Homebuyer basics

Knowledge is Power and That Applies to Buying a Home – Your First One or Your Fifth One or as an Investment

Prepare for your home purchase and bone up on things to know about home financing

You’re getting a home loan and you want to make sure your bases are covered before you start shopping and getting your hopes up. Lenders look at credit, income, assets, and the property that you purchase. The first three items are in your control and are the things you can work on as you get ready to shop. Here is a list to assist you in that preparation and links to other posts with deeper information on the topics are included:

  1. Check your credit scores – go to each to the bureaus directly and order a copy of your annual free credit report. The bureaus are Experian, Transunion, and Equifax. There are also a number of free services out there that will monitor scores and give you a rundown of what is showing on your report.
  2. Look at your work history for the last two years. Is it stable? Is the income steady? Can you prove it with standard documents like paystubs and W-2’s? If you are self-employed, what does the amount on your tax return that you have reported to the IRS look like? If you think you are making $100k because your business is grossing this amount, but the bottom line of your income is showing $15,000 for the year, you may need to consider a different type of loan than traditional financing.
  3. Review your savings. Determine how much you have saved for a down payment. Down payments can be as low as nothing if you are a Veteran and obtaining a VA loan or you are buying in a rural area and getting a USDA loan, or they can be 3-3.5% of the purchase price. There are closing costs too and there are ways to handle these – though they usually involve hiking up the sales price or the interest rate to cover them. Have a good idea of all the funds you have to work with.
  4. Make a budget. If you haven’t owned a home before, remember that you will no longer have a landlord repairing that front door when it falls off or cleaning the gutters and replacing the roof. Many times the landlord also covers the costs of garbage or water.
  5. Interview realtors, mortgage brokers and home inspectors. Get professionals in your corner that will assist you along the path that you feel comfortable with and can trust. If someone feels too pushy or doesn’t listen well, feel free to find another.
  6. Meet or connect with a mortgage professional and get pre-qualified. This is where the Loan Officer/Mortgage Consultant will review all of your financial information and give you an idea of what you can afford and help you create a financial roadmap to your purchase. If it looks like you are ready and feel ready to proceed it’s a good time to start a pre-approval process. These aren’t the same. The Pre-Qual usually involves a short conversation and if there appear to be credit issues or you aren’t sure of your expected credit score, may involve pulling credit. This takes only a few minutes once you sign a release. The pre-approval can take another 20 minutes if you have straight forward documentation on your income and assets or it might take a few days if your file needs to be sent to an underwriter for review.
  7. Shop for homes online and open houses to get a feel for what you want and see how it lines up with your budget and qualifications. Drive the neighborhoods. If you have an idea of where you want to purchase or the price range that appeals to you, this will help estimate the wildcards in the budget like property taxes and homeowner’s insurance. It will also help you know if you are likely to have any Homeowners fees. These too add into the housing expense and are considered in the qualification process.
  8. Set goals. If you aren’t able to afford to purchase the home you want right now, maybe purchase something that you can turn over in a couple of years and move up as your career flourishes, building equity.
  9. Enjoy! Yes, facing finances and spending money, taking out a loan can be stressful. Try to find the excitement of the hunt, the adventure of making new friends in a new place and making new professional connections that will be on your team for this big event.

There are a few things to avoid while you are in the process of getting a mortgage – though sometimes they are unavoidable

  1. Job change. If you can, save that professional leap until after your documents are signed, your check has cleared and the keys are in your hand. Seriously, don’t do it until you KNOW you are closed. If you get laid off or have to change during the process it’s not a disaster. Be sure to communicate everything to your loan officer so that it can be handled right away should this happen. Or if you are in the process of a change when you find that magical new home, communicate this as well. These things happen and need to be dealt with as smoothly as possible.
  2. Taking out new debt. They will make you explain it and document it because lenders want to know that the funds you are putting down are yours and not borrowed. This doesn’t usually help your credit score much in the immediate story.
  3. Forgetting to pay your bills. Be on time. Recent slow pays on any debt will at least temporarily sink your score. If you need to consolidate and rework your finances, try to get this done before the credit report is pulled and document all of the moves with a letter and copies of statements to explain what you did and why. Lenders are fine with these things if you find you have to. It’s just better to do it before you start the loan process.
  4. Making a major purchase. Buy those new appliances after you have the keys to the house unless you are paying with cash that you don’t need for closing your sale. Same for the new car to go in the garage. This only makes things more messy and will necessitate your lender having to come back to you for paperwork, an explanation letter and often another trip or two through underwriting. You might ended up frustrated.
  5. Co-signing for someone else on a loan. This too will muddy the waters of the loan process. Even if you know that your brother will pay back every dime of that car loan and that it will never be a problem, if it is new and even with a letter from your brother, the lender may still count the new payment in the ratios.
  6. Making big deposits into your savings or checking. Anything that is higher than 50% of your gross monthly income as a deposit is going to raise a flag with the lender and will need to be documented. If you are getting a gift from a family member for the purchase, it all needs to be done on a gift letter and proof that the family member didn’t go out and borrow it to give to you. Basically, a big jump in an account has to be documented. If it can’t be reasonably documented then they will not include it as viable funds for closing. If you are tight on funds, this could jeopardize your qualification for a loan.
  7. Forgetting to read what you are signing. Since you aren’t going to get the loan unless you sign, thee is little point in arguing over verbiage that isn’t going to change. Do sign and then read what you signed so you can be informed on the terms and conditions of the financing you are obtaining. This is particularly important if you are getting a mortgage that isn’t the traditional variety as they can be less standardized and could have wildcards like prepayment penalties or other.
  8. Thinking that your questions are too basic. Someone once said that the only dumb question is the one that wasn’t asked. This applies here in a big way. If you don’t understand the first or even the fifth time, it’s OK. For the person that doesn’t deal with this everyday it’s overwhelming and confusing. Keep asking.
  9. Avoid being dishonest. This seems like a no brainer, but many people live in the land of wishful thinking and want to put the prettiest face on their financial picture and this can lead to inadvertent deception. When you sign that loan application you are attesting to the accuracy of the information that you are providing under penalty of law. Here is the verbiage from the current Form 1003 Uniform Residential Loan Application:

