Most people are sure they have excellent credit and a good handle on their debt. But do they really? When it comes to buying a home, especially the first one, homebuyers need a lot of additional help.
Credit reports and debt balances
At the beginning of qualifying a buyer, we are talking about assets, liabilities, cash flow, and credit. Yes, some buyers are knowledgeable on these topics, but more often than not, some issues crop up. It’s better to know beforehand when I can manage expectations and help them find solutions than after they have been looking and found the perfect home, only to realize they can’t afford it. Being prepared is so much easier than heartbreak.
Next, I ask permission for a credit check and introduce them to Credit Karma, an easy-to-use app for their mobile devices. Credit scores are free. A good credit score is anything over 750. However, when the score is in the 600s and below, it indicates a problem. Monitoring credit on a regular basis is sound fiscal policy and allows recognizing a problem the moment it occurs, not down the road.
An ongoing dispute over a credit charge will affect the credit score until resolved, even if the consumer is found to be right. Outstanding balances for long periods affect credit. I advise my buyers to pay off credit card balances as quickly as possible and pay the balance in full each month.
It’s a financial discipline that will stand them in good stead all their lives. If their credit is abysmal, there are ways to repair it, and I help them find the agencies to do that. Identity Theft is becoming rampant, and frequent credit monitoring can catch that early.
State specific forms
Next, I ask them to fill out a financial form. In New York, The Real Estate Board of New York (REBNY) provides a widely used, comprehensive, and easy-to-complete form. The Excel version requires only the plugging in of numbers and calculates the rest.
On one page, clients can see their complete financial picture in black and white; assets on the left, liabilities on the right, and income and projected cash flow on the bottom. Numbers don’t emote, judge, or lie – they simply are, which takes the angst out of the process. It’s hard to argue with reality.
When the numbers are better than anticipated, it may mean that a larger home in a better area is possible. The not-so-happy surprises may indicate some additional thought, compromise and perhaps a need to wait, but in either instance, nothing is ambiguous.
Before seeking pre-approval and ultimately financing, I advise all my buyers to refrain from obtaining a second mortgage or home equity loan on another property. I also suggest they not make any big purchases (car, boat, jewelry, art) before applying for a loan.
I ask if they are current with tax filings and child support payments. If they are not, it is a red flag with any lender. Litigation is also a huge red flag to both lenders and apartment boards. There isn’t a purchase application in any New York apartment that doesn’t ask about litigation. A healthy financial form is far more likely to generate a pre-approval quickly.
People forget about the importance of projected cash flow. There has to be enough cash flow to maintain the property, pay the taxes, and still have enough to pay for food, clothes, schooling, vacations, and all the myriad other things they consume along the way. How buyers allot their income is up to them. Still, they have to figure out how to live within the income they generate, sooner or later.
A good rule of thumb for buyers of apartments is to keep their debt-to-income ratio at 25 percent or below. That means their monthly debt service and the monthly charges should be no more than 25 percent of their monthly income.
With judicious planning and a realistic outlook, buyers can be comfortable in a home they like for as long as possible. Cash flow planning for a house is usually best done on an annual basis with the same DTI.
Cash flow and net worth are examined by lenders but not with the same specificity as by New York City coop buildings. New buyers often equate the bank requirements with the coop requirements, but coop requirements are much more stringent.
During the 2008 housing crisis, there were no coop foreclosures in Manhattan because of the conservative standards coop boards upheld. There were plenty of bank foreclosures on other properties.
Home shopping with confidence
With a good credit score and a well-balanced financial profile, buyers can then go to a lender for the all-important pre-approval letter that shows sellers they are serious buyers, ready to move quickly. I usually have a list of at least three lenders with whom I have worked in the past and can recommend unequivocally if they don’t have their own sources.
I don’t like to leave the complete onus of the financing process on the buyer so if the lender is one with whom I have a good relationship that works out best for both the buyer and me. ‘
With finances organized and a pre-approval letter in hand, the fun can begin – looking for and seeing active listings, one of which could turn out to be that home the buyer has been waiting for. There is nothing more satisfying for an agent than to make a dream come true.