Shopping for your first home can seem like an overwhelming task, between all the paperwork and different lenders offering the “best rates” – many people are left chasing their tail. This is the largest investment most individuals will make in their lifetime, but the process doesn’t have to be intimating if you take the proper steps and work with an experienced loan originator.
Do research and get prepared in advance. Lending requirements are more stringent than the rules back in 2006, so you must be prepared with all the necessary documents and have stellar credit to obtain the rate you deserve.
Some people begin their home search with only one goal in mind – attaining homewnership. However, you want to be prepared and know exactly where you stand before you set your goals too high. Don’t just start making offers on properties until you know the exact amount you can afford and what your monthly payments will be. The more knowledge you gain ahead of time, the less stressful the process will be when it comes down to signing closing docs.
Monitor Your Credit Report
Monitoring your credit report is a vital step when shopping for a home or even looking to get approved for an auto loan. You don’t just need a down payment and proof of income to purchase a home, your credit score (or FICO) is another crucial component that will show the lender your ability and willingness to repay the debt on time.
Mortgage lenders will offer the best rates and terms available to creditworthy buyers, while borrowers with credit scores lower than 640 will likely be subject to higher interest rates and less favorable terms. Some mortgage products even require a minimum credit score. The FHA will allow credit scores as low as 580, however conventional loans may require a FICO of at least 620.
As soon as you start building credit, it’s wise to begin monitoring your credit report at least one time a year. Reports from 2012 showed that approximately 20% of all consumers had a least one error on their credit profile. Don’t be another victim of identity theft or let a creditor wrongfully report a debt, keep a close eye on your credit report to ensure everything has been reported accurately. You can order one free copy of your credit report annually from each of the three credit bureaus here.
Get the Ball Rolling
As stated before, you need to be prepared to ensure your investment is a sound one. Understand your buying power and what you can afford ahead of time, don’t let someone else make this decision for you.
A common rule of thumb when mortgage shopping is to start preparing for your purchase at least six months ahead of time. This will allow you time to restructure debt obligations or work on fixing errors on your credit report, while also allowing additional time to save money for a down payment. Although it may take as little as 30 days to correct a credit reporting error, in some cases it can takes months and this will not only delay the process, but another prospective buyer may swoop in and steal the deal.
Avoid Opening New Credit Accounts
It’s more important than ever to make sure you are properly utilizing your credit before applying for a loan. If you feel you need to boost your credit score and taking on a new line of credit may seem like a viable solution, do so at least 6 months ahead of time to ensure it pays off. Applying immediately before you submit an application for a mortgage may drag your score down – in turn you will be subject to a higher rate.
Opening new accounts will also affect your overall debt-to-income (DTI) ratio, or monthly cash flow. Obtaining too much debt may cause your DTI to fail the minimum requirement to secure a mortgage.
The home buying process can be delayed if you don’t have all the necessary documentation on hand. If you have been doing research or have obtained other loans in the past, you are likely aware that the lender is going to require proof that you are gainfully employed and have a solid job history. Keeping your financial information on hand can make the process much smoother for both yourself and the loan originator. At minimum you will need to provide – most recent 2 months worth of bank statements, pay stubs, w-2s and the last 2 years tax returns. Make sure you always keep your most recent pay stubs and bank statements in an easily accessible place. Lenders will also do a thorough review of your credit profile to verify your DTI and other debts you’ve obtained.
Once you are prepared and ready to get started, your next move is to find a lender to pre-approve you for a specific loan amount. However, before the actual pre-approval, a loan officer will do a verbal consultation to go over your situation and predetermine (prequalify) whether or not you may qualify.
If the loan officer feels you are a good candidate for a specific program, you will then supply your financial documentation for the lender to review. This is not a commitment from either party, it’s simply a letter giving you leverage when making an offer on a property. Don’t wait until you find a home to get prequalified. You may find out you need to increase your credit score or save more money for a down payment to obtain the loan – get started now and avoid missing out on your dream home!