This is Part One of a multipart series on home buying in Texas
So You’ve Decided To Buy A Home
The reasons people buy homes are as varied as the people who buy them. If they’re currently renting they may be tired of not being able to customize their lving space. Or maybe they don’t like the every Friday night party next door. Or the heavy footed resident living in the unit above. Or maybe they’re just tired of watching someone else get a return on the hard earned money they pay for rent each month. Maybe they want to landscape but don’t want to invest money in something that they don’t own.
Maybe they’re happy where they are but want to start building equity. They would like to begin buy purchasing a small starter home, build equity for a few years, sell it and re-invest the equity in a larger home.
Maybe there is a change in their life that is prompting the purchase. A wedding. A baby. A job change.
The reasons are many and varied.
Cash or Credit?
One thing that is common to most home purchases is the fact that the purchase will be financed. According to the National Association of REALTORS® 2015 Profile of Home Buyers and Sellers, 86 percent of the homes purchased that year were financed. That is an overwhelming majority of the homes purchased.
So it stands to reason that finding and talking to a lender is a logical starting point once you’ve made the decision to buy a home. But if you’re one of the 14% paying cash you can skip this part and go on to the next step – Finding An Agent.
And yes, the rest of us are jealous.
Finding A Lender
As with almost all things these days, the internet is a good place to start your search for a lender. However, when searching, be sure to include some sort of local indicator. For example, “Lenders in Montgomery County”. While out of state lenders can certainly underwrite home loans here in Texas, they are not always as familiar with the lending laws here and that may cause you a problem down the road.
Exceptions to that are the large, internet based lenders such as Rocket Mortgage. They tend to have people who specialize in the different areas of the country where they do business. Someone familiar with any unusual requirements or laws associated with that state or area.
Another source is your bank, credit union or any financial institute where you already do business and have an established relationship.
Why Talking To A Lender Is Important
Why do I recommend finding and talking to a lender first?
The first, and probably most important reason is to get an accurate idea of what your price range will be as you begin shopping for a home. There’s nothing worse than spending time shopping for a house, finding what you feel is one perfect for you, and then finding out it’s outside your budget.
But there are a number of other reasons:
- If you are a first time home buyer there are often programs available which will provide significant help with your down payment and/or closing cost expenses. Sometimes in the form of a low interest loan. Sometimes as a grant. When you talk to lenders be sure to ask if you qualify for one of these programs. These first time home buyer assistance programs are almost always funded by local city or county governments so if you’re talking with a national lender and they are not aware of any assistance then be sure to ask a local lender before deciding who to go with.
- A lender can advise you about areas where you can improve your credit score and therefore get a better interest rate. This can save you thousands of dollars over the life of the loan.
- Besides telling you how much home you should be shopping for, they can accurately tell you how much to expect your montly mortgage to be and also how much money you will need to bring to the closing table when you close on your house.
- Assuming you qualify, the lender will provide you with a pre-approval letter. Most sellers are going to require this letter as a condition for considering your offer. After all, their house will be off the market while you complete the process of purchasing the home. This typically takes 30 to 60 days. They want some assurance that you are credit worthy and that they are not removing it from the market only to have to put it back on two months later.
- Some agents (not me) are not willing to work with you unless you already have your pre-approval letter. And while there are plenty who will, having the letter proves you’re at least taking the process seriously enough to have gotten a pre-approval first. So when you’re shopping for an agent you will be taken as a serious buyer and someone they want to work with.
- If, for some reason, there is a ding in your credit, most lenders can and will work with you to help you smooth it out. Sometimes this takes a couple of months, sometimes a year or more. But you’ll know what your timeframe is and can plan your homebuying accordingly
Talking to a lender and getting pre-approved is not a binding step. You are under no obligation to use a lender just because they have provided you with a pre-approval letter. They understand that you should, and probably will, shop around for the best rate / deal.
While it’s true that credit inquiries for the purpose of getting a home mortgage can drop your credit score a few points, credit bureaus expect you to shop around when looking for a mortgage lender. In almost all cases, all inquiries from mortgage lenders within a certain amount of time are treated as one hard pull against your credit, not multiple pulls. So your score should only drop a few points, if at all.
Different lenders have different programs and rates available to them. So get pre-approvals from several lenders while you’re at it. Inquire about interest rates, grants for home buyers to assist with down payments and closing costs, and other factors concerning the mortgage. For example, what is their penalty for a late payment? What kind of a grace period do they offer, if any? You might think you would never need a grace period but life happens. You should know what to expect when it does. Talk to them, get to know them, see what they have to offer, then compare and decide who you want to work with when you find the house you want to buy.
If you’re buying a house in the near future, especially as a first time home buyer, then a visit with a mortgage lender should be your first step. They can give you an accurate picture of where you are now and what type of house you can afford. They can also give you a very good idea of how much money you’re going to need in cash to pay for the down payment and closing costs.
Shop around, talk to several lenders. Ask about their rates and what they can do for you as far as programs to assist you with your down payment and / or closing costs.
And if there is a ding in your credit, work with the lender to smooth it out. Sometimes, what may seem a logical step will actually do little to help while a smaller, less obvious action may produce much better results. Use their expertise to the fullest. Like me, they are there to help.
Now, on to part two. Finding an Agent.