5 tips for first-time homebuyers

5 tips for first-time homebuyers

Rick Gilbert, CRMS 1903 Manakin Road, Suite A Manakin Sabot, VA 23103 Ph: 804.784.4364 Fax: 804.784.4372

So you’ve decided to go for it. Buying a home can be thrilling and nerve-racking at the same time, especially for a first-time homebuyer. It’s difficult to know exactly what to expect. The learning curve can be steep, but most of the issues can be resolved by doing a little financial homework at the outset. Take these five steps to help make the process go more smoothly.

1) Check your credit The credit score of the buyer may be the most important factor when it comes to qualifying for a loan these days. In addition, the standards are higher in terms of what score you need and how it affects the cost of the loan. To get a sense of where your credit stands, give me a call and I’ll get your credit report from each of the three credit bureaus. I can find out what your numerical score is, but just checking the reports should give you an idea of what lenders will see. Scour the reports for mistakes, unpaid accounts or collection accounts. Just because you pay everything on time every month doesn’t mean your credit is stellar, however, the amount of credit you’re using relative to your available credit limit, or your credit utilization ratio, can sink a credit score. Lenders determine all of the available credit that you have on all of your cards added up and how much your balances are. So if you have $10,000 credit available to you and you have $5,000 on there, you have a 50 percent credit utilization rate. The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used. Give me a call and we’ll begin the process and get things straight before shopping for a home.

2) Evaluate assets and liabilities So you don’t owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month or are you on a shoestring budget? A first-time homebuyer should have a good idea of what is owed and what is coming in. If I were a first-time homebuyer and I wanted to do everything right, I would probably try to track my spending for a couple of months to see where my money was going. Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending. For instance, some professionals, such as the self-employed or straight-commission sales person, may have a more difficult time getting a loan these days than others. Gone are the days of the no-doc loan, thanks to the abuses of a couple years ago. A stated income loan was available to non-W-2 wage earners in previous years, but today’s standards are much more stringent. The self-employed or independent contractor will need a solid two years’ earnings history to show average income. In short, how you receive and report income as well as how you write off expenses can make a difference to lenders.

3) Organize documents The documents homebuyers must produce to be considered for a home mortgage are those which authenticate their income and taxes. Typically, mortgage lenders will request two recent paystubs, the previous two years’ W-2s, tax returns and the last two months of bank statements – every page, even the blank ones. Buying a home doesn’t have to take a long time, knowing what you need and where to find it can save time when you’re ready.

4) Qualify yourself Ideally, first-time homebuyers would know how much they can afford to spend before the mortgage lender tells them how much they qualify for. By calculating their debt-to-income ratio and factoring in a down payment, buyers should have a good idea of what they can afford to invest, both upfront and on a monthly basis, when it comes to their home. Though there’s not a fixed debt-to-income ratio that lenders require, the old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs, called the front-end ratio. But the underwriter will pay more attention to the ‘back-end ratio’. Including all debts with housing costs is the back-end ratio, and lenders prefer it to be under 41 percent, but most will go up to 45 percent. I really ask buyers to qualify themselves because although we can use that 28/41 ratio as a guideline, each of us knows our finances best. If we’re used to paying $800 in rent but 28 percent of your income would be $2,000 then maybe 28 percent is too high. Find out what you can afford and then you can back into everything else. We know the money you have available to put down, we know the monthly payment and we can solve for the third variable – and that is the home price.

5) Figure out your down payment Scraping up that initial down payment takes some effort. Though FHA loans require a less substantial down payment than conventional loans, it can still be a huge chunk of money for a young person or couple. Some borrowers working with a state housing finance agency can use the tax credit for a down payment. However, not all state agencies are offering interest-free or low interest loans to be paid back with the tax credit funds. Other programs can assist buyers with qualifying incomes and situations. Give me a call Finally, speak with mortgage lenders when you’re starting the process. Check with friends, co-workers and neighbors to find out which lenders they enjoyed working with and ask them questions about the process and what other steps first-time homebuyers should take. I’ve always taken pride in the fact that over 75% of my clients come from referrals of past clients! Rick Gilbert, CRMS

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