Your first time buying a home is exciting, but getting a mortgage can be a little overwhelming for a first-timer.
In this post, we’ll give first-time homebuyers what they need to know to confidently navigate the mortgage approval process so they can get closer to their dream of homeownership.
Make Sure You’re Financially Ready to Buy a Home
A lender will take a close look at your financial history to determine your eligibility for a mortgage, so you should do the same and review your finances, so there aren’t any surprises when you’re trying to close on a property.
Here are a few things that will help you get the home loan you want:
Narrow down what you can afford
It’s important not to borrow more money than you can realistically pay back.
Take time to calculate how much you can afford to pay for housing every month. Building a budget early on will help you select a mortgage that allows you to meet your financial goals and pay off your property on time.
Remember that buying a home comes with several up-front and monthly costs aside from your mortgage, including:
Home appraisal and inspection fees
Down payment
Homeowners insurance
Property taxes
Homeowners association fees
Maintenance and repairs
Have a steady income and job history
Consistency is key when it comes to showing a lender you’re a good candidate for a loan. Lenders want to see that you have a consistent source of income so you can make your mortgage payments every month.
A mortgage lender may ask to review your employment history, monthly household income, and other regular sources of income.
Build A Strong Credit Score
Your credit score is somewhere between 300 and 850 - a higher credit score suggests you’re financially responsible, which can help you qualify for better loan rates and terms. Conventional loans usually require a minimum credit score of 620, but there are other financing options for people with lower credit scores.
It may be a good idea to spend some time building up your credit before applying for a home loan. Here’s what can help your credit score:
-Use 30% or less of your available credit
-Pay your bills on time
-Avoid taking out new credit accounts
-Correct any errors on your credit report
Lower your debt-to-income ratio
Your debt-to-income ratio is how much monthly debt you have compared to your monthly pre-tax income. Your DTI is another way lenders can evaluate your financial wellbeing, and it will be a factor in how much money you can borrow.
Each lender has a different target DTI ratio, but lower ratios are always better. You can lower your DTI ratio by paying off debt and maximizing your income.
Take a look at your existing assets
Lenders will also consider how much money you have in savings or assets. More savings and assets are a sign that you’ll be able to pay your mortgage if your income changes in the future.
Assets may include:
-Bank accounts
-Retirement savings like a 401(k)
-Investments
Weigh your mortgage options
There are many different types of mortgages available, but the two most popular types are conventional and government-backed mortgages.
Conventional mortgages: These are the most common type of home loans. According to Forbes, borrowers typically need to have a minimum credit score of 640, a DTI of 43% or less, and a downpayment of at least 20% to avoid purchasing mortgage insurance. You can get a conventional mortgage with a down payment as low as 3-5% with mortgage insurance.
Government-backed mortgages: These are most often Federal Housing Administration (FHA) loans suited for low-to-moderate-income buyers or people with low credit scores. According to Nerd Wallet, these loans are typically easier to qualify for but offer fewer options in loan structures.
Ready to get a mortgage? Here are the documents you’ll need
Getting a mortgage involves a lot of paperwork.
Make sure you have basic identification documents on hand when you apply for a mortgage, including your Social Security number and driver’s license. You’ll also likely need to bring documents that show proof of your income, credit history, and assets.
Proof of income documents
Your lender will likely need several documents to prove your income. These may include:
Recent pay stubs and W-2s
1099 forms if you’re self-employed
Two most recent tax returns
Legal documents that confirm you receive regular payments such as divorce decrees or child support documents
Self-employed mortgage applicants may need to provide extra income documentation. This may be a cash flow statement or letters from clients stating that you work as an independent contractor.
Credit report
A lender will request and review your credit report to get a more detailed look at your credit history. Your credit report includes personal information, current and past credit accounts, previous credit inquiries, and public records.
Before meeting with a lender, check your credit report to confirm all the information is correct.
If you do find an error on your credit report, you’ll need to contact the credit reporting company and the company that shared that information. The Consumer Financial Protection Bureau has a useful guide and templates to dispute an error on your credit report.
Proof of assets
Your lender will also want to know how much you have saved and any outstanding debt you owe. You may need to provide documents such as:
Recent bank account statements
Recent retirement and/or investment account statements
Sale documents for assets that were recently sold
Proof of recent gift funds
Information about any other loans you have
Four basic steps of becoming a homeowner
Reviewing your finances and collecting important documents will make the home buying process much easier. Here’s what you can expect once you get started:
1. Get pre-approved for a mortgage
Before you start looking for a property, a lender can pre-approve you for a mortgage and make a conditional offer for a loan.
Getting pre-approved for a mortgage lets you know how much money you’ll receive and can make sellers more likely to accept your offer on their property.
2. Make an offer on a home
Now that you know how much you can borrow, it’s time to work with a real estate agent to look for a property within your budget.
3. Verify your financial details and apply for financing
This is where all of your preparation and documents will really come into play.
An underwriter will review your loan application and most recent documents. Your lender may also order an appraisal and inspections on the property.
4. Close on your new home
Once your loan application is approved, you can officially close on your new home and make your mortgage official. Be prepared to pay any closing costs and your down payment on the day you close.
https://www.consumerfinance.gov/ask-cfpb/how-do-i-dispute-an-error-on-my-credit-report-en-314/
https://www.forbes.com/advisor/mortgages/conventional-mortgage/
https://omahamortgageguy.com/blog/create-a-budget-to-become-a-homeowner
https://www.nerdwallet.com/article/mortgages/conventional-mortgage
https://www.investopedia.com/articles/mortgages-real-estate/08/self-employed-mortgage.asp
https://www.cnbc.com/select/what-is-a-credit-report/
AUTHOR BIO
Will Foster | First State Bank Mortgage Senior Loan Officer
I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.
Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.
The mortgage process can be a little confusing and even overwhelming these days with all of the regulations. I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.
