For almost everyone, buying a home is the largest financial transaction they will every make and it frequently has long lasting positive or negative financial effects. Buyers who are well prepared for the home buying process are much more likely to make a well informed, rational and financially responsible decision.
Tips To Prepare For Buying A Home
Credit is one of the most important factor of buying a home. When preparing to buy a home the item at the top of the list to consider is the credit score and overall credit. Typically, lenders will pull a credit report from all three credit bureaus: Experian, Equifax and Transunion. They will use the middle of the three scores as the criteria for loan approval. Currently, for a conventional purchase mortgage, the minimum FICO score is 640. This can vary a bit from lender to lender, and if the buyer qualifies for a VA loan, there is no stated minimum FICO score. In addition to the score, lenders will look at the credit report to see if there are any judgements or tax liens lodged against the borrower. Liens or money judgements are typically the result of unpaid loans or credit cards that charge off and that the creditor has taken to court and obtained a legal money judgement for. Money judgements are usually difficult to collect upon, but will attach to real property if the borrower attempts to sell a property. Lenders prevent this situation by requiring that all unpaid judgements be paid prior to loan approval. If a borrower does have unpaid judgements on their credit report, as part of preparing to buy a home, they will need to satisfy those judgements by contacting the creditor and arranging to pay off the debt. In almost all cases, the creditor holding the bad debt will be willing to mark it as paid in full for much less than the total amount owed and report it to the credit bureaus as paid. Federal and state tax liens also attach to real property, so the lenders regard those as items that have to be satisfied prior to loan approval. While situations will vary greatly from case to case, the IRS is usually willing to settle federal tax debt for less than owed. All this make it essential that a borrower know what their FICO scores are and know what else is on their credit reports before applying for a loan and searching for a house to buy. In some cases, the tasks required to make the credit score high enough and to satisfy judgements can take months to accomplish. Prior to applying, borrowers should take advantage of the resources available online and obtain a free credit report and study it. If there are items that are incorrect on the report, each credit reporting agency has a dispute process that can potentially remove those items. If the issue is raising the credit score to meet the lender’s minimum requirement, the quickest way to do this is to pay down or pay off revolving debt. Each credit card or line of credit reports not only the current balance, but the total credit limit to the credit bureaus. The credit bureaus score borrowers who have low or no balances on the credit lines much higher than borrowers who have half or more of their total credit limits used. People seeking to quickly increase the FICO scores should pay down their total credit line debt to less than 25% of the total credit line available. After this is done, a rescore request can be sent to almost immediately see the new improved score. When people apply for loans, and the lender pulls credit reports, this generates a credit inquiry. Credit inquiries are listed on the credit report and each inquiry decreases the FICO scores by a few points. When preparing to buy a home, it is important not to be applying for other loans.
Prepare all the necessary document before buying a home. Knowing what documents the lender will require before applying can save a significant amount of time and frustration. For people who are employees and who receive a W2, the requirement to verify income is the most recent two years of W2s, and the most recent two months-worth of paystubs. Additionally, expect to provide recent banks statements to verify cash on hand and retirement account statements to verify assets. For people who are self-employed the criteria are to provide the last two years of tax returns including all schedules. Lenders will use the amount listed on line 31 of schedule C and ad back in the amount listed for depreciation if any as the gross annual income. This is important to understand prior to applying because most self -employed people write off as much expense as possible to reduce their tax penalty, thereby causing their net income to be disproportionately small. This can cause their debt ratios to be higher which can affect their eligibility for a loan.
Pre-approval Of Mortgage
The Pre-approval of mortgage is another important factor of buying a house. Once a potential buyer has reviewed their credit and has understood what documents will be required, it is very important to get a pre-approval for purchase mortgage before looking at houses and making offers. Most realtors will not even show a house to a potential buyer who does not have an official pre approval from a lender. The pre-approval is basically a loan application that is not based on any specific property but on a purchase price, the borrower’s credit and stated income which provides the debt ratio. If all these factors are in line with the lender’s approval criteria, the lender will give the applicant a letter of pre-approval to show to realtors or sellers.
Down Payment Estimation
Make sure you have enough money for the down payment before buying a home. On a purchase transaction, almost all lenders require that the buyer make a down payment of at least 3% of the purchase price and in some cases, the minimum down payment can be 10% or even 20%. In any case, the down-payment amount will be a significant amount of money. Buyers need to be aware of this and need to plan and save the down-payment in a bank account because most lenders will require documentation of the source of the down-payment.