Thinking about buying your first home? I have some important information for you. It may not be the most exciting, or maybe it is…, it depends on your perspective, and if you see this as your opportunity to move toward your goal of owning your own property. Information about financing, mortgage rates, available loans, and bank statements is an integral part of your home buying experience. This is your first step toward your largest purchase that you will make in your lifetime. As a buyer and borrower, it is important to know what to expect. Looking at your dream home without knowing what you can truly afford…., not what you think you can afford, is key to moving forward successfully. So, we need to find out what your financial profile looks like through the eyes of a lender. Getting preapproved with a mortgage lender is your first step on the road to happy home ownership.
Want to know the basics? Of course you do. In order for you to qualify to buy a home, you will need to share the following:
Employment: How do you earn your living? Are you an Ostrich Jockey, Plumber, surgeon, a trust-fund- entrepreneur…? Your lender will need to see a two year job history in the same line of work. Bonus: if you went to school for your field of expertise, this may factor into your employment history (diploma, supporting documents will be needed). If you have interruptions in your employment over the past 24 months, you will need to clarify. Furthermore, if you are planning on factoring in a second job, they are often not factored in unless they have been held for 24 months or more. This is something your lender can discuss in detail.
Income: How are you paid? Are you self-employed or commissioned, paid hourly or better yet, are you paid an annual salary (the easiest to calculate)? Even your bonuses will have to be looked at, and are they on a regular basis and over a 2 year time span? Consistency is key.
Credit: If you have three to four lines of credit in good standing, that is ideal; and for at least two years or more. This will show a history of how you handle your credit, a very important factor. Your credit lines should be used but not abused. And new credit, lowers scores and older established credit that is paid in a timely manner raises your credit scores. Again, consistency is important.
Debt-to-income ratios: Lenders measure your ability to repay the money you have borrowed. Lenders like to see your back end ratio no higher than 45% (Depending on Credit) and Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income (https://www.fanniemae.com). This is calculated by dividing all of your monthly obligations (debts) plus the proposed total mortgage payment, insurance, taxes, etc…, by your gross monthly income.
Down payment: According to FHA.gov, “Your down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties;” “Conventional Loan 3% Down Available Via Fannie Mae & Freddie Mac,” according to The Mortgage Reports by Dan Green. Check out: http://themortgagereports.com/12603/conventional-97-mortgage-loan-guidelines-plus-mortgage-rates Also, VA and USDA are still zero down payment. Conforming loans (Fannie Mae and Freddie Mac guidelines) will allow for a minimum down payment of 3% with private mortgage insurance. There are also programs that will allow gifts from family for your down payment and/or closing cost. These funds will need to be documented and the donor provides a written letter stating no repayment is expected.
Bank statements: You need to provide every page of your bank statements, and document any large deposits that are on your statements. Lenders need to know where your money is coming from.
Additional Assets: If you have a retirement account, stocks, 401k that you are not planning on using for your down payment, show the accounts as you having additional reserves– above and beyond your savings account. Additional assets are complementary to your financial strength as an applicant.
On the surface it may seem like a no-brainer that you can take all of this into consideration and assess yourself, but not so. Lenders know what they are looking for and have a team of underwriters and support staff working on their behalf to make certain they have a qualified borrower. What they take into consideration is why it is important to meet with a mortgage professional as soon as possible. You want to be prepared and to have a stable understanding and financial foundation. When you put in your offer on your dream home, you want to know in your heart and mind that you can afford to move forward, without hesitation or worry.