You’ve decided to go for it. You know rates are at attractive lows!
Buying a home can be thrilling and nerve-wracking at the same time, especially for a first-time home buyer — it’s difficult to know exactly what to expect. The learning curve can be steep, but most of the issues can be resolved by doing a little financial homework.
Take these five steps to help make the process go more smoothly.
1. Check your credit
The home buyer's credit score is among the most important factors when it comes to qualifying for a loan these days. 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 home buyers 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. If you think your credit may need work, begin the repair process at least six months before shopping for a home.
2. Evaluate assets and liabilities
So you don’t owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month, or are you on a shoestring budget? A first-time home buyer should have a good idea of what is owed and what is coming in. Buyers should understand a little bit about monthly cash flow.
It is a good recommendation for a first time home buyer to try to track spendings for a couple of months to see where their money is going.
Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending.
For instance, some professionals, such as the self-employed or straight-commission salesperson, may have a more difficult time getting a loan than others. The self-employed or independent contractor will need a solid two years’ earnings history to show.
3. Organize Documents
When applying for mortgages, home buyers must document income and taxes. Typically, mortgage lenders will request two recent pay stubs, the previous two years’ W-2 s, tax returns and the past two months of bank statements — every page, even the blank ones.
Buying a home can take a long time, but knowing what you need and where to find it can save time when you’re ready.
4. Qualify yourself
Ideally, as a first-time home buyer, you already know how much you can afford to spend before the mortgage lender tells you how much you qualify for. By calculating debt-to-income ratio and factoring in a down payment, you will have a good idea of what you can afford, both upfront and monthly.
5. Figure out your down-payment
It takes effort to scrape together the down payment. There are programs that can assist buyers with qualifying incomes and situations. It is very important to speak with mortgage lenders when you’re starting the process. Check with friends, co-workers and neighbors to find out which lenders they enjoyed working with and ask them questions about the process and what other steps first-time home buyers should take.
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