We wish buying a house were as easy as a 30-minute episode of House Hunters. You’d only need to give a real estate agent your budget and ‘must-have’ list, look at 3 properties, choose one, and move in. Voilà! You're a homeowner.
House Hunters may be called ‘reality TV,’ but the true reality of buying a home takes more time and energy. If you’re thinking about buying your first home, preparation can speed up the process and get you into your new house with less financial stress. Review this checklist before making an appointment with a real estate agent or a bank in Michigan.
What is your credit score? When you apply for a mortgage to help finance your home purchase, most Michigan banks will access your FICO credit score. FICO (Fair Isaac Corporation) scores rate your credit history based on the amounts you owe, payments made, types of credit (loans or credit cards), and any new credit. Scores range from 300 up to 850 and the higher your score, the better your credit. Scores below 620 are considered ‘low.’ Recommendations for improving your credit score include:
- making monthly payments on time for all credit obligations
- getting ‘current’ if you are behind on payments
- avoiding opening new credit cards
- trying to reduce your overall debt
The Fair Credit Reporting Act (FCRA) requires the three major U.S. credit reporting agencies – Equifax, TransUnion, and Experian – give you free reports annually. You don’t need to contact each agency. The Federal Trade Commission (FTC) suggests ordering online at annualcreditreport.com (the only authorized website for free credit reports) or calling 1.877.322.8228. You’ll receive all 3 credit reports after verifying your identity by providing your name, address, social security number and date of birth.
What is your debt-to-income (DTI) ratio? Banks in Michigan (and across the U.S.) review the DTI metric when evaluating your ability to make mortgage payments. Lenders calculate the ratio by dividing all your monthly expenses by your gross monthly income. A low ratio is more favorable since it shows your debts are a small percentage of your income.
How much have you saved for a down payment? A larger down payment lowers your monthly mortgage expense. As a first-time buyer, saving 10% (or even as little as 3%) as a down payment toward the purchase of an average $150,000 home in Michigan is challenging. Fortunately, the Michigan State Housing Development Authority (MSHDA) is an approved lender network with several Michigan banks, including Level One Bank, to offer first-time homebuyers down payment assistance. The program provides up to $7,500 in down payment funds to qualified buyers (based on several factors including income and credit scores).
Are you able to pay for mortgage closing costs? After you find a house and the seller accepts your offer, you’ll need to pay for the costs associated with the mortgage transaction and the property transfer. Items such as property inspections, appraisals, and surveys are part of the closing costs. Zillow estimates that closing fees range between 2 and 5 percent of the home selling price. For a $150,000 Michigan home, closing costs could be $3,000 to $7,500. Importantly, closing costs are negotiable, with some mortgage lenders and/or sellers of the property assuming part of the expense.
Have you budgeted for moving expenses? If you have a group of friends willing to pack and unload your belongings in return for a few pizzas, your initial moving expenses will be very low. According to moving.com, hiring a professional mover for a local move (<1,000 miles) could cost around $1,250. A longer distance move may cost as much as $5,000.
Even if you’re relying on friends to help you move, you’ll still need extra funds as you set up housekeeping for items such as:
- Packing supplies
- Deposits for utilities including electricity, gas, satellite or cable TV, water/sewer, and telephone
- Any appliances not included in your home purchase such as a refrigerator, stove, washer, and dryer
- Pre-move-in enhancements like new carpeting, painting, or furniture
When you’ve determined that your financial health is in top form, it’s time to start the mortgage process. Getting pre-approved for a loan by a mortgage professional at Level One Bank helps you understand how much of a home you can qualify for and guides you through the entire process answering any questions you have along the way.
Deciding to buy a house is one of life's major decisions. You don't have to navigate the process alone. The team at Level One Bank is ready to talk with you about getting financially prepared and explain your mortgage options. As one of the best banks in Michigan, we understand the local real estate market. We’ll partner with you to help you realize your goal of home ownership! Contact us today for more information.
“I think buying a home is the best investment that any individual can make.” John Paulson