Our “First-Time Homebuyers” series continues this week with an entry from Dave Chmiel of Ruoff Home Mortgage.
It is never too early to start the mortgage pre-approval process! Many first time homebuyers are excited to get out and to start looking at houses but can end up disappointed that they may not qualify to purchase their dream home.
Consulting with a mortgage professional before you start you home search is the best place to start. The mortgage process can be intimidating and overwhelming but a step that all must take when purchasing a home. A good mortgage professional will take the time to educate the buyer, evaluate their ability to buy and hopefully end up with a mortgage product that best suits the clients needs.
The first step in the mortgage pre-approval process is to check credit reports. We look at all three reporting agencies and use the middle score to qualify. Credit score is very important as this will affect interest rates and what loan program we use. In the event that we do not have a qualifying credit score, we can look for some solutions to help.
So, we have a qualifying credit score, now we need to determine what loan program will help the buyer achieve their goal. There are conventional loans in addition to FHA, USDA and VA. Some of these have minimum down payment requirements, household income limits or location restrictions. There are also programs that can help with down payment.
A loan program has been chosen, now we will see how much house a buyer can qualify for. This is done by determining eligible income. This can be tricky if the buyer works on a commission or is self-employed. Time on the job can factor in on what is eligible and not. The buyer’s debt to income (DTI) ratio is what we look at. DTI is calculated by adding all liabilities to the proposed mortgage payment and dividing by the income.
Finally, the final step is checking assets. A buyer will need down payment and to cover any closing costs not covered by seller concessions. We will need to look at bank statements. Other options for down payment can be a 401K withdrawal or a gift from a family member. There are proper steps to take when using one of these options so check with you mortgage professional before doing anything.
Here is what we need to complete the mortgage pre-approval process:
- Pay stubs-most recent and covering 30 days, so if you are paid weekly, we will need five.
- Federal tax returns and all W2s/1099s associated with these for the last two years
- Bank statements covering the last two months. All numbered pages even if blank. A 60 day transaction history provided from you bank is also acceptable.
- Copies of drivers licenses.
A good mortgage loan officer will take the time to make sure that everything is in place before issuing a pre-approval letter. Most of the hard work will be done early in the process so once you buy a house, it should be all downhill!
Five Smart Money Moves for First-Time Homebuyers by John Foxworthy