Unless you have the funds to buy an island, a home is likely the largest purchase you’ll make in your adult life.
Strapping yourself to a 15-30 year mortgage is clearly not something to take lightly, and the financial process required to finalize the sale ensures you never take it as such. But while there are several hoops you must jump through before being handed your new set of keys, there are a few things you can do now to make sure the process runs as smoothly as possible.
Make sure to check off these boxes before you find yourself head over heals for a house.
Check your credit score and your credit report.
One of the quickest ways to get a snapshot of your loan eligibility is to check your credit score and look at what blemishes may be on the report itself.
Consumers are entitled to one free credit report annually from each of the three credit reporting agencies: TransUnion, Equifax, and Experian. Reports may be ordered through annualcreditreport.com or requested via mail. More information is available on the Federal Trade Commission website.
While your free credit report doesn’t contain your credit score, you can purchase your score through the individual credit reporting agencies. In addition, if you have a credit card through companies like Discover or Barclaycard, your FICO score might now be included on your statements.
Once you have your reports and score, make sure all information is correct, and that you are at or above the 620 range. That will improve your changes of acquiring a loan.
Determine how much you are able to use for a down payment, or which assistance programs you may be eligible for.
The widely used benchmark for a home down payment is 20%. Having such a large amount upfront will lower fees now and in the future, decrease the monthly payment, abolish the need for Private Mortgage Insurance – among other things.
If you aren’t confident in your ability to reach that number before searching for a home, that doesn’t mean you won’t be able to buy. It simply means you may have to get more creative.
The Federal Housing Administration can help some first-time homebuyers get into a home with as little as 3.5% down. Or, if you are or were a service member, you could receive help through the Department of Veterans Affairs.
Many people are eligible for assistance, it’s simply a matter of researching what you may be eligible for.
If you’re working a W-2 job, know how that may impact your chances of acquiring a loan.
If you are self-employed, you will have the additional struggle of proving your income and ability to make full, on-time mortgage payments.
Lenders usually require those who are self-employed to provide tax returns for the previous two years in order to qualify. However, while taking plenty of tax deductions might help you lower your obligations to the IRS, it will make your income appear lower as well – something that doesn’t always bode well in the loan approval process.
The bottom line in this scenario is to plan as far ahead as possible and understand how your financial decision-making in your business can impact your home buying prospects.
Make a plan to tackle your debt and stay on track with payments.
Carrying debt doesn’t disqualify you from getting a loan. In fact, even a larger debt load can sometimes be okay – as long as you can prove your ability to take on a mortgage given your income and current monthly debt payments.
This is referred to your as debt-to-income ratio – a percentage determined by your monthly debt payments (the minimum required) divided by your gross income. Determining if your percentage is within the approved range depends on the type of loan you are getting – conventional, FHA, VA, etc.
Whether you’re thinking about buying a home in the next six months or six years, it’s imperative that your debt payments be on time, every time. Payment history is a key component of your credit score.
Address serious delinquencies which could severely impact your chances of getting a loan.
If you’ve defaulted on child support payments or student loans or have an unpaid tax lien, that could be cause for immediate denial of your loan application.
Before heading down the path of purchasing a home, you will need to either address these issues and pay them in full, or at least establish a record of a years worth of on-time payments.
Showing a good faith effort towards paying off these debts will increase your chances of getting approved, but know that you likely won’t have a full plate of options until they are fully paid off.
Keep your spending in check with advice from your mortgage broker.
Even if your financial picture looks rosy from the get-go, money choices you make once the home buying process is underway can still lead to flags being raised.
When it comes to handling your cash, avoid moving money from one account to another unless it is absolutely necessary. In addition, avoid depositing cash into any account that is being used for loan qualification. This could complicate or slow the loan approval process considerably.
Avoid incurring new debt during this process – even an amount that might otherwise seem minimal. You want your financial picture to remain the same before and during the entire process.
The last and final step is to choose a reputable mortgage lender. We’ve curated a list of the top mortgage companies that will give you the best rates and fees. Always make sure the GFE (Good faith estimate) is accurate as possible and make sure you have all your documents ready to ensure a smooth process.