You are trying to buy your first home. Maybe you have heard stories from family, friends, and colleagues about nightmare scenarios when purchasing a home. There are many facets to the home-financing process, and a little bit of planning can reduce a significant amount of time and stress. Where do you begin? What do lenders look for when preapproving a borrower? What steps do I take to get preapproved for a mortgage loan? This article will help guide you through these initial stages to ultimately guide you to settlement on your new home.
Where to begin?
- Start by drafting a budget. How much of a monthly housing payment can you afford? Planning a budget is an extremely valuable exercise at any point in life, not just when buying a home. Often, borrowers will ask the question “How much can I afford?” The better question to ask is “Can I qualify for a home that meets the maximum monthly payment I have budgeted for?”
- What funds would I use for purchasing a home? Down payments and closing costs can add up quickly. Do you have funds readily available in an account you hold? Will you be obtaining a gift from a family member? Generally, funds for down payment are not allowed to be borrowed, unless the money is coming from an account secured by your own assets (for instance, borrowing from your own retirement account). Don’t think you necessarily need to put 20% down. Some loan programs offer little or no down payment options, while other programs may offer down payment assistance options.
- If you are not aware of your credit standing, run a free credit report to verify accurate information. Federal law allows consumers to access one free credit report annually with each of the three credit bureaus (Equifax, Experian, TransUnion). Knowing your credit history and data on your credit report is very important. If there are known or unknown issues on your credit report, it’s always best to at least be informed. You can access your free report at www.annualcreditreport.com.
- Start planning ahead with some of the documentation you will need for a loan approval. Lenders will request items such as tax returns and W-2s from the past 2 years, your recent pay stubs covering a 30-day period, most recent 2 months asset account statements (bank accounts, investment accounts, retirement accounts, etc.), as well as other documentation, depending on your specific scenario.
What are lenders looking at when preapproving an applicant?
Many people will often start to search for homes without having prepared for the preapproval process. This is not necessarily an issue and it doesn’t mean you will not be preapproved. Planning ahead could help you avoid any unforeseen problems and avoid rushing into the mortgage application process when trying to place an offer on a home.