Are you in the beginning stages of buying a home? It can be confusing as you try to determine how much home you can afford, what realtor to choose, what lending institution is best for your needs, and the list can go on and on creating a nightmare for you. It doesn’t need to be that way.
Before you go any further, you really need to consider hiring a real estate agent. A great agent can really help narrow down and hone your search to what you are really looking for, thereby saving you time and energy. I’m not saying that you should hire me. Although that would be great, there are really good agents (besides me) in the local area. Check out a few and hire the one that best suits your needs and your personalities. After all, you will be working closely with this individual on the biggest investment of your life.
Let’s go over a few steps to get you started in the home-buying process:
Step #1: Make a rough estimate of how much home you can afford based on your income.
Here are two methods to help:
- Method 1: The price of your home shouldn’t be any more than 2.5 times your annual salary.
- Method 2: A house payment should be no more than 25% of your gross monthly income (before taxes and deductions)
Keep in mind that these are guidelines. There are many other factors that determine how much home you can afford.
Step #2: Take a close look at your credit report.
Lenders really focus on your credit history to determine your interest rate. The better your credit, the better lending terms your bank or lending institution will be able to offer you. A higher interest rate translates into a higher monthly mortgage payment, and so your credit score will directly affect how much money you can borrow and at which homes you should be looking.
You should be aware of what information is on your credit report by obtaining and reviewing copies of your credit report from the three main credit report agencies.
- Equifax, www.equifax.com, 1.888.766.0008
- TransUnion, www.transunion.com, 1.800.888.4213
- Experian, www.experian.com, 1.888.397.3742
Remember that there are several factors that affect your credit report including your payment history, your current ratio of debt to income and signs of responsibility and stability. And, since not all creditors report to all three agencies, it’s best to order a report from all three institutions. Your goal in ordering all three credit reports is to make sure that all of the information stated on each report is accurate and correct.
If there are any discrepancies on your credit report, contact the rating agencies and have those records corrected. Taking the time to verify and correct your credit report before you speak to a lender will help eliminate hassles later on.
Step #3: Gather the Documents / Take a look at your Assets and Monthly Expenses.
Your lending institution will ask you to give a complete profile of your financial situation. In addition to your income, your existing assets and debts will determine how much money that you can borrow. The list of documents below may be required by your lender to qualify you for a loan:
- Social Security Number
- W2 Forms from the previous two years
- Pay Stubs (most recent months)
- Employment History Summary
- Bank statements for checking and savings accounts (past 3 months)
- Creditor Information. This includes debts like:
- Student Loans
- Auto Loans
- Credit Cards
- Child Support Payments
- Federal Tax Returns (for the past 2 years)
- Complete Record of Assets
- Stocks, bond, and investment accounts
- IRA / Retirement plan
- Life insurance policies
- Automobiles owned
- Construction loan
- Gift letters
- Documentation of other income
Improving any of these areas will help you qualify for better lending terms, so keep that in mind before you speak with a mortgage professional. If it’s possible to pay off a car loan or a credit card balance before you seek financing for your new home, the preferential financing terms that you could receive may save you thousands of dollars over the life of your mortgage.
Step #4: Talk to a Qualified Lender.
After looking at this information for yourself, it’s time to speak to a qualified lender. A professional advisor will not only be able to give you information on the best rates and terms available in the current market, but he or she can also explain to you what options you have given your unique financial situation.
Talking to a lender at this time will help you get a more accurate idea of what you can afford. When we begin to look seriously at homes you’ll go back to the lender and shop around for the best loan available.
Step #5: Start looking.
Get in contact with your real estate agent once you know what you have been approved to spend on a home. At this point your agent has the information needed to narrow down the search to find the right home for you, your budget, and your family.