Knowing your finances
When setting out to buy a house, whether it is your first home or your tenth, one of the most important steps is setting your budget and getting pre-approved for a mortgage.
Figure out your finances and determine what you can comfortably afford each month. When creating your budget, you will need take into account your mortgage payment, property taxes, homeowner’s insurance, and mortgage insurance. You should also keep in mind any homeowner’s association (HOA) fees that you might have to pay. Not all homes have homeowner’s associations, so HOA fees do not apply to all properties.
There are many costs associated with buying a home that most people forget to consider. When you move, your utility payment may change depending on where you live and the size of your new home. Your commute can also change, so you want to anticipate those changes and factor them into your budget. Possible upgrades, repairs and maintenance should be taken into account as well.
3 Key things to consider before you contact a lender for prequalification:1 | Save money. The lender may need to see that you have money in your account(s) and a record of saving money. Even if you are planning on using a loan program with no down payment, lenders sometimes require that you have reserves in the bank in case of an emergency. Money for a down payment needs to be seasoned – in an account for at least the most recent 60 days, or sourced – specific documentation showing where the money came from. Gifts are allowed for down payments and closing costs, but they will not count as reserves. Cash and most loans are not allowed to be used for down payments and reserves. These restrictions should be discussed with your lender if they apply to your situation.
2 | Have a good work or income history. You need to have record of stable employment or income. Your lender must be able to prove that you have a steady source of income to pay for the loan long term. Most lenders look for at least a two-year history, but not necessarily with the same company. There are exceptions for former students who received specific training or education for a new job with less than two years of history. For those who are part-time, self-employed, paid commission, or receive overtime or bonus income, there are firm restrictions for using this type of income, so it is important to discuss this with your lender if you are factoring this income into your budget. All income must have a provable or reasonable expectation to continue for at least three years after a loan closes.
3 | Know your credit history. You also should know your credit score. The number one thing that hinders prequalification for a mortgage is a bad credit score. If you are thinking of purchasing a house, find out what your credit score is and if there are any immediate actions you can take to improve it like removing erroneous information or paying down balances on credit cards. Also, be prepared to furnish documentation for former bad debts, bankruptcies, short sales, foreclosures, judgments, etc. The lender may ask for a written explanation of what led to the former issues on your credit report.
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