Tips on Buying Your First Home
Something I hear most often from first time home buyers is, “How do I start, I don’t understand how the process works, what do I need to do?” Essentially, “HELP!” Getting on the path to home ownership is much simpler than most people realize, especially when you break it down into actionable steps; making the dream of owning a home attainable.
Image via Jean Stoffer Design
To qualify for a home loan, you need to obtain what is called a Mortgage Pre-Approval Letter.
A mortgage pre-approval is a document or letter from a lender stating how much money the lending institution will let you borrow for a home.
1. Contact a Lender
The first step you’ll want to take is to get in contact with a mortgage lender, one that you know and trust, or one that has been referred to you by a friend, family member, or industry professional such as a local real estate agent who works alongside mortgage lenders every single day.
2. Gather Your Income Documents
Next you’ll need to gather up and provide documents about your income, assets, and debts. These documents typically include:
Pay stubs from at least the last two months
W-2s from the past two years
Proof of any other income sources
Account statements, including checking, CDs, and retirement savings, from at least the past two months
You'll need to share this information with any lender you're applying for a pre-approval, and is a good idea to have it on hand before you start.
3. Checking Your Credit
In addition to providing income documents, you'll have to agree to a credit check through your lender. If you're seeking a conventional mortgage, you'll need a credit score of at least 620 to qualify, although there are some down payment assistance programs that allow a score of 600. Know that the higher your credit score the lower your interest rate will be.
4. Get Your Pre-approval in Hand
Once the lender assesses your credit and financial profile, it'll determine whether you're pre-approved for a mortgage and how much you’re approved for. You'll be issued a pre-approval letter stating this information.
Many lenders use the "28/36" qualifying ratio to figure out what monthly payment you can afford. In general, lenders like to see a mortgage payment taking up no more than 28 percent of your gross monthly income. They also like to see your total debt payments (which includes credit cards, car loans, and other debt in addition to your mortgage) accounting for no more than 36 percent of your gross monthly income.
5. Start House Shopping!
This is the fun part, now that you have your pre-approval in hand, you are ready to start shopping for your next home, congratulations!