3 Big Signs You Are Not Ready To Buy A House
Let me start by saying that if you are not ready right now it does not mean you will never be ready. The key is knowing where you are now and the steps to get where you want to go. I say that upfront because I run into a lot of people that give up if they are not ready the first time. Don’t give up. Look at the path to ownership as a path like the “Game of life”. Remember that board game? It was the best. Right? Approach this with the same joy and enthusiasm. Sometimes you have to take extra steps to get to the finish line but if you keep playing by the rules then you will get to the finish line. Ok here we go!
When looking at qualifying a person for a home loan I am looking at three big categories. It is generally in one of these categories that I get “red flagged” that someone is not ready. They are:
What I am looking for is that the above 3 categories are stable. Yes, the key to getting pre-approved is showing stability. So, let’s go through them one by one
- Assets: You do not need a ton of money but you do need enough for your down payment and closing costs. Now of course there are exceptions to this such as with a VA mortgage we do not require a down payment, and we can sometimes get the seller to pay the closing costs. Even in situations such as that you will need enough money to pay for your inspections and appraisal at a minimum. The big thing that can throw off the asset category is of you have overdrafts. Yes, if an underwriter looks at your bank statement and you are negative that is a huge red flag. It shows the underwriter that you are not capable of properly managing your money and that is a bad sign. If you are overdrawn once and there is a good reason then you can get it excused but if you are consistently overdrawn you are showing an underwriter that you do not care about your money, the banks money or being responsible. I know that sounds brutal, but it is true. There is no reason to be overdrawn in today’s day and age. With free budgeting apps that notify you if your bank account is getting low (mint) there is no excuse to not know what is in your account. I have always thought that high schools should teach the basics of budgeting, yet they don’t. With budgets people do not get overdrawn. If you are in this situation don’t despair. You can fix this. You are going to start budgeting and you are going to set account alerts for when your account gets low. I would also recommend having a cushion in your account at all times. What that means if you have for instance $100 in your account that never gets touched. It is there just to take the cushion if your budgeting is off by a few dollars. Check out. mint.com It really is amazing, and it is free. Set up those alerts, analyze your spending and take control!:)
- Income: We are looking for stability once again. You are in a salary position? Fantastic! We can use your salary to qualify yuou with. Now we do need to show that you have been employed for two years. It does not have to be in the same line of work, but underwriters are looking for two years working. One exception to this would be if for instance you just graduated dental school or a job-based education program. With those we can count your new salary income immediately. If you are a commission salesperson we need a two year history of you earning commission. Even if you make 100k a month I needed to see that you have been doing that consistently for at least two years to count it. Hourly workers we are going to do a two-year average unless you are guaranteed and always work 40 hours a week. Self-employed? Yes, we are going to need two years of filed tax returns. What is the deal with two years you ask? A two-year period gives underwriters a view into the overall stability of your job and a realistic view of your income. There were some programs awhile back where people were qualified with no income verification (2006-2008) and we all know how that ended (foreclosures foreclosures foreclosures)
- Credit: Credit is key. The first rule of thumb with credit is the score. Lenders have zero ability to change your score so if there is something on your credit that is wrong don’t expect that if you tell a lender that we can fix it or we can ignore it or we can raise your score. It is not the way it works. The credit report is from an independent company that is collecting your information from 3 separate independent companies. Transunion, Experian and Equifax. We have zero control over these companies. If you have items that are wrong on your credit I suggest you fix them now, and today. If you want to talk to a great credit repair person check out Ken at Scorewell 925-478-5213. A great credit repair person is worth their weight in gold. No matter what you do, do not do debt negotiation. I have seen so many ads for this and the way it is pitched is that it is so easy. Here is the thing if you negotiate all your debt down it is going to hurt your credit and throw a huge red flag for a lender. Think this through with me. If you friend paul borrowed $50 from your friend April and only paid her back $25 would you lend Paul $50? Probably not for a long time until Paul had showed he had changed. Paying your bills on time is critical. I see this with people who even make 500k a year. They get “busy” and forgot. If you can’t remember to pay your bills a lender does not want to be the next person you forget no matter how rich you are. There is no excuse to forget in todays day and age. Remember mint.com that we talked about in assets. Yeah, set that baby up to remind you to pay your bills to or better yet set up autopay on every bill and have mint set up to double check. That is one time set up on your end. Easy peasey. If your credit is bad now it does not mean it will be bad forever. It just means you will have to “roll up your sleeves” and put in some work to increase your score and show better payment habits. I have seen people go from a 400 to a 760. All it took was work. You can do that😊
You may be thinking underwriters are super annoying dream killers right now, but they are not. They are your best friend double checking everything for you to make sure you do not end up house poor or with a foreclosure. I came into the business in 2008 and spent my formative years listening to people breakdown on the phone about losing their homes. I had not put people in these loans, but I was the person they now called as they were looking for hope and a solution.
We had none because the people had never qualified for the loan in the first place. My heart broke for every single person who had been told by a lender not to worry and they could afford the payment. Loose underwriting led to heartbreak. You may think you would not care if you lost a house but tell that to the people who lost their spouses to suicide over it.
You have no idea the devastating toll a foreclosure can take on a person. The guidelines for loans now are cautious and they are designed that way to stop another 2008 from happening. The guidelines are designed to protect you from getting in over your head and ending up in a bad situation. If you are not ready yet, that is OK. Do the homework follow the path and you will get to the finish line. Your entire financial picture will improve along the way😊