“The information I have provided in this application is true, accurate, and complete as of the date I signed this application.• If the information I submitted changes or I have new information before closing of the Loan, I must change and supplement this application, including providing any updated/supplemented real estate sales contract. • For purchase transactions: The terms and conditions of any real estate sales contract signed by me in connection with this application are true, accurate, and complete to the best of my knowledge and belief. I have not entered into any other agreement, written or oral, in connection with this real estate transaction.• The Lender and Other Loan Participants may rely on the information contained in the application before and after closing of the Loan.• Any intentional or negligent misrepresentation of information may result in the imposition of: (a) civil liability on me, including monetary damages, if a person suffers any loss because the person relied on any misrepresentation that I have made on this application, and/or (b) criminal penalties on me including, but not limited to, fine or imprisonment or both under the provisions of Federal law (18 U.S.C. §§ 1001 et seq.).“

Section 6 (1) URLA

Lenders verify and check all of the information that you provide on your mortgage application

The loan application, which is a summary of your assets, income, and debt load serves a template the lender works off of to better understand your financial profile. They will verify all of the information that you have provided with documentation that supports it and adjust it accordingly. Since much of that information fluctuates on a daily basis, they will use the verified amounts on the final for qualifying you. Your employer may be contacted by telephone or in writing to verify that you work there, for how long and confirm any details that they find on your paystubs and W-2’s like shift differentials, bonuses, and so forth. Copies of bank statements serve to show you have funds to close and usually a copy of the cleared earnest money check is requested to show that the funds that cleared the bank were applied to the purchase and that they were your funds.

Credit report is also pulled and if there are any updates that need to happen if items on it don’t appear to be current they may ask for documentation to support it’s been paid on time or an updated balance or minimum payment. They also may pull a supplement on particular tradelines in doing the same thing. This will include a credit score. As a point of reference on some loans, such as FHA, an acceptable score may be as low as 550 and still qualify for a mortgage. Typically the benchmark is 680-720 for most traditional lending programs on conforming loan amounts.

The property is also reviewed and often an appraisal of the property is ordered and paid for by you. This confirms that the market value is there and in some cases may confirm condition of the property. The lender will also review the sales contract confirming that the purchase is an arms length transaction and if it is not that it meets their guidelines.

Approval times can vary depending on area, type of transaction and property

Once you make a preliminary credit application the time to approval might be a few hours or a few days. If your financial situation is straight forward, where you have adequate verifiable funds, a regular wage earning job, a solid credit score and little debt and no other anomalies then you can expect it to be the shorter side. If you are self-employed, have funds coming from an unusual source or have some bugs in your credit, then the Loan Officer will likely ask you for information to appropriately document the file and will want to send it to an underwriter for a preliminary review. From the time that you provide all that is asked it might take 48 hours and could be longer if the underwriter sees the need for more information or documentation. Consider it like a conversation where every iteration is to clarify and strengthen the file so that there is a clear and honest appraisal of your financial ability to handle the loan requested. You are a part of that ongoing conversation and the goal is to give you the terms the fit best and will satisfy investors who purchase that loan after you are closed and in your home.

As always if you have specific questions and live on the West Coast, please tag the yellow floating button at the lower right corner and reach out. If you live elsewhere, find a mortgage broker to assist you in better understanding how loans work in your area.

Kristin M Eklund NMLS #1872091
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