So you've decided to go for it.
Buying a home can be thrilling and nerve-racking 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 at the outset.
Take these five steps to help make the process go more smoothly.
"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, mortgage planner with McKinley Carter Wealth Services in Wheeling, W.Va.
To get a sense of where your credit stands, go to AnnualCreditReport.com to get your free
credit report from each of the three credit bureaus. For an extra fee you can find out what your numerical score is, but just checking the reports should give you an idea of what lenders
will see. 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.
"Lenders determine all of the available credit that you have on all of your cards added up and how much your balances are. So if you have $10,000 credit available to you and you have $5,000 on there, you have a 50 percent credit utilization rate," says Winesburg.
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. Begin the process at least six months before shopping for a home.
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
A stated income loan was available to non-W-2 wage earners in previous years, but today's standards are much more stringent.
In short, how you receive and report income as well as how you write off expenses can make a difference to lenders.
The documents homebuyers must produce to be considered for a
home mortgage are those which authenticate their income and taxes.
Typically, mortgage lenders will request two recent paystubs, the previous two years' W-2s, tax returns and the last 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 BWA Mortgage in La Canada Flintridge, Calif.
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, first-time homebuyers would know how much they can afford to spend before the mortgage lender tells them how much they qualify for.
By calculating their debt-to-income ratio and factoring in a down payment, buyers should have a good idea of what they can afford to invest, both upfront and on a monthly basis, when it comes to their home.
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, called the front-end ratio.
Including all debts with housing costs is the back-end ratio, and lenders prefer it to be under 41 percent.
"I really ask buyers to qualify themselves because although we can use that 28/41 ratio as a guideline, each of us knows our finances best. If we're used to paying $800 in rent but 28 percent of your income would be $2,000 then maybe 28 percent is too high,"
"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 for the third variable -- and that is the home price," he says.
Scraping up that initial down payment takes some effort. Though FHA loans require a less substantial down payment than conventional loans, it can still be a huge chunk of money for a young person or couple.
Uncle Sam is here to help, however, with the
first-time homebuyer tax credit, at least until the end of April.
Some borrowers working with a state housing finance agency can use the tax credit for a down payment. However, not all state agencies are offering interest-free or low interest loans to be paid back with the tax credit funds.
Other programs 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.