When Cassandra Carpio and her fiancÃ©, Greg Small, were looking to buy their first home, they knew they both had good credit.
"It wasn't even $100, but our mortgage consultant said it affected the credit report," said Carpio.
The couple paid the bill immediately and updated their credit report, securing a "slightly higher" credit score for Small. They wound up thrilled with the town house they bought in Mahwah, closing in April 2010.
The "minor hiccup," as Carpio calls, illustrates why it's important for first-time home buyers to do a little homework before they even start looking at listings:
The first step is to pull all three credit reports â€” Experian, Equifax and TransUnion â€” which you can do for free every 12 months, at annualcreditreport.com. Check for mistakes, like a bill that does not belong to you, a closed credit card that is still listed as open or mistaken personal information like an address or phone number.
A 2004 survey by U.S. PIRG found that 79 percent of credit reports contained serious errors.
"An alarming number of people have an error of some sort on their credit report," said Greg McBride, senior financial analyst with Bankrate.com.
If there is a legitimate black mark on your credit, you won't be able to erase it, said McBride, but you can take steps to bolster your score. Pay off unpaid bills or, if you can't, try to negotiate with the creditor to remove it from your credit report.
McBride said that a credit score of 680 and up is considered good. With a score of about 740, you can often get a mortgage that is a quarter- or a half-point better than you can get with a score between 680 and 700.
Many times first-time buyers find an agent by looking online, seeing a property they like and then calling the person who represents the home. A better idea is to interview agents working in the area you want to live in and find someone you really like.
"You're going to be spending a lot of time with this person to make the biggest purchase in your lifetime," said Kristin Gildea Fox, of Marron & Gildea Realtors in Ridgewood. "You're going to want to have a good time spending two hours with them on a Saturday."
Paula Clark, a sales associate with Coldwell Banker in Hillsdale, said a potential agent should ask you about the features you want and how long you plan to stay in the home. The agent should also talk about all the costs associated with buying, from closing costs to the possibility of major repairs.
Jeff Adler of Re/Max Legend in Mahwah said that when buyers call a main office cold, the least-experienced staff member is often the person on hand to answer the phone.
"You really want to interview two or three agents to see who you are most comfortable with," he said. Ask how many sales they've had the past year and whether they work on weekends and nights. Be wary if an agent seems to push you toward homes that are not in your price range or in your desired areas.
One thing to consider is your indebtedness ratio, which tells you what percentage of your overall monthly income is encumbered by debt. Russell Tucker, senior vice president of ISB Mortgage, said those numbers have shrunk. Two years ago lenders were permitting loans that brought the buyers' ratio of debt to 50 percent of their income. Those days are mostly gone.
But no matter what lenders are willing to give, Tucker said, buyers should think hard about what they want to be paying for that mortgage every month.
"While I may be willing to give you a loan in this amount, you need to understand how that is going to affect your lifestyle," he said. "If you're used to going out a few nights a week, you may not have that option, and you need to figure out what is best for you."
McBride, of Bankrate.com, said you don't want your housing payment â€” principal, interest, insurance and property taxes â€” to be more than 28 percent of your monthly gross income.
McBride also suggested that buyers should think about more than just the house price.
"There's the closing costs and everything else that comes with a home â€” moving expenses, repeated trips to home improvement stores," he said. "You don't want to jeopardize your emergency savings fund, which you will need more than ever because you own a house.
"People whose credit is fine but they have a little too much debt or not enough savings, should take another six or 12 months to pay down debt or increase their savings," McBride said. "Home prices are not going to run away from you in the meantime."
According to a Zillow Mortgage Marketplace national survey, one-third of prospective home buyers mistakenly believe that a prequalification means you have secured financing. What buyers really need is a preapproval, a much more thorough process compared with the prequalifying, which is simply a rough estimate.
"If the lender is not asking you for your W-2s, paystubs, bank statements and permission to run your credit report, you're wasting your time," said Tucker.
McBride, of Bankrate.com, said getting preapproved also gives a buyer a leg up in the process because sellers look at it more favorably.
"There is more certainty that the deal is going to go through," he said. The preapproval process also helps buyers be more reasonable in what they can really afford, which helps them narrow their search process.
"You don't want to fall in love with a house that you can't buy because you'd never get a loan that big," he said.
Gildea Fox, the Ridgewood Realtor, said many of her clients come in after doing hours of Internet research,
"Online is a great place to start, but you really do need that human element," she said. Gildea Fox tells her clients to talk to shopkeepers and residents in a potential hometown to get a feel for a place.
"I tell people, 'let's talk through your list and then throw the list out the door and actually get out and look at some houses. Maybe then you redo your list. Maybe you thought you needed a two-car garage, but the homes in your price range only have one.' "
"You need to have an open mind," said Gildea Fox. "If you go in too focused then you close yourself off to some really good options."
Adler, the Mahwah Realtor, said it's always good for buyers to list their priorities but remember that you might have to do a little give and take. Maybe you wanted a cul-de-sac but found a fantastic home on a main road; perhaps you thought you needed two full baths but realized you can live with one and a half.
"There is never going to be a perfect home," Adler said. "But both partners should be on the same page with what is most important to them."
Adler also said many buyers have an unrealistic wish list for their price range because they've been hearing for months how bad the market is.
"They have unrealistic dreams for what their pocketbook can afford," he said. "There are tremendous values out there, but houses aren't free."
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