Getting Ready for Home Buying

You can do several things to prepare for your first home purchase. This blog is the second of three on home buying. The first one describes how much house you can afford. This one describes things to do to prepare to make an offer. The third one describes mortgage loan products.

The early bird catches the worm. But for home buying, the prepared bird catches the best home. Preparation involves reviewing your credit reports, assembling a down payment, and obtaining a pre-qualification letter. You’ll then be ready to make an offer once you find the home you want.

1. Review Your Credit History

Obtain your free credit reports from from all three credit bureaus – Equifax, TransUnion, and Experian.

Check the accuracy of your creditor account history on each report. Each credit bureau offers ways to clean up offending information.

The data in these reports are your credit score’s input. The credit reports do not contain your credit score. You’ll have to get that from your bank or through an online service such as CreditKarma or Mint.

A good credit score is above 740. A good score tells the mortgage loan lender that you have a low chance of default.

Use these tips to get your credit score up if it is lower than 740. The two main actions include paying your bills on time (always) and using less than one-third of your available credit.

If your score is in the mid-700s or below, wait until your score improves before buying. A bigger down payment and/or a better credit score can cut your borrowing costs substantially.

2. Assemble Your Down Payment

Save for your down payment. Cut out the garbage spending and focus on saving.

If you are getting down payment help from a family member, make sure to have that money in bank for at least three months. Mortgage lenders don’t like to see newly deposited unearned money in your account right before you apply for a loan. They think it is a loan you’ll have to repay.

3. Obtain a Pre-Qualification Letter

Ask the friendly loan officer at your bank for a letter showing the mortgage amount for which you qualify. You’ll have to suppy the loan officer with income and asset information.

You will include this letter in your offer to the prospective seller. The letter shows the seller that you can close a mortgage loan timely.

Remember, you don’t need to use that lender when you actually get the mortgage loan. You can shop later.

Get the pre-qualification letter when you know your credit score is good and you have the down payment ready. You’ll then be ready to make an offer.

4. Make an Offer

You’ll be ready to seize your dream property once you’ve assembled the down payment and obtained your pre-qualification letter.

After getting these two things ready, I remember looking for my first home. My Dad gave me invaluable advice at that time. He said I’d know it when I saw it.

I was frustrated after looking for five or six months and not finding what I wanted. I kept trying to make properties work. If this one had a finished basement, if that one didn’t have leaky roof issues, if this one didn’t need a somewhat new kitchen. I am not the fixer-upper type. It had to be move-in ready.

When I walked into my now home, I knew it immediately. I looked around corners hoping there wasn’t something weird. There wasn’t. I made an offer that afternoon because I was ready to go.

I knew that if I wanted the home, I’d include a sizable earnest money deposit with the offer.

The earnest money deposit shows the seller that you are, not surprisingly, “earnest” in your offer. The seller gets to keep your earnest money deposit if you break the contract after accepting your offer. The earnest money deposit is an “advance” of part of the down payment.

A typical earnest money deposit is 1.0% of the price. You can offer more to show you really want the property and can close the deal timely.

In my instance, I was a first-time home buyer with good credit. I didn’t have a prior home to sell so I had few contingencies. I made a reasonable offer (lower than the asking price), the ability to close quickly, and a high earnest money deposit (4%) to show I was serious.

The seller accepted my offer that evening.

In sum, get your down payment and pre-qualification letter ready so you can make an offer quickly on the home you want.

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