Now that we’ve covered the first two steps of our five-step process to being prepared for your first home purchase, it’s time to look at the next three steps so that you’re as prepared as you can be. If you haven’t read Part I yet where we discuss the importance of reviewing your credit history and having a good understanding of the cash required to purchase a home, we suggest you start there.
Next, it’s time to find a lender to work with.
Partner With a Reputable Lender
Your lender plays a critical role in the home-buying process and can mean the difference between getting your dream home or missing out. It’s important to take the time to find a credible and trustworthy lender that has your best interest in mind. Ask family and friends for referrals and do your own research to make sure you find the right lender.
Once you select your lender, it’s time to get pre-approved. Read on to learn more about the pre-approval process and why it’s so important to get pre-approved.
Why Do I Need to Get Pre-approved?
There are many reasons to get pre-approved before you start house hunting. Here are just a few of the top reasons:
1). You’re viewed as a more desirable buyer
As a pre-approved buyer, you’re more attractive to a seller and the seller’s agent. Because you’ve been vetted by a lender and have met the qualifications for financing, you’re considered a more serious buyer which makes it more likely that you will complete the purchase of the home. A seller and seller’s agent are more likely to accept an offer from a pre-approved buyer than one that has not been pre-approved, all else being equal. In fact, listing agents typically won’t even entertain offers from buyers who have not been pre-approved.
2). You can be more efficient with your time
Knowing the purchase price and estimated monthly mortgage payment for which you’re qualified means that you can focus on homes within a certain price range so that you don’t waste time looking at homes that you can’t afford. In addition, if you do the legwork upfront before you put in an offer and open escrow, you can have a shorter closing period because the lender has already reviewed your documentation and would likely only require updated documents. A shorter closing period could make your offer more attractive to the seller, especially in a competitive market.
3). You can lower the risk of surprises and emotional stress
Without a pre-approval, you may spend time looking at homes that you can’t afford and if you happen upon a home that you fall in love with only to lose it because you can’t qualify, it will take an emotional toll on you. Knowing the maximum purchase price and loan amount can prevent surprises and emotional stress,
The Pre-approval Process
Once you find a lender, the first step in getting pre-approved is to have your credit reviewed. Thankfully you’ve already taken the necessary steps to review your credit and correct any errors that you found (See Step 1). The lender will review your credit score and history to determine whether there are any issues that would prevent you from getting approved by the loan underwriter. The credit report also lists your debt obligations and monthly debt payments which are used to determine your debt-to-income ratio which is a percentage of monthly debt payments compared to your overall gross monthly income.
After reviewing your credit history, the lender will ask for income and asset documentation. This includes the following items for all borrowers that will be on the loan for qualification purposes:
- Personal identification including a driver’s license and social security card
- Two most recent paycheck stubs
- W-2 statements and/or tax returns for the two most recent tax years
- Two most recent months’ bank, brokerage, or other account statements showing the funds for your down payment and closing costs
- Additional documents required by the lender
The above is not an exhaustive list and some documents may not be required at all. Your lender will help determine what’s needed based on your unique situation and loan program.
Review Your Loan Options
In addition to reviewing your documentation and determining whether or not you’ll be approved for a home loan, the lender can also provide you with expert advice on the variety of loan programs that are available – from first-time buyer programs to low and no down payment loans to jumbo loan programs.
Historically, a down payment of 20% of the purchase price was required to purchase a home, but that’s not the case today. Factors such as the purchase price of the home you’re considering, your credit history, and loan program determine what’s needed for a down payment. There are a variety of low-down-payment options as well as programs for low to moderate-income buyers. Ask your lender about programs such as the HomeReady Mortgage program and Home Possible programs which have down payments as low as 3% as long as eligibility requirements are met. A Conventional 97 mortgage, sometimes called the 97% LTV Standard program is the counterpart to the HomeReady and Home Possible 3% down programs but does not have income limitations.
Government-backed loan programs such as FHA, VA, and USDA loans require little or no money down and there are a multitude of state-sponsored homebuyer programs as well. To learn about state-sponsored loans in your state, visit your state housing authority or check with a local lender or bank.
Know the Dos and Don’ts
Once you’ve been pre-approved with a lender, there are some dos and don’ts to be aware of. Often, buyers unwittingly jeopardize their pre-approval and ability to qualify for a home loan. Below is a list of dos and don’ts to help you remember what you should and should not do once you decide to buy a home:
DO
- Continue to make all of your payments on time. It’s important that you continue making your rent, credit card, auto, and other payments on time to maintain your credit score
- Continue to save money even if you have plenty of funds to cover your down payment and closing costs. Buyers often go over their planned price once they start looking at homes. In addition, sometimes buyers underestimate the costs associated with purchasing a home, so it’s best to have some additional padding, but remember not to make large deposits. See the “Don’ts” section below for more information.
- Keep your lender informed. Maintain open communication with your lender. The sooner the lender is aware that your offer has been accepted, the better prepared you and your lender will be which will ensure that the loan closes on time. If you need to make a large transaction, let your lender know as soon as possible.
- Document all your transactions. Lenders require documentation and a “paper trail” for any significant and unusual deposits and withdrawals into and from the account(s) that hold the funds that will be used for your down payment, closing costs, and reserves. Avoid large transactions to save yourself from having to provide explanations for those transactions and potentially disqualifying yourself from loan approval.
DON’T
- Have your credit pulled multiple times. Each time your credit report is pulled, it could ding your credit score which could move you into a credit range that comes with a higher interest rate or prevents you from qualifying for the loan.
- Apply for new credit. Having your credit pulled will not only negatively impact your credit score, but it may signal to the lender that you’re looking to take on new debt which could affect your ability to pay your mortgage. When looking to purchase a home, do not apply for a new credit card, auto loan, or any other credit obligation that could affect your credit and debt-to-income ratios.
- Make any large withdrawals or deposits. Unusual transactions, especially larger deposits and withdrawals from any account being used in your loan transaction will raise flags with your lender and trigger requests to provide letters of explanation. It’s best not to make transactions that are outside of your normal monthly activities until your loan closes.
- Move money around. Simply transferring funds from one account to another seems harmless, but it could trigger red flags and questions from the lender, creating extra work for everyone. The lender may request a “paper trail” that documents every transaction that involves the movement of funds from one account to another. It’s best to avoid the trigger altogether.
Partner with a Real Estate Expert
When you’re ready to start looking for your dream home in your desired neighborhood(s), it’s best to work with a local real estate agent. Working with a real estate expert gives you first-hand information about the neighborhood, schools, crime rate, traffic patterns, and other factors that are important to you. In some cases, the real estate expert may personally know the seller or listing agent and can put in a good word for you.
Working with a licensed real estate professional also gives you peace of mind that your interests are protected in the purchase transaction. A licensed real estate expert knows how to write up the offer, knows the essential questions to ask, and has a duty to represent your best interests as the buyer. In addition, real estate agents are often privy to information such as pocket listings or new homes about to come on the market. Your real estate partner may be able to provide you with insider information and access to properties before they become widely available on the market. And because they know the local market well, local real estate experts can advise you on the best strategy to get an accepted offer including the offer price, escrow period, whether to ask for seller concessions, and the like.
If you are not currently working with a real estate agent, BrightPath can introduce you to local real estate professionals that can assist you.
The Takeaway
In the end, you may find that buying your first home is not as hard or time-consuming as you thought. But of course, as with any big decision, it’s important to be informed and prepared before jumping in blind. One good way to start? Take a look at our Five Steps so you’ll know what to expect—and what to do—when it comes to your first home. And may the odds be in your favor!
