Qualifying for a Home
Before you can attend that open house around the corner, you’ll need to know whether or not you qualify to get financed for a home. Lenders look at several factors to determine your eligibility for a mortgage and how much home you can afford.
The basic hallmarks to qualify for a home are your income, your current credit standings, and your debts versus how much income you’re bringing in. These are just the basics, but they’re also the building blocks to determine if you do or do not qualify to make such a monumental purchase.
You’ll need to talk to a mortgage lender who can work with you to determine if you qualify for a home. They will look at several factors to help you get a clearer picture of your home buying abilities, so let’s break it down into smaller, bite-sized chunks.
First on Your Home Buying Checklist: How Much Home Can You Afford?
In order to decide just how much house you can actually buy, you’ll need to take a close look at your current debt in relation to your income. This is called a debt-to-income ratio, and it’s one of the biggest things lenders look at to decide how much house you can actually afford.
The DTI examines how much of your gross income should be spent on at home, and most lenders put that number at around 35 percent or less. Remember that your housing cost will include the principal mortgage payment, homeowner’s insurance, property taxes, and PMI if you’re making less than a 20 percent downpayment.
This total amount will be your “housing costs” and will be factored into your debt-to-income ratio. Most lenders want this number to be 28 percent, and then 36 percent should be all remaining debts like credit card payments, student loans, or auto payments.
The higher your DTI ratio is, the riskier you are in the eyes of most lenders. This means you could end up paying a higher interest rate on your mortgage or you may not be able to afford as much home as you thought in terms of asking price. Figure out your DTI before you apply for a loan to help you get an idea of what your threshold will be.
The Famous Down Payment
One thing that keeps many people from becoming first time home buyers is the down payment. With an initial down payment of 20 percent or more, you can avoid paying PMI, or private mortgage insurance.
Realistically, most people don’t have 20 percent to put down on a home which is perfectly fine. There are many different loan programs available that allow you to pay as little as 3.5 percent or even no down payment if you qualify.
Save your money and put it toward your down payment as soon as you’re in the planning stages of buying a home. That way, you’ll be prepared when it’s time to apply for a loan and will have the funds you need. Most first-time homebuyers can pay five percent or less for their down payment as long as they qualify for certain programs.
Some government-backed loans like USDA and VA may require no down payment, and FHA loans typically only require around 3.5 percent down. There are even some conventional loans backed by Fanie Mae and Freddie Mac that require small down payments of just three percent.
Your Credit Score
Before you apply for any form of credit, it’s a good idea to know your FICO score. This score will tell your lender whether you have healthy credit and if they consider you a low or high-risk consumer.
The higher your credit score, the more favorable your mortgage terms will be. This can save you thousands of dollars over the life of your mortgage, so make sure your score is as high as possible before you apply.
You can pull one free credit report a year, so get yours as soon as you can and look for any discrepancies or dings. Get those issues rectified before applying for a mortgage so you have the best possible terms available to you. A healthy score will also improve your odds of getting approved.
A score as low as 500 may still qualify you for some FHA loans, and a score as low as 620 could still get you in the door with a conventional loan. It’s recommended that you get your scores as high as possible whenever you can to improve your loan terms and chances for approval.
Step 1: Look at Your Personal Finances and Financial Health
Now that you know more about qualifying for a home, it’s time to take a close look at your own personal financial situation. Check your score and credit report and take a very good look at your budget to find out where you could cut down on spending.
Determine if you think you’ll be able to afford a down payment and start a separate savings account right away. You’ll also need to have money set aside for an earnest money deposit when it’s time to get serious about a specific home.
Get all of your current bills, pay stubs, and other financial paperwork together so you can prove your financial health and stability to a lender. Gather your W2 forms, federal tax returns for the last two years, and your most recent bank statements. The lender will check all of this and verify it when you apply, so it’s good to have it handy before you begin the process.
Don’t forget that you will likely also need to pay closing costs when you buy a home. These costs can range from around two to five percent of the purchase price, so make sure you have that extra money set aside, too. Do your homework and decide how much money you can reasonably save before you prepare to buy your first home.
Step 2: Get Mortgage Quotes and Shop Around
If possible, apply for a mortgage with three different lenders or more so you have a better idea of the various rates and terms available to you. Remember, the lowest rate is always the best option since that means you’ll have a lower mortgage payment and more disposable income. Lower payments also give you more cash to pay for home upkeep and other emergencies.
Take a close look at the various loan options and programs that are available to you. Each one has different requirements, and not all banks will offer the same loans or loan programs. Write down your goals and what you want to achieve before you apply.
For first-time homebuyers with a low to moderate-income level and mediocre credit, an FHA loan might be your best option. Veterans should look into VA loans, while buyers with good credit and a higher income can consider a conventional loan.
Use the Internet to your advantage and do some rate and term comparisons online before you take the plunge. These online guides will show you what terms you can expect to get and if you may qualify based on your personal data.
Step 3: The Mortgage Preapproval Process
Once you get a few quotes from lenders, it’s time to get preapproved for your mortgage. When you have a preapproval letter from a lender, you’ll have more buying power and more confidence to make an offer on a home.
A preapproval letter shows how much money you are supposedly qualified to borrow, which loan program you will be using, and how much of a down payment you will make. It’s important to note that a preapproval letter is not the same as being pre-qualified, but it will still give you the ability to look at homes and put in offers.
