home. Sellers want the deal to go through and the stronger the loan application is, the more security they have that the home loan will not fall through at the last minute.
Look forward at your lifestyle and family needs. A home is a long term commitment. Looking 3 to 5 years ahead will help you buy a home you can grow into. Will you be taking up a new hobby, expanding your family and taking care of aging parents? Understanding your personal situation and the contingencies that may happen in the near future can impact the size and style of home that will best meet your needs. Home layout, square footage along with budgeting considerations should be evaluated when looking at what you need in a home.
Checking these five things off your to-do list, before searching for a home, will lead to faster loan approval and closing, and ensure you buy the right house for your needs.
