Prepare to Shop
Buying a home is exciting! It's also one of the most important financial decisions you'll make. Choosing a mortgage to pay for your new home is just as important, so don't rush into it! Before you start shopping for a home and a mortgage, set yourself up for success by taking some time to prepare. Below are some recommended steps to prepare for the home buying process.
Steps for Action
1. Check Your Credit
CFCU Community Credit will use your credit scores and the information on your credit report to determine whether you qualify for a loan and what interest rate to offer you. Check your own credit reports early on to prevent unpleasant surprises and correct any mistakes. In addition, having a good idea of your credit scores will allow you to make the most of our budgeting and planning tools.
Get copies of your credit reports. There are three major credit reporting companies-Equifax (http://equifax.com), Experian (http://www.experian.com), and TransUnion (http://www.transunion.com). You can get a free copy of your credit report once per year from all three companies at www.annualcreditreport.com (http://www.annualcreditreport.com).
Check your credit reports carefully for errors. Look on your credit reports for any debts or credit cards you don't recognize. Also check for disputed items that still show up even though they were resolved in your favor. A late or missed payment isn't an error if it actually happened. If you find any errors on your reports, file a dispute to get them corrected as soon as possible.
All About Credit Scores
2. Assess Your Spending
Before you start home shopping, take a close look at your current spending. For most people, buying a new home means taking on new expenses-whether you are currently renting or already own a home. You need a clear understanding of how much you're currently spending to decide what you can comfortably afford to spend on a new home.
Take a realistic look at your current spending patterns. There are several ways to look at your current spending. Choose what works best for you, and consider one or more of the following:
- Look at your checking account and credit card history for the last several months
- Consider signing up for a personal financial management tool to help track your spending if you don't currently use one. CFCU's MyMoney tool is great option.
- Save your receipts or use a small notebook to record all of your expenses. Do not leave anything out.
Draw up an as-is monthly budget that accurately reflects your current spending.
- Make sure to include a "miscellaneous" category. Whether it is a brake replacement for the car or plane tickets to a best friend's wedding, there's always something out of the ordinary.
- If you make regular savings contributions to an emergency fund or other savings goal, include these in your budget.
- Look back over several months to make sure you don't miss less frequent expenses like insurance payments, medical expenses, school clothes, tuition, support for family members, seasonal and recreational costs, gifts, donations to charity, and vacations.
Add up all the categories and compare this budget to your monthly take-home pay. Check your bank statements carefully to see whether your budget is realistic. If the amount you typically have left over in your bank account each month doesn't match the amount your budget says should be left over, re-examine your spending patterns to see if you need to adjust the numbers in your budget.
What to Know About Budgets
3. Budget For New or Changed Expenses
Now that you have a clear picture of your current spending habits, you can develop a forward-looking budget for how you'll spend your money once you've bought a new home. This lets you decide on a target monthly home payment.
Decide how much you can afford to spend on a total monthly home payment. Your total monthly home payment includes mortgage principal, interest, property taxes, homeowner's insurance, and any mortgage insurance. Estimate expenses for electricity, gas, cable, water, and other required monthly costs of home-ownership such as condo or Homeowner's Association (HOA) dues. Also estimate expenses for home maintenance, improvements, and make sure you will have enough money to pay for these costs in addition to your total monthly mortgage payment. Think about what your budget will be once you have bought your home, and decide how much you want to be saving each month for emergencies and other goals.
Make adjustments. If you are considering cutting back on some of your discretionary spending in order to be able to comfortably afford the kind of home you want, take a second look at your budget and make realistic adjustments. Make sure your adjusted budget adequately accounts for all of the new costs of home-ownership.
What to Know
4. Determine Your Down Payment
Now that you have a good sense of what you can comfortably afford on a monthly basis, it's time to look at your savings and determine how much you can afford for a down payment.
Determine how much money you are able to spend upfront on your home purchase.
- Gather your savings and investment statements and add up your total available funds.
- Decide how much you want to set aside for other savings goals, moving costs, and any renovations for your new home. Subtract these amounts.
- Now, subtract an additional amount for an emergency cushion. A good rule of thumb is at least three to six months' worth of expenses.
- The result is your possible maximum available cash for closing-how much you can contribute out of pocket at the time you close on your loan.
Estimate your costs to "close". In addition to your down payment, there are many costs associated with "closing" or finalizing your loan and home purchase. Closing costs depend on a lot of things-the price of the home you buy, your down payment amount, the lender costs, the kind of loan you choose, and the location of your new home. Since you're still early in the process, it's hard to make a precise estimate at this stage. You can make a rough estimate now using a home price that is typical for the neighborhoods you'd like to live in. Refine your estimate as you move forward an gather more information. Typically, closing costs (not including your down payment) range from 2-5% of the home purchase price.
Set aside some money to cover initial home expenses. New homeowners often find things that need fixing, or discover that they need an additional piece of furniture to make the new home work for their family. Moving expenses and utility set-up fees can also add up. When thinking about how much you can afford for a down payment, make sure to set aside some money to cover these expenses.
