The home buying process can be time intensive, not to mention stressful. If this is your first plunge into the real estate market, knowing what to expect when you apply for a mortgage loan can help things go a bit more smoothly. Once you’re sure that you and your partner are ready to buy your first home, you will want to be financially prepared. Buying a home is a huge investment; therefore, it pays to educate yourself about the loan process beforehand.
Find out where your credit stands. Check your credit score and order a copy of your credit report from each of the three major credit-reporting bureaus — Experian, Equifax and TransUnion (see Resources). Lenders put a lot of weight on this three-digit number. If your credit needs some repair, start at least six months before you start looking to buy a home. Kiplinger points out that you will need a credit score somewhere above the mid 700s to qualify for the best interest rates when you apply for a mortgage loan.
Calculate how much money you have coming in each month, and know how much you have going out. A lender is going to take a careful look at your monthly cash flow to make certain that your budget can handle a mortgage payment, property taxes, homeowners insurance, utilities and general upkeep. Personal finance guru Suze Orman advises buying a house only if you can truly afford it. No matter how badly you want it, owning your own home won’t mean very much if you end up house-poor.
Show proof of income. Lenders usually request homebuyers to produce the previous two years’ tax returns and W-2 forms, bank statements for the last two months, and at least two recent pay stubs. According to Bankrate, borrowers who are self-employed or only earn commissions will need to show a lender constant earnings for at least the past two years.
Pull together enough money for a down payment. Depending on the lender, you might be able to get away with a minimum down payment of 10 percent; however, 20 percent is the standard. By putting 20 percent down when you purchase a home, you will save the money you would have to pay for private mortgage insurance on the loan. This could put $50 to $100 more in your pocket each month. If you apply for a home loan insured by the Federal Housing Administration (FHA), the down payment required could be as little as three percent.
Run the numbers yourself before talking to a lender to see if you will qualify for a mortgage loan. This also gives you a better idea of how much house you can afford to buy. Compute your debt-to-income ratio. Don’t forget to factor in a down payment. A general rule of thumb is that no more than 28 percent of a borrower’s gross monthly income should be spent on housing costs. Housing costs in addition to all other debts should total no more than 41 percent of your income.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.