Buying a home can be intimidating, especially if you are a first time home buyer. Not only is it probably the biggest purchase of your life, but it is not a simple process. With unfamiliar lingo and surprise costs you may feel a little lost. To make the process less stressful, here are some tips to navigate the process smoothly, save time and money.
REDUCE DEBT, INCREASE CREDIT SCORE
Before you start looking for your next home, you should request a credit report. The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting agencies — Equifax, Experian, and Transunion –to provide you with a free copy of your credit report, at your request, once every 12 months. The report will help you understand your credit score before requesting a loan. Your credit score will influence the interest rate of your loan.
SAVING FOR A DOWN PAYMENT
While it is possible to purchase a home without 20% down, it is ideal to be as close as possible. This will allow you to pay off a mortgage quicker, avoid PMI, and receive a better rate. Although, if you do not have 20% down you may still qualify for a mortgage loan. There are several low to no down payment mortgage options.
VA Loans | Reserved for active-duty and honorably discharged service members, reserves, National Guard members with at least six years of service, and spouses of service members killed in the line of duty. VA loans require 0% down and no private mortgage insurance.
USDA Loans | Also known as the “rural housing loan,” this 0% down loan is meant to help low to moderate income households in eligible areas that are in need of housing but may be unable to qualify for other loans.
FHA Loans | With more lenient approval requirements than conventional loans, FHA loans also require as little as 3.5% down. However, mortgage insurance premiums will have to be paid for the life of the loan.
Conventional Loans | It is possible to get a conventional loan with as little as 3% down, but just as with FHA loans, there is an additional requirement of private mortgage insurance (PMI). However, once you reach 20% equity in the home, this additional cost can be dropped.
INTERVIEWING MORE THAN ONE LENDER
When shopping for a mortgage it is important to interview with more than one lender. Fees such as, application fees, can vary substantially depending on the lender. Interest rates will vary as well. Be sure to talk to a mortgage banker at each of the following: a big bank, regional bank, credit union, and online lender.
GET PRE-APPROVED EARLY ON
Getting pre-approved early on will help you understand how much you can spend. This will also show sellers not only are you a motivated buyer, but you are also qualified. Getting pre-approved should be one of the first steps in the home buying process — and certainly be done before looking at homes.
GETTING YOUR DOCUMENTS TOGETHER
Your mortgage company will request a long list of documents. It can take some time to get these documents together. So start getting your documents together in a folder as soon as you can. Here is a list of some documents they might ask for:
Social Security Number | This will be required for anyone who is on the loan. It can be verified by a social security card.
Proof of Employment | Your lender will probably request a list of employers from the last two years (at minimum). This document will include employer’s name, address, and phone number.
Proof of Income | This will be your two most recent pay stubs, or electronic equivalent. These will need to show your year-to-date earnings. It is your annual income that the lender wants to know about. The lender will also use tax documents to verify your annual earnings.
Tax Documents | Most lenders want to see you W-2 statements and tax returns for the last two years. This will show how much you earned in previous years.
Bank Account Information | When you apply for mortgage pre-approval, the lender will want to know how much money you have in the bank. They need to ensure you have sufficient funds for your closing costs, down payments, and cash reserves (if applicable). So they will probably ask you for account statements and balances for any checking, savings, or money market accounts. This is another standard mortgage document for pre-approval. All lenders will require this.
Credit Information | If you have any outstanding loans that you are currently repaying (car loans, student loans, etc.), the lender may ask for documents related to those accounts. They will need this to measure your debt to income ratio.
Purchase Agreement | Also referred to as the real estate contract. Once you have a signed contract with the seller, you’ll need to give a copy to the lender. You won’t have this document during the pre-approval process. But, you’ll need to provide it for the final approval, after you’ve made an offer on the house. This document shows the lender how much you’ve agreed to pay for the house. Later, they will have the property appraised to make sure it’s worth the amount you’ve agreed to pay.
Gift Letters | Is a family member helping you with a down payment? If so, they will need a gift letter. They need to make sure the money is truly a gift and family members don’t expect repayment. Your lender will tell you what is required for this gift letter.
Monthly Expenses | Some lenders may ask for a list of itemized monthly expenses. This list may include you rent, credit card payments, student loans, etc.
Be sure to ask your lender for a complete list of documents they require. They might require documents not listed here. Or, the list could be shorter.
KEEP A CONSERVATIVE BUDGET
Although a bank may tell you that you are pre approved for “x” amount, it is important to create a budget to determine what your “real” limit should be. This will allow for financial flexibility in the case of home repairs, or even a change in income.
Also, keep in mind it is not just the list price that is included in the purchase. There are inspection fees, earnest fees, moving fees, and typically new furniture purchases that you should prepare for in advance. Your monthly budget should now include property taxes, insurance, home repairs, and more.
AVOID NEW CREDIT ACTIVITY
Remember, pre-approval does not guarantee funding. If your credit score or income changes drastically between pre-approval and close lenders may change terms or revoke the offer entirely. Any time you open a new credit account, whether to take out an auto loan or get a new credit card, the lender runs a hard inquiry, which can temporarily ding your credit score. If you’re applying for a mortgage soon, avoid opening new credit accounts and stay on top of any bills to keep your score