Kasara Williams, an Arlington resident, has learned how important it is… (Tracy A. Woodward/THE WASHINGTON…)
Want to buy your first home? You’ve probably got some cash saved for a down payment and maybe even recommendations for realty agents from savvy friends you trust. But have you cleared up your credit report, hired a tax adviser or considered the benefits of FHA financing compared with a conventional mortgage?
Kasara Williams, 31, has taken all three steps in a year-long quest to buy her first home. “This whole experience has taught me that it’s important to have your financial act in order,” said Williams, a commercial property manager in Arlington. “It’s important to start your search early.”
Not every first-time homebuyer will need a tax adviser, like Williams did to fill out forms needed to withdraw part of her IRA without being penalized. But everyone interested in becoming a homeowner should prepare early with orderly finances, information and plenty of patience for the long and complicated process ahead.
Since the housing market’s collapse in 2008, mortgage lenders and home sellers have become more demanding in the documentation they require for a home sale. And with the real estate market in the Washington area heating up for the spring season, you’ll need to think through the contingencies and prepare your balance sheet to compete with the other would-be home buyers making offers on properties — many of them with a track record of homeownership.
Here’s a primer on what potential first-time buyers need to do before they take that big plunge:
Step 1: Credit and savings
First, request a free copy of your credit report from the three major credit bureaus via https://www.annualcreditreport.com. Use only this link to avoid the many credit-reporting scams out there. If you see accounts on your credit report that you don’t recognize or if there are negative marks against you, act now to clear them up.
“You’d be surprised. Your parents might be on there, your cousins,” said Mary Malgoire, founder of the Family Firm, a financial advisory firm in Bethesda. “It’s really important to clean it up before you start this whole process.”
Williams learned that her father was still a joint holder on her checking account, so she had him write a letter certifying that all the funds were hers. She also noticed a negative item about an old dispute with Verizon over a land line that she had requested but that had never functioned — so she had refused to pay the bill. “I had to call them multiple times until I could talk to someone who was sympathetic and would get it removed,” she said.
If you see old credit cards that you no longer use, consider closing some strategically, starting with the newest, low-limit cards that are unused. Lenders prefer a low ratio of debt to credit limit, so it’s good to have more credit available than you use on a monthly basis. They also like to see long-standing lending relationships, so don’t close your oldest credit card. Finally, if you close too many credit cards in a short period, that raises a red flag as well.
“If you close down a lot of credit cards that you’re not using, it could trip a switch. If you have too many lines of credit open, it could affect your score negatively,” said Christopher Brown, a fee-only certified financial planner in Rockville. “There’s a happy medium.”
Step 2: Stick to your budget
Next, create or revise your monthly budget so that you are setting aside whatever money you’ll need to pay as a homeowner that you don’t pay as a renter. This includes the home mortgage, mortgage insurance, property taxes, condo or homeowner association fees, home furnishings, maintenance, cleaning and any utilities or fees that your landlord currently pays. Living with this budget month after month will teach you what you truly can afford when it comes to a house payment. It will also help you pay off any remaining credit card debt or add to the savings that you should already have amassed for a down payment. You’ll return to this budget when you actually make an offer on a home, so consider this just a draft version.
Moreover, the bank and credit card statements that you use to create your budget will probably be requested by mortgage lenders when you get to that stage. Start keeping your financial statements and pay stubs in a file, where you’ll put new documents as they arrive so that everything remains current.
For Kate Fries, a certified financial planner with the Family Firm, this is an opportunity for a reality check about whether you can truly afford homeownership. Will you stay in the area where you want to buy for at least five years, and do you have enough saved for moving costs, maintenance and repairs, beyond the down payment?
“A lot of people jump into homeownership before they should. They get excited — their friends are doing it, the rates are really low, and the idea that you should own a home. That’s not always a good starting point for making good financial decisions,” Fries said.