If you are ready to buy your first home, there are many things you should know about the mortgage approval. It takes some time to prepare yourself for the mortgage process, ensuring that you get the best terms and rates available to you.
Keep reading to learn the first-time homebuyer’s secrets that you need.
Understand Your Credit
Since you’ve never bought a home before, you might have never even looked at your credit. You need to do this. Even if you haven’t had a lot of credit in the past, there could be things on your credit report that you don’t recognize.
Head to this link and pull your credit report from each of the three bureaus. They may each have different information reporting. Then compare each account reporting to your information. Do the accounts belong to you? Are the balances correct? Is the payment history correct? If anything isn’t right, you have to dispute it with the credit bureau. You’ll have to do this in writing and it could take some time. The earlier you start this process, the easier your mortgage approval will go.
You Need More than the Down Payment
You might think you did good by saving up enough money to put a 20% down payment on the price you want to spend on a home. That’s a huge accomplishment, so great job! But you will need more money. Each mortgage, no matter the program, will require you to pay closing costs. How much you pay depends on the program and the lender.
If we were to estimate, we’d say you need at least 5% of the loan amount for closing costs. On a $200,000 loan, that’s another $10,000. Don’t worry, though, you can negotiate these costs. You can either shop around and find a lender that offers the lowest costs or you can negotiate with the lender you chose.
Sometimes lenders are willing to lower their closing costs because you comparison shopped and they know you can go elsewhere. Other lenders will only lower your closing costs in exchange for a slightly higher interest rate. In fact, you can even get a no closing cost loan, but you’ll have to take a higher interest rate, sometimes as high as 0.5% more.
Keep this in mind as you prepare yourself to buy your first home. The down payment is just the start – you’ll need much more than that when it comes down to the closing.
You Have to Season Your Assets
Speaking of bringing money to the closing, your lender is going to evaluate every dollar you bring to the closing very carefully. In other words, you can’t hide your money under your mattress and then bring it to the closing. The lender needs to see that money in a bank account for at least 2 months.
If you have any large deposits in the bank account that the lender evaluates, you will have to explain them. You may even have to write a formal Letter of Explanation and provide proof of where the money originated. This is all so that the lender can determine that the money did not come from a loan. All money used for the down payment and closing costs must be money that you earned or obtained by selling an asset. In some cases, you may be able to accept gift funds from a relative, but again, you must have proof that it’s not a loan.
Gift Funds are Accepted but Monitored
Gift funds have similar stipulations as your own funds. Like we said above, the funds cannot be a loan. The lender will need to be 100% certain that this is the case. The donor providing the funds will need to write a Gift Letter. This letter states who they are giving the money to, the reason, and that it is not a loan.
The lender will also have to verify the origin of the funds, just like they have to do with your own funds. Again, the funds must be seasoned for at least 2 months. If the donor sold an asset or secured the funds another way, they will have to provide a paper trail so that the lender can make sure there isn’t a loan that was taken out somewhere along the line.
You Must Watch Your Debt Ratio
Prior to the housing crisis, lenders were a bit lenient about debt ratios. Today, they are not allowed to be lenient. They have to make sure no one has a debt ratio that exceeds 43%. This means your mortgage payment and other monthly debts cannot exceed 43% of your gross monthly income.
Some loan programs, such as the conventional loan require a 36% back-end ratio. That’s even lower than the 43% maximum, which can make it harder to secure a mortgage approval. Keep this in mind as you shop around for mortgages. FHA loans have more lenient guidelines, allowing borrowers to have a 31% debt ratio on the front-end and a 41% debt ratio on the back-end.
Getting a mortgage approval isn’t impossible, but it does require plenty of planning. You cannot just decide one day that you want to buy a house. You have to make sure you have time to save, fix your credit, and get your debt ratio down as low as possible.Click to See the Latest Mortgage Rates»