Buying your first home can be nerve-racking, challenging, and scary all at the same time. But with a little education up front and a lot of preparation on the back end you too can stop paying rent and become a homeowner. The benefits of long term homeownership are obvious and well documented so it’s well worth it to take the necessary steps to become a homeowner. We have gathered some helpful information for buying your first home with three tips to make the process easier.
Start the Process Early and Be Sure to Check Your Credit
I work with home buyers every day running credit reports and evaluating credit. One of the biggest problems I see when working with new home buyers is they start the loan process too late and right before they need to move from their current residence. The biggest problem this causes is when something unexpected appears on a credit report that will take time to repair. This happens often, especially with first time home buyers that may have not managed their credit so diligently in their younger years so they need time to make some adjustments and improvements to their credit report.
Depending on how a buyer feels about their credit, I recommend a buyer works with a loan officer six months to a year before they will be ready to buy so we can look at the credit report early and fix anything that comes up. Loan officers like me primarily look at credit, income, and debt to determine if a buyer is qualified to buy a home. Borrowers must be able to show the “ability to repay” their mortgage so a thorough evaluation of one’s credit, income, and debts is always done at the beginning of the mortgage loan process.
If you want to check your credit even earlier and be proactive on your own, go to AnnualCreditReport.com to get a copy of your free credit report from each of the three credit bureaus. For an extra fee you can find out what your numerical score is, but just checking the reports should give you a good sense of what lenders will see. Review the reports for mistakes, unpaid accounts or collection accounts. If you see any credit errors or mistakes reported on your credit report, it may make sense to write to the credit bureaus to request that the items be removed.
Be diligent about managing your credit and use one of the credit monitoring services offered directly by one of the three credit bureaus. Pay all your credit cards on-time and keep your balances as low as possible. Staying active with your credit and managing your finances responsibly should place you on the right path to homeownership.
Know your Debt-to-Income Ratio
Stating the obvious for potential home buyers, the lower your debt, the more qualified you are to buy a home. But how much debt is too much is a question that I am asked often by new clients, I normally answer by saying “everyone has a different acceptable level of debt because we all earn different amounts of income”. The debt-to-income (DTI) ratio is defined as adding up all of your monthly debt payments and dividing that by your monthly gross income. That calculation is something a mortgage loan officer evaluates on every loan application and it is an important criteria to evaluate in order to qualify a potential home buyer.
There are different acceptable debt-to-income ratio requirements for the different loan programs and your loan officer can explain each of these to you based on the loan program you are using. But a general rule is to try and keep your debt-to-income ratio under 43% in order to qualify to buy a home. Knowing how much debt you have in relation to your gross monthly income is a great first step in the home buying process.
Know How Much You Need for a Down Payment
Coming up with that initial down payment can be a challenge for many first time homebuyers. There are mortgage programs ideally suited for first time homebuyers such as FHA mortgage loans which only require 3.5% down, whereas Conventional loans are a tad bit higher with only a 5% down payment required. Those eligible for VA loans can get 100% down payment financing depending on their VA home loan program eligibility.
There are also down payment assistance loan programs for first time homebuyers that have qualification requirements centered around income levels, minimum credit score requirements, and debt-to-income ratio limitations. For those that qualify this can be a great way to get in to a home and have your down payment covered.
First time homebuyers should set a goal to have some funds saved and earmarked for their first home purchase. In addition to the down payment there will be closing costs involved with a home purchase so home buyers should also be prepared for this expense. Home buyers should start saving early, don’t spend your tax refund checks, save any bonuses, and save any extra cash that you are able to get in to the bank.
Organize, Organize, Organize your documents
“We see borrowers all of the time who want to buy a home but haven’t kept good financial records over the years and then struggle to gather the necessary financial documentation needed to apply for a loan” says Stephen Khan, a Phoenix, Arizona based mortgage loan officer. Potential home buyers need to make a habit of keeping good financial records, make their credit payments on time with no late payments, and have an established relationship with their preferred bank or credit union with money saved for their upcoming home purchase. “We try to make the mortgage process as simple as possible by giving the borrower a straight-forward list of documents they need to provide when applying for a mortgage” says Khan.
The best advice is to keep good financial records of income, debts, savings and investments so when the time comes to produce those documents they are in a file organized and ready to go. You would be surprised at how hard it is to piece this information together quickly if a home buyer hasn’t been keeping good records over the years.
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