Give yourself a cushion. At this stage, none of the numbers you are working with are precise. It's a good idea to give yourself a cushion in your estimates, so that if you costs turn out ot be higher than you expected, you're not left scrambling for money.
Don't forget your other savings goals. when considering how much savings you have available for your down payment, don't forget your retirement and other savings goals.
All About Down Payments
5. Decide How Much You Want to Spend on a Home
Once you know your estimated down payment amount, one of your credit scores, and a few other details, you can use our tools to figure out what interest rate you might expect to pay for a mortgage. This lets you get a realistic estimate of the home price range that you can comfortably afford.
Explore interest rates. The interest rate you receive is one of the most important factors in determining the home price you can afford. It's important to know the range of rates you can expect, and the impact that rate has on your home price. Explore the range of interest rates you can expect based on your information, and choose a realistic interest rate to use in calculating your affordable home price. Explore our current rates here.
Figure out how much you can afford for monthly principal and interest. The loan amount you can afford depends on how much you can afford to pay back each month.
- If you haven't already, decide how much you can afford to spend on a total monthly home payment.
- Your total monthly home payment includes several costs of home-ownership. Your principal and interest payment is the part of your total monthly payment that pays back your loan and is used to calculate your affordable loan amount.
- Estimate how much you expect to pay monthly in property taxes and homeowner's insurance. Browsing for-sale listings or talking with family, friends, or a real estate agent in your area is a good way to get a rough estimate.
- Subtract your estimated taxes and insurance from your target total monthly home payment to get the amount you can afford to pay monthly for principal and interest.
Calculate your affordable loan amount. You can use our simple calculator or try searching online for "mortgage calculator."
Estimate your affordable home price. Add your down payment amount to your calculated loan amount to get an estimate of the home price that will be affordable for you.
What to Know: Home Prices
6. Consider Whether It's the Right Time for You to Buy
Buying a home is a big financial decision. Now that you've looked at your finances and estimated how much you can afford to pay for a home, consider whether now is the right time for you to buy.
Compare your estimate for the home price you can afford to the prices of homes in your target area. Real estate websites can help you find general prices for the neighborhoods you are interested in. If the typical home price in your target neighborhoods is more than you can afford, you may want to explore options in other neighborhoods or adjust your search criteria.
Explore the financial trade-offs of renting vs. buying. If you're currently renting, or moving to a new area Our CFCU calculator can help you assess the financial trade-offs of renting versus buying based on your financial situation and the length of time you expect to be in your new home. Try several different scenarios when using a calculator to see a range of possible outcomes. Calculators make assumptions about future economic conditions, such as the rate of home price growth. These assumptions can have a big impact on the calculator's results.
Understand the risks and responsibilities of home-ownership. Home-ownership can be rewarding and a good way to build wealth. But there are risks and responsibilities associated with owning property. When you rent, your landlord is responsible for the property and takes on the risks. When you buy, you take on these risks and responsibilities:
- Your home value could decline, and you could lose equity or even owe more than your home is worth.
- If something important breaks-for example, the furnace stops working, or the roof starts to leak-you will have to pay for expensive repairs to get it fixed right away.
- If something else breaks-for example, a cracked window, a broken dishwasher, or a clogged toilet-you will need to spend the time to fix it yourself or pay for a professional.
What to Know About Home-Ownership
7. Create a Loan Application Packet
In the exploring loan choices phase, you will talk with a CFCU Mortgage Loan Sales Associate to get acquainted with the loan process, and you'll provide CFCU some information about your finances. It's best to gather this information now, so you'll have it ready at your fingertips.
Gather your personal and financial information.
- Pay stub for the last 30 days
- W-2 forms, last two years
- Signed federal tax return, last two years
- Documentation of any other sources of income
- Bank statements, two most recent
- Documentation of the source of your down payment: investment or savings account statements showing at least two months' history of ownership. If some of the funds were a gift, get a signed gift letter from a CFCU Mortgage Loan Sales Associate.
- Documentation of name change, if recent
- Proof of your identity (typically a divers' license or non-driver ID)
- Social security number
- Certificate of housing counseling or home buyer education, if you have one
Make sure your documents are accurate and complete. The more organized you are, the faster the loan approval process is likely to be. Your lenders use the information you provide to decide how much they are willing to lend you at what interest rate. If your information is inaccurate, you could encounter costly surprises down the road. If your documents are incomplete, lenders may reject them. Make sure to include every page of multi-page documents, even ones marked "intentionally left blank", and make sure when printing online documents that the full URL is included on the bottom of each page.
Chances are, you'll need to update your loan application packet at least once during this process. CFCU needs to see the most recent bank statements, pay stubs, etc. If you access any of these items online, write a reminder to yourself on how to find the information again so you can update your packet easily. If you are self-employed or have irregular or non-wage income, you may need additional documentation. Share your situation when you meet your CFCU mortgage originator and ask what kind of documentation you need.
Next, Explore Loan Choices!