Growing a family can be almost as hard as growing equity lately. If the crazy drop in real estate values during the last few years has got you scared to invest in a piece of property, look again. Incredibly low mortgage interest rates and relatively cheap home prices make now an excellent time to purchase.
According to the affordability index, which was created back in 1970, purchasing a home today is more affordable than it has been in the 41 years since records were kept. Values are rising quickly, thank goodness, so if you can invest in property now, by the time your kids are grown you'll be glad you were patient.
Involve your children in shopping for a home. You will all be growing there together.
Consider these tips to help you survive the process of qualifying for a loan and shopping for a home.
1. Clean up your credit report
Check out your FICO score and get a free copyof your credit report each year to see how banks look at you. Correct any errors before you apply for a mortgage. Even better, pay off any debts. Teach your children how to begin to create a good credit record so that they are well set when it's time for them to buy a home.
2. Pre-qualify for a mortgage
Any real estate agent or bank can help you determine how much house you can actually afford, as well as what your monthly payments would be. You’ll actually want to get several “Good Faith” estimates before you go shopping for a home. Just don’t go hog-wild on getting a bunch of quotes, because any time a lender checks your credit and goes into your records, your account will get “dinged.” Too many “dings” can actually lower your credit score. And by the way, every time you apply for a credit card you also get dinged.
You can compare lender rates online for free. Look for the lender with the lowest total cost during the first 30 months of the loan, not just the lowest interest rate. When you're shopping, use a form like the HUD-1 Settlement Statement or the American Enterprise Institute's “mortgage cheat sheet” to help you understand the terms of your loan before you sign.
3. Stop spending
Put off buying anything extra until AFTER you buy the house. Banks will look at your debts and your spending habits before loaning you more money. Save as much as you can for your down payment. If you qualify for a FHA loan, you’ll only need about 3.5 percent down payment of the purchase price; otherwise you’re looking at 20 percent for most conventional loans. You’ll also need to pay for PMI (private mortgage insurance), unless you can put down 20 percent of the purchase price.
Remember to factor in the expense of closing costs when you’re saving for your home purchase, which include fees for the appraisal, credit report, processing fee, underwriter fee, attorney fee, notary fee, title insurance and any other charges the lender may throw in. Closing costs typically run between $2,000 and $3,000.
4. Be conservative
Most people buy the biggest house they can barely afford, which is one of the reasons why so many people are “under water,” meaning they owe more than their house is worth. Instead, buy a home that you can still afford if your income were to change or even stop. Consider all possibilities such as if one of the spouses gets laid off or if the wife gets pregnant and wants to stay home with the baby rather than continue working.
Don’t stretch yourself so that every penny goes into the house. Remember to diversify your assets and always have enough money for an emergency fund. If you’re buying a foreclosure, you’ll especially need funds after the sale in order to make unexpected repairs on the home.
6. Do your research
Shop around carefully for a home. Look at the neighborhood at night to see if you feel safe. Talk to the neighbors. Visit the nearby school and church. Sadly, some real estate agents are just hungry salesman, looking to close the deal to pay their own bills without your best interest in mind.
Most realtors are willing to negotiate their commission during a down economy. Consider hiring a buyer’s agent who will legally have a fiduciary responsibility to represent you. Most people don’t realize that a regular real estate agent earns commission from the seller and, therefore, is legally bound to represent the seller in the transaction, even though he or she may have driven you all over town to shop for houses.
7. Be patient
If you’re purchasing a short-sale, you’re going to need a lot of patience. Some of these more creative real estate purchases require a lot of time and paperwork. Lock in a good interest rate as soon as possible and be patient, yet persistent with loan officers to ensure the escrow process is moving forward. If the escrow takes a really long time, you’ll need to renegotiate the terms of your loan in case your lock expires before the closing. Keep an eye open and don’t assume all the paperwork is humming along. In real estate transactions, the squeaky wheel does get the grease.
8. Compare rates
Just as with shopping around for your loan the first time you bought your house, compare rates as well as service. The big banks may not be your best bet right now, so consider looking at mortgage brokers, credit unions, or small local community banks. You’re under no obligation to remain with your current lender when refinancing, but give them a chance to offer you their best rate.
If you can afford to pay a bit more each month, consider switching from a 30-year loan to a 15-year loan. Over the life of the loan you’ll save a lot more money. Show your kids how to calculate your costs so they appreciate what goes into your home purchase.
You may qualify for a refinance as part of the federal Making Home Affordable program — even if you're upside-down in your home. In an effort to enable more struggling homeowners to take advantage of the program, they have extended the application deadline of the programto December 31, 2013
Remember, what's most important is what's in your home: your family!