So you’ve decided to go for it, and buy your first home. Congratulations! The process can be both thrilling and nerve-wracking, especially for a first-time home buyer. The learning curve can be steep, but with a little help from the right people, doing your homework, and working smart can make all the difference.
Here are 7 Steps to help make the process go smoothly
1. Check your Credit Score
Your credit score is among the most important factors in qualifying for a loan, and getting favorable rates. Try to get a sense of where your credit stands before you visit with a lender, as being armed with this info will give you more confidence and peace of mind through the qualification process. Start by going to AnnualCreditReport.com to get your free credit report. Just because you pay everything on time every month doesn’t mean your credit is stellar, however.
The amount of credit you’re using relative to your available credit limit, or your credit utilization ratio, can sink a credit score. The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used. Repairing damaged credit takes time — and money, if you owe more than lenders would prefer to see relative to your income. Begin the process at least six months before shopping for a home.
2. Know your monthly budget
Do you have a good handle on how you spend your money? A first-time homebuyer should have a good idea of what is owed and what is coming in. Create a spreadsheet, or go online to find a budget calculator, and then track your spending for several months before.
Some professionals, such as the self-employed or straight-commission salesperson, may have a more difficult time getting a loan these days than others. A stated-income loan was available to non-W-2 wage earners in previous years, but today’s standards are much more stringent. Typically the self-employed or independent contractor will need a solid two years’ earnings history.
3. Organize your documents
When applying for mortgages, homebuyers must document their income and taxes. Typically, mortgage lenders will request two recent pay stubs, the previous two years’ W-2s, 2 years tax returns and the last two months of bank statements — every page, even the blank ones.
4. Get pre-qualified
Ideally, first-time homebuyers would know how much they can afford to spend before the mortgage lender tells them how much they qualify for. By calculating their debt-to-income ratio and factoring in a down payment, buyers should have a good idea of what they can afford, both upfront and monthly, when it comes to their home.
It’s good to find out what your lender requires for fixed debt-to-income ratio. The old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs. This percentage is called the front-end ratio.
The back-end ratio shows what portion of income covers all monthly debt obligations. Most lenders prefer the back-end ratio to be 36 percent or less, but in some cases borrowers can get approved with back-end ratios of 45 percent or higher.
With your qualification, your lender will provide you with an approval letter which you will want to submit with your purchase and sale offer.
5. Low down payment options
While it would be nice if we all had a rich uncle to give us a fat check for 20% down, the reality is that a vast majority of first time home buyers have to work hard to save for that down payment. Ideally a large down payment is better, thus lowering your monthly payments. However, most first-time home buyers don’t have this luxury.
The good news is that there are dozens of programs that exist to help first time home buyers with their down payment, and others still that even assist with closing costs. Many lenders have programs, and lending officers are eager to present these options to you. Here are a few reliable lenders to get you started:
6. Find a broker that you’re comfortable with
A great place to start is by asking your friends or family for a referral. Your lender is a good source of reliable person for sourcing qualified brokers for you to work with. Lenders and realtors work together, often sharing contacts, and those who are most successful tend to stay with the same lender/broker relationships. If you’re new to the area, perhaps a co-worker can be of help. If you’re not comfortable with the first one you meet, be sure to meet with more, until you find the right fit. And when you find the right one, you will know it.
7. Broker previews can save time
Gone are the days of the hidden gem in house hunting. Most realtors employ professional photography to present their listings, making homes seem bigger, more tasteful and more fabulous than they really are. Touring these ‘fabulous’ homes is often a letdown, as the real thing in the light of day seems ordinary and full of flaws. Having your broker, who knows what you’re looking for, preview your ‘favorites list’ before you visit, for can save you a ton of time touring homes that would otherwise never make your short list. A good broker is out in the field daily and can easily cover a lot of ground for you, helping you efficiently sift through the market to find that gem that you’ve been looking for.