Preparing for Homeownership

Hey Guardians! The ultimate goal that seems to be the trend among all Guardians is Homeownership. This is a goal that we encourage all of our Guardians to achieve, because it is important that we have assets that we can pass down to our children. It is extremely important that we prepare accordingly as it is a major commitment and requires extreme organization and discipline with your finances. Here are some useful tips that can help you along the way when preparing yourself for homeowership.

Study your credit report and review it at least 30 minutes per day to ensure accuracy with each item that is reporting. If you find any inaccuracies, be sure to dispute them immediately.
Do not miss any payments on any accounts that you have from credit cards, student loan payments, auto loans, installment loans, etc. Remember, lenders are looking at your payment history from the past 12-24 months.
The minimum credit score required to qualify for a FHA loan is 580. Although this is the case with HUD (Housing of Urban Development), lenders have their own set of requirements as well. Some may require a minimum score of 620, 650 or 680. This also means that your interest rate will be less and may even qualify for more loan products outside of the FHA program, like a Conventional, Freddie or Fannie Mae loan. (We’ll discuss the differences between loan products in another post.)
If your score is less than 620, it doesn’t mean that you wouldn’t qualify for the FHA program, you may just need to shop around for lenders that will accept lower scores.
Be prepared to submit 2 years tax returns, a minimum of 3 months bank statements, 90 days pay stubs. In addition, if you are a renter, the lender may request a VOR (verification of rent), VOE (verification of employment) among other forms of documentation. You may need to submit this documentation several times throughout this process, so it’s important that you you create a folder on your desktop to scan these documents in each time you receive a new one, so when your loan officer has a documentation condition, you are ready to send it off. Better yet, just forward it to your loan officer so he/she has it ready to fire off upon request.
If you decide to move forward with the FHA program, note that you will need 3.5% of the purchase price as a downpayment. For example, if you are wanting a home where the purchase price is $150,000, you will need $5,250 at closing, just for the downpayment. This will make your loan amount $144,750. However, we are just getting started with the cash it takes….
Now, when coming up with the money for your downpayment, the lender will require proof of funds, which means you can’t just take money from one of your pay checks or tax refund check and and show it being deposited into your account. You will need to show that this money is “seasoned” in your account, be it checking or savings, even money from your retirement will suffice. Seasoned funds is money that has sat in your bank account for at least 60 days. Doing this is pretty simple, it’s just a matter of opening another account that you NEVER touch, but just to deposit funds in to for the purpose of saving for your home. If you are receiving funds as a gift from a family member or simply taking a distribution from your retirement account, you just need to provide proof of where these funds are coming from.
Most lenders charge an application fee of about $30.00, which is generally the cost of pulling your tri-merged credit report with all three credit bureaus, usually through CoreLogic.
If you go to a mortgage broker, once your application is completed, the loan officer will review your credit and provide you with a pre-approval. He/she will notify you of the documentation that is needed to submit your “package” to lenders whose qualifications you meet.
When you go through your initial underwrite to receive a conditional approval and if all goes well, your loan officer will give you the green light to begin shopping for a home. In this phase, you will know exactly home you can shop for.
This is when you begin working with your real estate agent. Most agents will ask you for your approval letter to ensure that their efforts will not be for void and will reassure sellers that you are a serious buyer.
Once you find the house, you will need to have earnest money to present to the sellers of the home with your contract and conditions. Earnest money, simply put, is a security deposit made to the seller so that they will take the home off the market while securing financing. Typical earnest money range between $500-$1,000, which is held in escrow and upon successful completion of the sale transaction, the amount will applied to the cash needed to close. If for some reason the deal falls through, the earnest money will be returned to you.
Now you’ve found the house, but it’s time for your appraisal and home inspection. Appraisals can start at $300 and about the same for inspections. These are two different types of transactions and both are necessary. While your appraisal is validating the value of the home to ensure the seller isn’t asking for more than the home is worth, the home inspection is ensuring that there is no major work that the home needs. Both reports come to you, but also goes directly to the lender t review carefully. See how quickly this is adding up?
You may also want to purchase a home warranty, if it is not offered with the sale of the home and if you didn’t ask your agent to write this in to the purchase contract as a condition. Home warranties are fairly reasonable starting at around $150. I would recommend purchasing this because it gives you a sense of security, knowing that if anything goes wrong with the furnace, air conditioning unit, plumbing, etc. you can just call your home warranty company and these issues will be covered and fixed without costing you a ton.
The next thing you would have to do is secure your Homeowner’s Insurance policy. This can start as little as $300 – $1000/year. This all depends on the state you live and the value of the property you are purchasing. Your policy will need to active prior to closing.
Also, property taxes will need to be prepaid on the property you are purchasing. Your lender will advise you on the amount that you need to pay prior to closing, but you can opt to pay for the years worth of taxes in advance if you’d like. Just know if you should overpay, your lender may inform you of your overpayment and send you an escrow check later down the line or you could opt to just keep it in your escrow account in the event your property taxes increase and you won’t have to worry about an escrow shortage. Am I losing you? I hope not. This can be a very tricky topic, even to the most seasoned homeowners.
Finally, your lender has cleared all of your conditions and has given you a clear to close! On this day, you will take all the money necessary to close in form of a personal or cashier’s check, you sign the most important documents you may ever sign in your life, your agent hands over your keys and YOU DID IT!!! YOU’RE A HOMEOWNER!!!!! CONGRATULATIONS!!!!

I hope I was able to shine some light on preparing for homeownership and you now understand just how costly this process is. Don’t forget, you will need to furnish your home and pay moving expenses, so you need to take this into consideration as well. This is also why planning and budgeting is of the utmost importance when taking on this major financial responsibility. For more information about preparing for homeownership, please join our Facebook group.

As always, helping you to #RebuildRestoreRevive.