Window shop first, then choose the right realtor

Dear Ms. Mortgage Maven,I have read your columns and I was impressed with the thoroughness of explanation in the home buying process. My husband and I are interested in homeownership but have run into some realtors/lenders whose interest is "when are you going to buy?" and rushing us into the home buying process. I need help, but I do not want to be pushed into anything before I am ready. We pay $1250/month now in rent, we just paid off a few collections, have credit scores below 600 and very little savings. I would like to know how we can find a loan that would be the same payment as my current rent payment of $1250/month and buy the house of our dreams?

Thanks.

Andrea G

Dear Andrea,

Thank you for your kind words. I am glad my columns are helpful to you.

I think the pressure you are feeling from realtors and lenders is the result of our compensation structure in a commission-driven business. Since many real estate professionals only get paid when a deal closes, many realtors and lenders choose to devote their time to customers or clients whose purchases they think will close in what they determine is a reasonable time frame. It does not necessarily mean they have a character flaw - it is reasonable to want to be compensated for your work. And without some sort of written agreement with you, the buyer, the realtor may invest months of time showing you properties, only to have you, the buyer, go into an open house and write an offer with the listing agent, thereby cutting them out of their commission. (I cannot tell you how many times I have seen that happen, and it is one reason I never want to be a realtor.)

With lenders, it can be even riskier to devote months and months of time to a borrower. Very few lenders charge upfront fees, so over the course of the home search the borrower could easily find another lender. I had one borrower take 16 months or so to make her purchase. I must have done her loan over half a dozen times to keep her loan commitment current, and at any point she could have simply decided not to use me, and my processor and underwriter and I would have been unpaid.

From what you told me of your situation, I think that you are several months away from making a home purchase anyway, at least if you want 100% prime financing from Fannie Mae. Paying off those collections probably lowered your credit score. I know, it makes no sense, because it would seem that paying off a collection would raise your score. It will, eventually, but the immediate effect is to pull your score down because of recent activity on a collection account. If there is any other work that has to be done on your credit report, now may be the time to do it. Since your credit score has already suffered, if there are any other collections you might as well pay those as well. After several months of on-time payment for your bills, your score will ultimately recover and be higher than it was. Your goal should be to have scores of 620 for you and your husband.

Next, you have no savings. To qualify for the financing option mentioned above, I would recommend that you save an amount equal to three months of principle, interest, taxes and insurance (known as "piti"). Since you pay $1,250 a month in rent, my guestimate is that you could afford $1,800/month for your mortgage payment, factoring in the mortgage interest tax deduction you will receive as a home owner. So, I would recommend that you save about $5,400 to meet this reserve requirement.

Ultimately, though, you will only have to put $500 of your own money into the transaction, assuming the seller will cover all the other closing costs.

Since it will take some time for your credit scores to recover and to save money, I recommend that you spend the time going to open houses in a modest price range, talking to the realtors you meet there, signing up for some on-line listing alerts to be e-mailed to you, and do some reading on home buying. There is a lot of work to do before you begin looking for a realtor. The work ahead of you is hard, but it is very achievable. Good luck!

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage, a division of Tenacity Group, the Capital region's leading financing, real estate advisory and tenant condominium-conversion company. Call or email her to discuss your home purchase or refinancing needs. She can be reached at 202-607-4449 or Jessica@msmortgagemaven.com. You can also apply online at www.msmortgagemaven.com.