You can typically get preapproved in just a few short minutes based on some basic information. The actual, final approval for your mortgage will occur after an underwriter from your lender verifies the information you provided. You will also need a home inspection and appraisal before you can close on your home.
Once you start the home loan application and preapproval process, be ready to have a lender look closely at every aspect of your financial situation. They need to have all of this information so they can decide if you’re able to afford your home and what mortgage program you can get.
Step 4: Hire a Quality Realtor
Your real estate agent will be your biggest ally in the home buying process, so it’s important to find one who knows your local real estate market well. The realtor will give you insight into the best neighborhoods, what a fair price looks like, and what you can expect in the current market climate.
Talk to a few different real estate agents until you find one who understands your needs. Their goal should be to make sure they find you a home that you love and that meets your particular requirements.
A good buyer’s agent will make sure you can negotiate the best offer and will also work with other professionals who will work toward your best interest. When you finally buy your home, the seller will pay for your real estate agent’s commission. Talk to family members and friends for a personal reference if you’re having trouble finding a real estate agent you like.
Step 5: It’s Time to Shop for a Home!
You’ve checked on your finances, compared rates, gotten preapproved, and hired a real estate agent. Not it’s time to have some fun and begin shopping for your first home!
This part of the home buying checklist is exciting since it’s the time when you can actually view homes you’re interested in buying. Make a thorough list of the things you need, want, and must have in a home so you can give it your realtor. If you see homes you like, take a photo or forward the listing to them so you can schedule a viewing.
The neighborhood is crucial to determining if you’ll be happy in your new home, so make sure to visit different neighborhoods at various times to get a feel for the traffic and its character. Look into crime statistics and don’t be afraid to talk to neighbors and find out how they like living in the neighborhood.
When you learn more about the neighborhoods you’re interested in, it may help you whittle down your choices until you find the perfect spot for you and your family. Never buy a home without visiting the area first, and always do your homework in advance. Remember, this is the biggest investment you’ll ever make, so you want to be sure you’ll be happy where you land.
Step 6: Time to Make an Official Offer
If you finally find a home you love, have your agent submit an offer. This part of the process can be stressful, but it’s also a very exciting time!
Your agent can run a list of comparable sales in the same area to help you determine how much your offer should be. Prepare to make another offer if the seller comes back with a counter-offer, which happens more frequently in “hot” real estate markets.
The offer will include your offer price, the deadline for the seller to respond, along with any specific contingencies you may request. The most common contingencies include a home inspection, appraisal, any specific repairs you need, and terms that allow you to walk away if these contingencies are not met.
A reputable agent should give you a list of recently closed sales to help you decide on the amount of your offer. Once you submit it, the seller usually has around 24-48 hours to accept, decline, or make a counter-offer at a different price.
Step 7: Closing Costs
After you apply for a mortgage, you will receive a loan disclosure within three days of application that shows all of the details of your loan including terms, closing costs, and other fees. This information will give you an idea of how much money in closing costs you’ll need to bring to the table.
Some closing costs may be negotiable, but you will always pay for certain fees as a buyer like underwriting fees or loan origination costs. Talk to your lender and find out if they could give you a discount on these fees, or if there are any fees the seller can pay for.
In some cases, your closing costs may be rolled into your mortgage if you cannot afford to pay for them upfront. Just be aware that rolling these costs into the mortgage will give you a higher interest rate and a higher payment over the life of the loan.
Contact your lender immediately after getting the loan disclosure if you have questions about any of the closing costs. They can clarify what each one means and help prepare you for the closing day.
Step 8: The Home Inspection
A home inspection is one of the most important things on your home buying checklist. As a buyer, you’re responsible for the inspection which can run you anywhere from $300 to $1,000 depending on how large the home is and other factors.
The home inspector will take a look at the main components of the house like the roof, the HVAC system, foundation, and major appliances. They will also look at the current state of all plumbing and electrical systems and make recommendations for repair.
If anything comes back that concerns you, add a clause in your offer that ensures the seller makes repairs before you close. This contingency clause will save you money and ensure that important elements of the home are up to current standards. Your realtor can work with you to create a contingency clause after the inspection.
Step 9: Homeowners Insurance and Move-In Day
Your lender will require you to have homeowner’s insurance, so shop around for rates and sign up for a policy as soon as possible. A broker can help you get the best rates, but always make sure you get adequate insurance for your needs.
Homeowner’s insurance covers you in the event of things like floods, fire, or natural disasters. If you live in a flood zone, you will also need to buy a separate flood insurance policy.
Once you’re signed up for insurance, turn on all of your utilities like gas, power, water, and cable/Internet and let them know your move-in date. Look for a quality mover, and start packing your stuff so you’re ready to move in after you close. Planning ahead will make this day go smoothly.
Step 10: Closing Day
Just before you close, your lender may ask for updates like a new credit score and verification of employment just to be sure your financial status hasn’t changed. Within 24 hours of closing, you’ll do a final walk-through of the home to make sure everything is as it should be.
On the closing day, you’ll sign lots of paperwork to finalize your loan and transfer ownership of the home from the seller to you. You should have a cashier’s check ready that has your total amount made out for closing costs and down payment. Make sure you bring your ID and checkbook as well. After all of the paperwork is signed and payments are made, you’ll get the keys to your new home!
Home Buying Made Easy
Use this home buying checklist to help you take the steps you need in order to find the home of your dreams. With some proper planning and a clear financial picture, you can move into your new home with minimal bumps along the way.
If you want to learn more about how to save money, visit our website and find out how you can start saving today!