By Leslie Mann
Special to the Tribune
June 22, 2007
"It's scary and exciting at the same time" says Cohen, who has counseled hundreds of first-timers as a mortgage banker at Chicago Bancorp. "When you jump, you have to trust the equipment. When you buy a house, you have to trust your banker."
Finding a lender to trust, in fact, is the first-time buyer's first step, says Cohen, a resident of Chicago.
"Using the Internet to gather information is fine," says Cohen."But before you get a mortgage, you should establish a relationship with a loan officer in person."
We quizzed Cohen for other tips for those jumping into the housing market for the first time.
Q. What advice do first-timers usually bring along from Mom and Dad and does listening to them make sense?
A. Mom and Dad tell them they have to put 20 percent down [for a mortgage down payment]. That's not necessarily true anymore. Now there are all sorts of loans, with down payments as little as zero.
But Mom and Dad are right when they tell them to make budgets. Most people do not have budgets and don't know how much they spend each month. So they don't know how much they can afford to pay for a mortgage.
Q. What do you mean when you say it's "not about rate"?
A. Most first-timers shop around for the lowest interest rate, then go for it. But rate is only part of it. And, it may be deceiving.
You also have to look, for example, at things like origination fees and prepayment penalties. Often, people don't even notice these until the closing.
One client asked me after my first meeting with him, "So, I'm going to have to spend a lot of time on this?"
That says it all; finding the right mortgage is more complicated than just finding a low rate.
Q. What does your client counseling include?
A. I help them figure out a budget so they can determine if they can afford to buy a home. I tell them the differences between renting and owning.
When you rent, for example, the landlord fixes the broken window. When you own, you fix it. On the other hand, owning gives you tax advantages, especially because of the mortgage interest deduction.
For many young first-time buyers, credit is an issue. I don't see as much bad credit as lack of credit history. And, if they only have one credit line, such as a credit card, one late payment has a greater effect on their credit report than if they had more credit lines.
Before they try to get a mortgage, I recommend they establish a few lines of credit, then pay their bills on time to establish good credit.
I ask them why they want to buy a home now. If they are feeling pressured into buying because their friends are all doing it or their family or real estate agent tells them they should, they may not be ready.
Q. Which first-timers should NOT buy?
A. Those without savings. It's not just the down payment; it's the reserves you need to fix that broken window and to go to Home Depot to buy things you need for the house.
And, those with unstable or unclear job futures. You need a stable income so you know you can pay the mortgage every month.
Q. In your book, you stress the difference between being pre-qualified and pre-approved. Explain.
A. Pre-qualification is a superficial guess based on basic information you give the lender. But pre-approval is based on documented income, assets and credit score. It means you are good to go.
Q. If you could give first-timers just one bit of advice, what would it be?
A. Budget first, then shop, not the other way around.
If I could put this on a banner, I'd hang it from the Hancock to the Sears Tower.
Don't even look at houses or condos until you have figured out your finances and become pre-approved. Otherwise, you are wasting your time and your real estate agent's time.
Shop AFTER you have done your finances and it won't be so scary. Then you can enjoy what I call the 'bungee boing' -- the bliss of owning a home you can afford.
Readers are encouraged to submit questions about housing, purchasing, financing and other issues related to a new home. Feel free to suggest names of experts, as well.
Write to Ask an Expert, New Homes section, Chicago Tribune, 435 N. Michigan Ave., Chicago, Ill., 60611. Or email@example.com.