You’ve decided to go for it. You know mortgage rates are enticingly low. Buying a home can be thrilling and nerve-wracking at the same time, especially for first-time homebuyers. It’s difficult to know exactly what to expect.
Take these five steps to make the process go more smoothly.
Check Your Credit
Your credit score is among the most important factors when it comes to qualifying for a mortgage.
“In addition, the standards are higher in terms of what score you need and how it affects the cost of the loan,” says Mike Winesburg, formerly a mortgage planner in Wheeling, W. Va.
Scour your credit reports for mistakes, unpaid accounts or collection accounts.
Just because you pay everything on time every month doesn’t mean your credit is stellar. The amount of credit you’re using relative to your available credit limit, or your credit utilization ratio, can sink a credit score.
The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used.
Repairing damaged credit takes time. If you think your credit may need work, begin the repair process at least six months before shopping for a home.
Evaluate Assets and Liabilities
A first-time homebuyer should have a good idea of money they owe and money they have coming in.
“If I were a first-time homebuyer and I wanted to do everything right, I would probably try to track my spending for a couple of months to see where my money was going,” Winesburg says.
Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending.
For instance, some professionals, such as the self-employed or straight-commission salesperson, may have a more difficult time getting a loan than others.
The self-employed or independent contractor will need a solid two years’ earnings history to show, according to Winesburg.
When applying for mortgages, you must document income and taxes.
Typically, mortgage lenders will request two recent pay stubs, the previous two years’ W-2s, tax returns and the past two months of bank statements—every page, even the blank ones.
“Why it has to be every single last page, I don’t know. But that is what they want to see. I think they look for nonsufficient funds or odd money in or out,” says Floyd Walters, owner of a mortgage company in La Canada Flintridge, Calif.
Ideally, you already know how much you can afford to spend before the mortgage lender tells you how much you qualify for.
By calculating debt-to-income ratio and factoring in a down payment, you will have a good idea of what you can afford, both upfront and monthly.
Though there’s not a fixed debt-to-income ratio that lenders require, the standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs. This percentage is called the front-end ratio.
The back-end ratio shows what portion of income covers all monthly debt obligations. Lenders prefer the back-end ratio to be 36 percent or less, but some borrowers get approved with back-end ratios of 45 percent or higher.
Figure Out Your Down Payment
It takes effort to scrape together the down payment.
There are programs that can assist buyers with qualifying incomes and situations.
“I’ve helped arrange assistance loans for $10,000, which are interest- and payment-free, and forgivable after five years. Although considered a loan, they’re more like grants. Other programs can provide up to $40,000 interest-free,” Winesburg says.
Finally, speak with mortgage lenders when you’re starting the process. Check with friends, co-workers and neighbors to find out which lenders they enjoyed working with and ask them questions about the process and what other steps first-time homebuyers should take.