|5 Tips for First-Time Homebuyers|
|Adapted from an article By Sheyna Steiner|
|RISMEDIA, Saturday, February 07, 2015— (TNS)—
You’ve decided to go for it. Buying a home can be thrilling and nerve-wracking at the same time, especially for a first-time homebuyer. It’s difficult to know exactly what to expect. The learning curve can be steep, but most of the issues can be resolved by doing a little financial homework at the outset.
Take these five steps to help make the process go more smoothly.
1) Check Your Credit
The homebuyer’s credit score is among the most important factors when it comes to qualifying for a loan these days.
To get a sense of where your credit stands, go to AnnualCreditReport.com to get your free credit report from each of the three credit bureaus.
Scour the reports for mistakes, unpaid accounts or collection accounts.
Just because you pay everything on time every month doesn’t mean your credit is stellar, however. The amount of credit you’re using relative to your available credit limit, or your credit utilization ratio, can sink a credit score.
The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used.
Repairing damaged credit takes time—and money, if you owe more than lenders would prefer to see relative to your income. Begin the process at least six months before shopping for a home.
2) Evaluate Assets and Liabilities
So you don’t owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month, or are you on a shoestring budget?
A first-time homebuyer should have a good idea of what is owed and what is coming in.
You should understand a little bit about monthly cash flow,” says Winesburg.
Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending.
For instance, some professionals, such as the self-employed or straight-commission salesperson, may have a more difficult time getting a loan these days than others. Gone are the days of the no-doc loan, thanks to the abuses of the go-go days.
A stated income loan was available to non-W-2 wage earners in previous years, but today’s standards are much more stringent.
According to Winesburg, the self-employed or independent contractor will need a solid two years’ earnings history to show.
3) Organize Documents
When applying for mortgages, homebuyers must document their income and taxes.
Typically, mortgage lenders will request two recent pay stubs, the previous two years’ W-2s, tax returns and the last two months of bank statements—every page, even the blank ones.
Buying a home can take a long time, but knowing what you need and where to find it can save time when you’re ready.
Ideally, first-time homebuyers would know how much they can afford to spend before the mortgage lender tells them how much they qualify for.
By calculating their debt-to-income ratio and factoring in a down payment, buyers should have a good idea of what they can afford, both upfront and monthly, when it comes to their home.
Though there’s not a fixed debt-to-income ratio that lenders require, the old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs. This percentage is called the front-end ratio.
The back-end ratio shows what portion of income covers all monthly debt obligations. Lenders prefer the back-end ratio to be 36 percent or less, but some borrowers get approved with back-end ratios of 45 percent or higher.
“Find out what you can afford and then you can back into everything else. We know the money you have available to put down, we know the monthly payment and we can solve (the equation) for the third variable—and that is the home price,” Winesburg says.
5) Figure Out Your Down Payment
It takes effort to scrap together the down payment.
Speak with mortgage lenders when you’re starting the process. Check with friends, co-workers and neighbors to find out which lenders they enjoyed working with and ask them questions about the process and what other steps first-time homebuyers should take.
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