YOUR FIRST HOUSE | BY CHRISTY MURDOCK EDGAR
When most people think about buying a home, they think about neighborhoods, paint colors, and wish lists, not paycheck stubs and closing costs. However, in reality you’ll probably find that mortgage application and approval is one of the more time and energy-consuming aspects of the purchase process. Work your way through this list to make sure you are better prepared for the months ahead and the journey to the closing table.
Check (and Repair) Your Credit
When you first start thinking about buying a home, you’ll want to do a deep dive into your credit. Check with each of the big three reporting agencies (TransUnion, Experian, and Equifax) since each may have different information. If there are errors on your reports, reach out with corrections and required information.
If your credit is just not great, there are ways to improve it. Here’s are a few suggestions:
If you don’t have much credit, look for ways to build your credit record. Seek out a starter credit card, make regular, small charges and pay them off immediately. Look for programs that report your current rent and utility payments to the credit bureaus so that you can use your on-time payment record to build your credit score.
If you have damaged credit, work on paying down existing debt and making on-time payments going forward. If you pay your rent and utilities on time, seek out reporting programs to allow you to use your positive payment history to rebuild your credit score.
As you pay off credit cards and loans, don’t close out the accounts. Leave them open and at a zero balance, or use them for occasional, small purchases that you then pay off immediately. Part of your credit score comes from the length of time that you have had your accounts, so closing out an older account can have a negative impact.
Organize Your Financial Records
One of the biggest things you’ll have to do during the process of applying for your home loan is obtaining and providing a wide variety of financial records to submit to underwriting. Start gathering these now. When you apply, you’ll need the following:
Tax returns (generally two-year’s worth)
Pay stubs, 1099s, W-2s or other proof of income
Bank statements and other asset statements
If you are using gift funds from a family member to finance your down payment, closing costs, or reserves, you will need to present a letter from that donor. The lender may request additional documentation, as well. Be sure to find out what donors and uses are acceptable for your particular situation.
Find a Lender
You will need to find a lender to work with on your mortgage application. You may find someone at your local bank or credit union, through an online lending platform, through a referral from a friend, or through your real estate professional. Make sure that you feel comfortable working with and communicating with your chosen lender so that you will feel confident throughout the process.
Consider a Variety of Loan Options
Don’t feel locked into a conventional, 30-year loan with a 20 percent down payment. While that scenario works for some buyers, it doesn’t work for everyone. Work with your lender to determine what types of financing options you qualify for and what types of financing will help you fulfill your goals.
For example, if you are open to a larger monthly payment, you may find that a 15-year loan makes more sense than a 30-year loan. Just remember, there is no one-size-fits-all solution.
It will be important for you to work with your lender to obtain pre-approval before you begin looking for your home. This will allow you to better determine your budget and timeline. In addition, pre-approval helps you to make a stronger offer once you find the right home for you.
Determine Your Budget
Once you know how much you’ll potentially be approved for and what your interest rate will be, you can create a budget based on your down payment and your desired monthly payment amount. Remember, just because you qualify for a large amount doesn’t mean that you will want to spend that much. Let your comfort level determine your budget.
Don’t Forget the Extras
Remember, you don’t just pay the monthly mortgage and required down payment. There is an earnest money deposit (EMD) that you will need to have available as well as reserve funds that you will need to show. You’ll have closing costs, insurance costs, and other expenses associated with moving and setting yourself up in your new home. Try to keep an eye on the big picture when making your decisions during this time.
Avoid Major Purchases and Changes to Your Credit
You may want a brand new car to park in your new driveway or a houseful of new furniture and decorative items. While it would be fun to have those things in place on moving day, you’ll probably need to hold off until after the closing. That’s because changes to your credit report or to the amount of debt you carry can have major negative consequences on your mortgage underwriting and approval process.
Expect the Unexpected
A lot of things can happen on the journey to homeownership. You may find that your budget is different than you thought or that you have to make some compromises along the way. You may also find that some parts of the process you dreaded turn out to be easier than those things you thought were no-brainers. Stay open and stay in communication with your real estate broker to ensure that you are always in the best position to make good decisions.