September 1st, 2017 6:15 AM by Jackie A. Graves, President
You've decided to go for it. You know rates
are near all-time lows.
Buying a home can be thrilling and
nerve-wracking at the same time, especially for a first-time homebuyer -- it's
difficult to know exactly what to expect. The learning curve can be steep, but
most of the issues can be resolved by doing a little financial homework.
Take these five steps to help make the
process go more smoothly.
Check your credit
The homebuyer's credit score is among the most
important factors when it comes to qualifying for a loan these days.
"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 with McKinley Carter Wealth
Services in Wheeling, West Virginia.
To get a sense of where your credit stands, go
to myBankrate to collect your credit
report and score today, free and with no obligation.
Scour the reports for mistakes, unpaid accounts
or collection accounts.
Just because you pay everything on time every
month doesn't mean your credit is stellar, however. 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 -- and
money, if you owe more than lenders would prefer to see relative to your
income. 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
So you don't owe too much money and your
payments are up to date. But how do you spend your money? Do you have piles of
money left over every month, or are you on a shoestring budget?
A first-time homebuyer should have a good idea
of what is owed and what is coming in.
"You should understand a little bit about
monthly cash flow," says Winesburg.
"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," he 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.
According to Winesburg, the self-employed or
independent contractor will need a solid two years' earnings history to
When applying for mortgages, homebuyers 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
"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
BWA Mortgage in La Canada Flintridge, California.
Buying a home can take a long time, but knowing
what you need and where to find it can save time when you're ready.
Ideally, as a first-time homebuyer, you already
know how much you can afford to spend before the mortgage lender tells you how
much you qualify for. Bankrate's "How much house
can I afford?" calculator will help.
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 old 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.
"Find out what you can afford and then you
can back into everything else. We know the money you have available to put
down, we know the monthly payment and we can solve (the equation) for the third
variable -- and that is the home price," Winesburg says.
Now that you know how much you can afford, check
out Bankrate's mortgage rate
comparison-shopping tool today.
Figure out your down payment
It takes effort to scrape together the down
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," says Winesburg.
"Each state is different, but most of this
money comes from the HOME Investment Partnership Program, which is a federal
block grant to create affordable housing," he 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.
By Sheyna Steiner - To view the original article