Buying a home is not a given – it’s a dream. Here’s how you can make it happen, and make it happen more smoothly.
Don’t take out another big loan, including an auto loan. Avoid taking on any new debt while you’re shopping for a home. The lender will only approve a mortgage in a dollar amount that will keep your debt ratio under approximately 40%. The more debt you have, the less of a mortgage payment you can afford, and the lower your mortgage offer will be. Also, every inquiry affects your score, so it’s best to simply avoid applying for any type of credit if you think you’ll be shopping for a mortgage in the next few months.
Don’t make any big changes in your assets. Don’t close accounts, don’t open new accounts and don’t move significant assets around. Don’t consolidate debt, max out any credit card or change banks. Don’t even pay off collection accounts until your lender instructs you to. These activities can cause your credit score to drop, and they may raise red flags for the underwriter.
Don’t change jobs. Most lenders require at least two years’ stable employment before they will approve your loan. Don’t quit your job, even for a better one. If you’re laid off, you may need to apply for your loan immediately, using your two most recent paystubs.
Don’t take an interest-only loan, unless you’re an experienced investor. Unaffordable loans were a huge part of the recent housing bust. Many homeowners were convinced by an agent or broker to take an interest-only loan for the first few years, after which they’d be able to easily refinance because the home value would be much higher, resulting in greater equity. We all know how this worked out – an avalanche of foreclosures that hasn’t ended yet. Just buy something you can afford and ignore any and all speculation about future value.
Shop around. Check with multiple lenders, and don’t forget to ask about fees and costs in addition to interest rates. If you’ve never bought a home before, participate in a free first time homebuyer’s workshop. They’re offered by lenders, nonprofit organizations, and by state and local governments. To find one near you, perform an online search for “first time homebuyer workshop [your state].”
Be honest. Don’t lie on your loan application. Don’t exaggerate your income or omit any liabilities. The lender could come after you for the entire mortgage and you might be subject to criminal charges if it’s later discovered that you obtained the loan under false pretenses.
Get pre-approved. Pre-approval means the loan is as close to being in your pocket as it can ever be, short of actual final approval. The entire transaction will go much more quickly and smoothly if the lender has already checked out your credit and finances and you have a dollar amount you know you can work with.
Protect your credit score. Don’t apply for new credit or make any late payments – two sure-fire ways to torpedo your credit – while you’re shopping for a home, even if you’ve been pre-approved for your loan. The lender will pull your credit score once more when it comes time to finalize your loan, and any dip could cause your loan to fall through.
Continue to pay your existing mortgage. Even if you’re refinancing, don’t assume you’ll have the money in hand by any particular date. Just continue to pay all of your bills as you normally would.
Document all large deposits to your bank account. If you receive a cash gift from a family member, for example, to help with closing costs and the down payment, you must provide documentation of the gift. The lender will need to verify the origin of the money.
Save as much money as you can, toward the down payment and cash reserves. You’ll get the very best terms if you can pay at least 20% down. But if the 20% will wipe out your liquid assets, the bank may not offer you the lowest rate. The lender might also require you to have accessible money in an amount of up to 10% of the value of the loan (especially for some refinances).
Talk to your broker. If your employment situation changes, if you become aware of an adverse account that could affect your credit score, if you have any questions at all – just call your broker to discuss the situation and be proactive about keeping your mortgage financing process on track.