You’re thinking about buying a home – probably this is the first, right? – and you don’t know where to begin. To get that house, you’ve got to first have your own financial house in order.
I wrote that same message in one of my first blog posts in 2018. (Some things never change!)
And it’s true. Before searching online for homes or contacting friends or associates for a few names of lenders, start with your finances. Are they in good standing? There are many potential answers to that question but here are a few pieces of information to consider.
Lenders will want to know more about your credit, income and assets – your CIA – to begin checking on your eligibility for a mortgage.
Is your credit score consistently good? The average score for Americans is in the low 700s, on a scale of 300-850. The higher the score, the better the mortgage interest rate and the available amount you may be able to borrow. Some applicants can have scores as low as 500 to get a government-backed mortgage. Take note: lenders tend to skew scores lower than what consumers see online. Check your score through annualcreditreport.com or creditkarma.com.
How about your income – are you paid consistently at an amount that is within a reasonable range? Lenders like to see a monthly debt-to-income ratio of no more than 43% but this figure can be as high as 50% in some cases. They will work with applicants to review those monthly outlays – from current housing expenses to car payments and more – while helping to determine a comfortable monthly mortgage payment and maximum loan amount.
Do you have enough money to cover the initial costs of buying a home? Assets can include funds available today, such as savings in bank accounts, and your “tomorrow,” for example, access to family gift money, 401(k) retirement funds, shares of stock or cryptocurrency. This second set of examples is known as contingent funds, which should be made liquid – or non-contingent – well before using them for a down payment.
If you are feeling good about your financial position based on the information above, then take the next step and contact two or three loan consultants to get their take on your situation. Remember to bring at least two forms of valid identification, including one picture ID. Some lenders – not all – will require an application fee, so weigh the costs versus the reward of working with them.
All lenders, however, will need your assistance with documentation of who you are, where you live and how much you have earned in the recent past as well as take-home pay. Ah, yes, the paperwork!
Lenders will want to see stubs from at least the last two pay periods to show current earnings. They will also ask to see proof of any other income, such as support payments, investments or Social Security benefits.
In addition, the latest bank and investment statements will help paint a clearer picture of a buyer’s financial position. This information is helpful for lenders to see how much money an applicant has available today in the event of an emergency, for example, if the buyer potentially faces a major healthcare expense. Are there emergency funds available should they be needed after purchasing the home?
Applicants will need to share two years’ worth of W-2 forms and tax returns. Some lenders will request to see the submitted tax filings directly from the IRS after an applicant agrees to that step.
And, if you know you’re relying on money from a friend or family member, it’s wise to bring a letter signed by the giftor. This will help smooth out some questions from lenders about the availability of those funds. Contributions of $17,000 can be tax-free each year to the person making the gift.
There are more requirements from lenders and the people underwriting the potential loan. That varies from one financial institution to another and is affected by certain federal requirements. For example, conventional 30-year, fixed-rate loans have fewer hurdles to clear than say a high-worth mortgage. These so-called jumbo loans tend to be above the $977,500 threshold established by the federal government for King, Pierce and Snohomish counties. Jumbo loans in most other parts of the country start with loan applications for more than $726,200.
The beauty of working with a loan consultant is that they bring years of experience and a broad range of financing options for prospective buyers. Each lending company offers special mortgage programs and one may suit you better than offers from other mortgage firms – another good reason to interview more than one lender.
Once you’ve settled on a lender and know the maximum loan amount, it’s time to start interviewing a couple of real estate professionals to see which one is a good fit. Please keep me in mind. I would love to help!