Congratulations on becoming a first-time home buyer! This is an exciting time in your life, but we can also guarantee it might be a bit confusing. With ample home loans to consider with various requirements, you may be wondering where to start.
Let’s take a look at what’s required when applying for a loan to buy your first house.
Learn About the Housing Market In Your Intended Areas
Getting approved for a loan means you need to decipher a realistic budget. Where you intend to buy can make a large impact on your overall budget. In turn, this can alter how much you would need to take out for a home loan, which can impact your needed credit score. It’s like the domino effect.
Say, for example, you are looking at homes for sale in Arizona. You’ll want to learn more about the housing market and the prices of the various neighborhoods within the state. This will help you figure out what area would best fit your budget.
Income and Employment
What all lenders are going to want to see is that you have the ability to pay your mortgage each month. For them to be certain, they’ll need to have a proper look into your income and employment status over the last two years.
They’ll want to see that you have worked consistently over a period of twenty-four months. This doesn’t necessarily mean with the same company, but it does mean that you have a regular, sustainable income.
If you are an independent contractor or are self-employed, you will still need to show two years’ worth of tax returns so they can see what your overall income looks like. Self-employed individuals are usually a higher risk to them because of the lack of consistency, but it’s not impossible. This is why mortgage lenders will want to have proper documentation of all of this information.
Save Your Money for a Downpayment
Conventional loans, like FHA loans, usually require anywhere between 3% and 5% of a down payment. A down payment on a home is usually around 20% of the total cost of the house. Because some people can’t afford to pay this, they will opt-in for private mortgage insurance (PMI) which is a monthly payment in exchange for a lower initial down payment.
This one is a bit of a tricky matter. Not every type of loan you may qualify for will require you to have a downpayment for a house. VA loans, for example, do not have a minimum down payment requirement. This doesn’t exempt you from paying closing costs which can be several thousands of dollars.
Borrowers who aren’t required to put down a certain amount of money for their loan still opt into giving the 20% ahead of time. This means they can avoid any extra PMI they may incur monthly.
Low Debt-to-Income Ratio
If you have a significant amount of debt, you may want to consider lowering it before trying to apply for a loan to buy a house. Any type of debt – such as credit cards, student loans, or even installment plans for your cell phone – can all add up to a higher ratio than mortgage lenders tend to work with.
It’s incredibly easy to be able to calculate your debt-to-income ratio. There are several online calculators that help you sort out this number. Make sure you aren’t taking into consideration any of your current living expenses such as rent, utilities, or gas. They want to see your overall debt, so the lender can determine if you have the ability to pay them if they were to provide you with the home loan.
Get Pre-Approved for a Loan
The best thing you can do before touring any homes is to speak with different lenders for a pre-approval. Find out if you have the ability to get a loan prior to actually receiving the loan. It will make it easier for you when viewing potential houses to live in so you can get a clearer picture of what you can actually afford in the long run.
As one last added piece of advice, speak to at least three different lenders for your pre-approval to see if you are eligible for the highest amount with the lowest interest.