The process of owning a home can be stressful for the first time home buyer. Based on our experience we came up with seven steps to streamline the process of owning a home and to make the transaction process less stressful.

Getting pre-approved is the first step in buying a home. This step involves consulting with a bank or mortgage broker and obtaining a pre-approval letter.

What can you afford

What you can afford depends on your income, credit rating, current monthly expenses, downpayment and the interest rate.

A good indicator of what you can afford is your debt-to-income-ratio. Your debt-to-income ratio (DTI) ratio compares how much debt you have relative to your income in each month. It typically includes monthly debt payments such as rent, mortgage, credit cards, car payments, and other debt. Specifically, it is your monthly debt payments divided by your gross (pre-tax) monthly income.

The Benefits

There are plenty benefits of this step. First, the buyer meets with the lender and discuss with a loan officer loan options that fits their budget. Second, once the lender checks the credit he/she will have a better understanding as to which loan program matches their credit criteria and alert them if there are any problems with their credit. Third, the buyer learns the total amount they can borrow and therefore have an idea of their price range. Finally, sellers first thought is that the buyer is already pre-approved or have a pre-approval letter. Without this, sellers are reluctant in taking buyers seriously and won’t be willing to negotiate.

Here is a scenario of a buyer looking at houses without an approval.

The buyer decides to buy a house without doing any research. The buyer forget the first step in buying a home and goes house hunting. The buyer finds a house and make an offer which was accepted by the seller. The buyer then seeks to obtain a loan or mortgage. The Lender goes through the approval process only to find out that the buyer does not qualify for the loan or mortgage. The buyer now must go back to the seller with the bad news and has to cancel the contract. However, the seller decides not to release the deposit due to the buyer’s negligence. This is one of the main reasons why a buyer should obtain a pre-approval or obtain a pre-qualification before house hunting.

Pre-Qualification VS Pre-Approval

A mortgage pre-qualification is a good faith estimate(GFE) of how much a buyer can afford. A pre-qualification is the total amount a lender is willing to lend a buyer to spend on a home. This is not an estimate, it’s the final amount a lender is willing to lend the buyer after all the necessary checks and balances have been ticked off. However, the loan is contingent upon an appraisal. An appraisal tells the lender how much the house is worth.

There are a few items a lender requires to pre-approve a buyer, these items include:

Proof Of Income

All borrowers must show proof of income which includes their last two pay-stubs, last two years tax returns, and last two years W2s.

Proof of Assets

The lender also verifies assets which includes funds in the bank that they will need to pay closing cost and down payment as well as cash reserves. They will need to present bank statements, and investment account statements to prove that they have the funds. Federal Housing Authority(FHA) loan requires a down payment as low as 3.5% of the cost of the home, FHA loan programs offer lower down-payments and are a good option for first-time homebuyers! Conventional requires 10% to 20% of the cost of the home. Veteran loans (VA) requires 0% down up to $450,000.00 and 20% after that. If money is received from a friend or relative to help with the down payment a gift letter is required to proof that this is not a loan.

Good Credit

Buyers with credit scores as low as 540 can obtain a loan but should expect to pay a higher down payment and a higher interest rate. The average score that lenders accept today is 620. Buyers with 740 and above pays the lowest rates.

Employment Verification

One would think that pay-stubs are enough to verify employment, but lenders will call your employer to verify employment to match your pay-stub information and to check if you do work there. The usually verify two years of consecutive employment and if there is a job change they may want to contact your previous employer. Stable employment is a most because lenders want to make sure that their risk is limited. Borrowers who are self-employed will need to supply additional documents regarding their business and income.

Documentation

The lender requires mutual assistant in working towards the goal of closing the transaction. They will require signatures, driver’s license, social security and other documents as quickly as possible. So be prepared at the pre-approval stage and during the whole process to be asked for more documents.

Expert advice from a lender before you start housing hunting is the first step in buying a home. Gather your documents and make an appointment today!