Here are some key pointers to keep in mind as you undertake the process of qualifying for a loan and shopping for your first home.
Tips for first-time homebuyers: What you need to do before you start shopping
Make sure your credit is in good working order
If you're in the market for a mortgage, begin by visiting myFICO.com and getting your true credit score. If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score; most lenders will base your rate on the lower score if you're a couple.
In addition to your credit score, you'll also want to pull a free copy of your credit reports at AnnualCreditReport.com. Make sure there are no surprise delinquencies eating up your credit. If there are, many times they'll be small piddling bills of a medical nature. Get those things paid off pronto before you apply for a mortgage.
Pre-qualify for a mortgage
It's very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.
Most people only get one mortgage quote. That's the wrong way to go about it. You'll want to get quotes from multiple lenders. Check with a local bank or credit union and maybe even get an online quote or two. Credit unions in particular offer creative mortgages that can save you money.
But know this: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file. You can minimize the damage by getting all quotes within a 14-day period, so it doesn't look you're applying for multiple loans from multiple lenders each time.
BONUS TIP: When you apply for a mortgage, you'll face a variety of junk fees. Many of them can negotiated down or away altogether. Know the junk fees so you can take action!
How much down payment is necessary?
The FHA Loan Program offers you the ability to generally bring the least amount of money to the closing table possible. Most FHA loans require 3.5% down payment of the purchase price. If you don't go the FHA route, many loans will require 20% down payment.
Foreclosure or short sale?
OK, so you've been approved for the loan. Great! I am neutral on the issue of whether you should buy a foreclosure, a short sale or just a home that somebody needs to get rid of. The latter will generally be in better shape and condition than a short sale. And foreclosures look downright sad many times.
I bought one foreclosure during this economic cycle and it required expensive TLC to nurse it back to health. So if you do opt for the foreclosure route, you've got to build rehabilitation money into your budget. I also want you to comparison shop for owner's title insurance any time you buy a foreclosure.
As you start to look at properties, you want an agent who "farms" the neighborhood where you're most interested in buying a home. That means they'll have the inside scoop on available properties and can make the process much easier.
I want you to look at a ton of homes, both online and in person, so you can target what's a deal and what's not. Know the neighborhood where you're buying. For women in particular, drive around the neighborhood at night and see if you're still comfortable then.
Plan to stay put for years
Sure, real estate is a deal, but only if you buy and hold. Stay in a traditional single-family home a minimum of five years, but more like seven years before you go to move and sell again. That's at least how long it could take real estate values to recover.
If you're starting out in a townhome, that particular market is even more distressed than the single-family home market. You need to dig in your heels and stay put in a townhome for at least 10 years.