Getting Credit Ready / How much house can I afford?
Recently, I had the pleasure of doing an adult ed. home buyers class for the Marietta Community School. I have decided to take some of my outline notes and form the into a blog series for home buyers.
The content is geared a little more toward first time buyers but will still be very relevant for move up buyers as well. Also, this is based on my own knowledge and experience in our local market. All real estate is local, so if you are reading this in another part of the country then some of the ideas may not apply or at least they may apply differently.
Part 3: Getting Credit Ready / How much house can I afford?
Originally I had planned on doing these as two separate posts, but I think they will go well together as one.
Get Approved: It is important to go ahead and get pre approved prior to shopping for a home. For an approval the lender will look much deeper at your credit and income. Essentially you will be approved for the loan and all you will need to do is pick the home to add to the loan package.
So what are some things that you will need for loan approval?
- 3 months most recent pay check stubs
- 3 months most recent bank statements. All pages front and back
- Monthly or quarterly statements form any stock, saving, or retirement accounts.
- 2 years worth of w-2 income verification (or 2 years tax returns for self employed)
- Name, address, phone number for all employers from last 5 years.
Once you get in to the loan process the lender may require other items but this will certainly be enough to get the process started.
Credit: DO NOT APPLY FOR ANY NEW CREDIT!! You do not need to finance a car, get a credit card, or obtain other forms of credit to build credit for a home purchase! Do not let some salesman tell you to finance a new flat screen TV, just to build credit!
- If you do not have a credit score or if you have very limited credit you can establish alternate credit by proving that you pay your regular bills on time. Your payment history on your rent, utilities, cell phone, gym membership and other monthly bills can all be used.
- Have cash reserves and assets available. Even if you are buying with a low down payment, you need to have extra money set aside for emergencies and cash reserves. It is good planning on your part and the lenders really like it. Savings accounts, 401k, and cash on hand all are good. Dave Ramsey recommends that you have at least 3 months and preferably 6 months of living expenses set aside before buying a home.
- Have at least 12 months of on time payment history.
How Much can I afford? : Here are the basic guidelines.
- Most lender guidelines allow a maximum 28% of your gross income (income before taxes) to go to mortgage debt. So, if you make $4000 per month your total allowable payment would be $1120 per month including taxes insurance and any HOA dues. Dave Ramsey recommends that you keep this to 25% of your take home pay and base that on obtaining a 15 year mortgage.
- For total allowable debt most lender guidelines are around 36% of your gross income for total debt. That would be your house payment + car payment + credit payments of any kind cannot total more than 36% of your gross income. If you are following Dave's advice you will be debt free and this figure wont matter :-)
- When you become a home owner your mortgage interest is tax deductible. Be sure to adjust the amount that is withheld from your paycheck so that your monthly take home pay goes up. This is a good thing that the government allows to make owning a home more affordable.
Next time - Searching for a home and using a buyers agent.
Read Part 1, Here - Is it a good time to buy and should I buy?
Read Part 2, Here - Should you buy a home if you currently have a home to sell?
Read part 3, Here - Getting Credit Ready/ How much house can I afford?
Read Part 6, Here - Appraisal, Inspection, and Due Diligence
Read Part 7, Here - To the closing and beyond
Bob Southard, e-Pro, Realtor ®, Solid Source Realty, Inc. Buy a home, Sell a home, in Powder Springs, Marietta, Kennesaw, Acworth, Dallas, Hiram,and Cobb, Paulding, Douglas, North Fulton, South Cherokee, County, Ga
Visit my website www.AgentBobSells.com
Call me for all of your Real Estate needs
Copyright © 2008 By Bob Southard, All Rights Reserved