This was originally published on Monday, January 4, 2016, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: My family and I finally saved up enough money to start looking into buying our first home. I have heard that the process can be long and somewhat confusing. What are our next steps?
Congratulations on saving that amount of money. That usually is the most challenging part of buying a home. I am not going to sugar coat it. The process can still be difficult, stressful, and exhausting but that should not be a deterrent to owning your dream home. Before looking and going through the process you should take a few things into consideration.
Credit Score. This is a topic I have mentioned many times in my articles because it is so important. Having a high credit score will save you a sizable amount of money especially when it comes to your home loan. Financial institutions see your credit score as a report of how responsible you are with money. Borrowers that are in the 580 to 600 range can expect to pay larger fees or a higher down payment. On the other hand, if your score is 700 and above you can expect lower interest rates and smaller monthly payments.
Know your credit score before applying for your loan. If you see any discrepancies, get them corrected as soon as possible. If your score is lower than 660, take some time to work on increasing your score. You may also want to hold off applying for new credit for at least a year before applying for a mortgage.
Savings. From your question you mentioned that you and your family had saved enough for a down payment. Did you take into consideration other fees and closing costs? A down payment on a home can be anywhere from 3% to 20% of a home’s selling price. Some programs such as Veterans Affair (VA) loan requires no down payment. Your bank may also have fees that your loan does not cover such as processing your loan or researching the title of the property. Other items that you may have to pay is the closing costs and title insurance, to name a few.
When applying for a loan, your financial records will be reviewed including credit card statements, bank statements and other loans that you currently have open. Financial institutions like to see that applicants have money saved up and that you do not live paycheck to paycheck. Having a few months of a mortgage payments in your savings account will make you a better loan candidate.
Location. In retail they always say location is everything. The same holds true for purchasing your home. Know the area you want to live. Deciding where you want to purchase a home can give you an idea of how much your home will cost. Do you want to live close to shopping malls and night life or quiet and further away from the crowds? Take a look at the neighborhood. Do you want a closed gated community? Do people in the area seem friendly? If your kids are in school will they have to move to a different school? Maybe moving will get you closer to a school you like. Commuting on Guam isn’t as bad as some areas, but you may want to take into consideration how long it takes you to get to work. Do you have to battle downtown traffic? Is the neighborhood in a high-crime area? Do you feel safe? Is it close to the beach, golf course, or have a beautiful view? Determining these factors can determine how much your home will cost.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.