Are you in the market to buy a new home?

Posted by Jessica Akright on Mar 02, 2017 18:00:00 PM

Topic: ALL


Tips to get your finances mortgage-ready

Whether you’re a first-time homebuyer or buying a home for the second or third time, getting your finances in order before you start looking for a home is essential. Follow these tips to plan and prepare so you can finance your new home quickly.

Covering expenses and debt
Before beginning serious house hunting, take stock of your financial situation. A lender will want to know your financial health before considering you for a home mortgage. In addition to steady income and the ability to continue to meet your expenses, you’ll need to demonstrate savings that can support a down payment. The down payment amount can vary depending on the loan program you choose. You’ll also need cash reserves to cover a variety of expenses associated with buying a home. These often include:

  • a home inspection and appraisal

  • sales and property taxes

  • closing costs

  • homeowner’s insurance

It’s also smart to keep cash on hand for any moving related incidentals or unforeseen expenses and emergencies.

Your current debt also plays a major role in qualifying for a home mortgage. Even with a steady income, too much debt can be a barrier to getting a home loan. Debt from credit cards, car payments, and student loans are factored into a debt-to-income (DTI) ratio (your monthly debt divided by monthly gross income.) A DTI is typically used to calculate your capacity to manage a monthly mortgage payment. The lower the number the better, but lenders typically prefer a DTI that does not exceed 43 percent. If your DTI is above 43 percent, paying down your debt should be a priority.

Credit matters
Equally important to a low DTI is a good credit score. It’s worth your while to check with all three of the major credit bureaus (Experian©, TransUnion© and Equifax©) to review your credit summaries for any possible discrepancies or errors. Generally, lenders will be looking for score of 620 or better. If your score is below that, you can, with a little time, take steps to improve your score. In addition to paying down debt, make sure you make every payment shown on your credit report on time. Avoid applying for new credit cards or making major purchases that can drive up credit card balances.

Finding a lender
With your savings secure, your debt at a manageable level, and your credit score in good shape you’re ready to look for a lender to handle your pre-approval and offer you the best financing options. Contact mortgage professionals who can offer you pre-approval at no cost and with no obligation.

Whether completing an application online or meeting with a lender, have W-2 forms and tax returns for the past two years ready. You’ll also need paycheck stubs covering the past 30 days as well as two months of bank statements. Documentation of additional assets such as 401k’s, stocks, and other real estate holdings should also be on hand. Other items may be required depending on your situation. Review our helpful Mortgage Application Checklist to help gather all the necessary documents needed to apply for your home loan.

Perhaps the most important consideration in choosing a lender is a high level of personal service and ability to answer your questions. Recommendations from family and friends can get you started on your search but also talk to your accountant, attorney, or banker for a referral. In fact, your bank may offer special incentives for being a valuable and loyal customer, and may be willing to work with you on special circumstances that might arise. In addition, your bank may be able to provide comprehensive options for down payment and closing cost assistance for low- to moderate-income first-time homebuyers.

Buying a new home is one of life’s greatest pleasures. Bringing organization and planning into the process early will make the hunt for your perfect new home even more enjoyable.