Buying a home can be an intimidating and complex process, so its important to work with both a real estate agent and lender who can guide you through.
Mortgage companies are increasingly scrutinizing mortgage applications to limit the risk of foreclosure, or a homeowner being unable to make payments on their home loan. Thats why its important that your application package shows your financial strength. Heres how to do it:
Save your rent checks – By providing canceled checks that you wrote to pay rent, you prove youre capable of carrying a housing payment and that youll pay it on time. Some mortgage companies may accept letters from the apartments management company, but the best way to show your payment history is by providing canceled checks.
Save employment pay stubs You will need your last 60 days of pay stubs and at least two years of W-2 forms to show your income level. This helps the mortgage specialist determine how much of a loan you may qualify for.
Show records of recently canceled negative credit history If you have a debt collection above a certain dollar amount, it might be necessary to pay it off before you can close a loan with this documentation, the application process is sped up. Consult with your lender.
Collect proof of any savings and/or additional income The mortgage specialist wants to know just how much money you have at your disposal in case you fall on hard times. Savings and supplemental income prove there are other sources from which to draw payment should you lose your job, for example.
Dont be late on credit card bills Pay at least the minimum each month and try to pay off or reduce as many debts as possible, as this improves your credit score. Always remember that bad credit or low credit can hamper your chances of being approved for a loan. The interest rate is also tied to credit in an inverse relationship: the lower your credit score, the higher your interest rate will climb.
Dont take on any new debts No new cars! Taking on new debt can hurt your credit score as your debt-to-income ratio jumps. An ideal debt-to-income ratio hovers around 40 percent, which means that only 40 percent of what you make as income (before taxes) should go to paying off debts.
Understand your own finances Knowing where your money goes is important in figuring out your price ceiling for a mortgage. You also need to realize theres more to owning a home than just paying the mortgage. Additional costs such as repairs, utilities, insurance, association fees, maintenance and lawn care all can weigh heavily on your pocketbook. Realistically compile a list of expenses that come with owning a home. This helps you avoid the temptation of buying a house thats too expensive, resulting in your current lifestyle being reduced.
Attend a seminar for first-time home buyers Depending upon your area, you may find seminars specifically focused on first-timers that are often very informative and hosted by local governments, real estate agents, lenders and nonprofit organizations.
Investigate first-time home buyer loan programs A few exist that are suited to helping home owners for the first time.
Once youve gotten all these ducks in a row, look into getting pre-approved. Contrary to popular belief, its not necessary to have a contract on a house to be pre-approved for a mortgage. If there is much competition for a certain house you like, take the lead by being pre-approved for a mortgage.
Ultimately, the best tip is to be honest with yourself so the mortgage you accept best suits your lifestyle and financial ability. If your loan were to end up in foreclosure, it could be up to five years before you would be eligible for another mortgage.
Holly Davis is vice president and branch manager; Scott Davis is senior loan officer, at the Falls Church branch of Market Street Mortgage, which also has locations in Fairfax and Tysons Corner.