Before you start house hunting, get your finances in order. Most lenders — banks, credit unions, mortgage companies — have certain fundamental requirements of homebuyers. Armed with information, you’ll be in a much better position to get pre-approved for financing, shop for a house within your budget and negotiate terms based on your financial standing.
As with any loan, you have to be able to prove to the lender that you have the ability to make the monthly payments on the loan. You’ll need to show proof of income with pay stubs and income tax returns for the past two years as well as proof of your current employment. You can rely on the combined income of yourself and your spouse to meet the financial requirements of the lender. Lenders also look at your current bills and outstanding loans and deduct those payments from your total income.
To qualify for a home loan, you need a solid credit history. Your credit score on your credit report determines whether you are eligible for a mortgage and plays a role in the terms you’ll be offered. Lenders review your credit history to get a view of how you handled previous credit accounts and whether your loans are up-to-date. The amount of down payment you’ll be required to provide as well as the interest rate you qualify for depend largely on your credit score.
The down payment is the third piece of financial data you’ll need to set in place before buying a home. Most lenders require that you put down 20 percent of the cost of the house before considering a mortgage. At the same time, many lenders are willing to forgo the large down payment if you elect to purchase private mortgage insurance, or PMI, which will raise your monthly payment. The insurance also is available through the U.S. Department of Housing and Urban Development. In addition to a percentage of the total cost of the house, you’ll also be expected to pay closing costs when you sign the final paperwork for the house, although closing costs often can be included in the loan, which will also raise your payment.
As of 2010, the federal first-time homebuyer tax credits were eliminated, but your state may offer programs to help you get into your first home if you can’t meet all the financial requirements of your lender. For example, the Ohio Housing Finance Agency provides veterans and first-time homebuyers with access to low interest loans if the house is within a targeted geographical area. You still need to prove you can pay the mortgage and meet minimum credit report standards, but the program can help if you’ve exhausted other avenues for financing. Check with your own state’s housing authority for information about programs for which you might be eligible.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."