The average cycle to purchasing homes takes approximately 1 year. If you’re currently renting with the intention of purchasing, I’ve provided the steps you need to take before shopping for a home. Purchasing a home is a complicated process and can be very overwhelming and stressful if you’re not prepared. Here is a step by step guide to understanding the financial aspects of purchasing a home.
Picking the home you want is the easy part, but there are three qualifying factors that a Mortgage Consultant looks at to determine your pre-approval. Your credit score, debt to income ratio, and the amount of money you have to put down. From here the broker will be able to determine the type of programs you qualify for. Understanding your financial choices will allow you to make an informed decision when picking out the right home.
Factor 1: Credit Report
The major factor that can determine your qualifications is your Credit Report. A Credit Report is a tool that is used to determine your credit worthiness. Your credit score can literally save you millions or it can cost you millions; knowing what’s on your Credit Report as early as possible is key to your success in getting the best financing. You can get free copies of your reports from the three major Credit Bureaus: Equifax, Experian and TransUnion at AnnualCreditReport.com.
Another tool I recommend is creditkarma.com. These will both provide an in depth look into your credit background. If you do not understand how to interpret what is on your Credit Report I advise you to speak to a Mortgage Professional. I don’t know a single Mortgage Professional who wouldn’t be glad to help a first time home buyer prepare for purchasing a home.
To better understand credit and credit scores, see my article “Low Rates equal Credit Cards and Credit Scores”. Once you have your credit under control, the next step is to determine how much you want to pay monthly for your mortgage payment. There is a major difference between knowing what you can afford and what you are comfortable paying on a monthly basis. Buying a home at the top of your budget can lead to a life of being house poor and living paycheck to paycheck.
Factor 2: Debt to Income Ratio
If you are looking at purchasing the right home in your payment range, you will need to determine your monthly income. The term “debt to income ratio” is used to determine your qualifications. To do so you will need to gather your last two years’ Tax Returns, consecutive 30 days of pay stubs, and your W-2’s from every employer you have worked for in the past 2 years. Calculating your income can be very difficult, therefore I would suggest scheduling an appointment with a Mortgage Broker to assist in this process. He will help you get all the answers you need.
Factor 3: Your down payment
The third factor is the amount of funds you want to put down when purchasing a home. When you begin the process and submit your signed application to the broker for approval, you will need to supply asset statements to show you have the funds to bring to closing. The better prepared you are for providing clean asset statements the easier the process will be.
At this point, if you know the type of loan you’ll be getting and the amount of funds needed to close, and if you’re receiving gift funds, transferring funds from one account to another account, or cashing in your 401k, get the funds into an isolated account to use only for the down payment. The bank is going to ask for each page of the last two months’ bank statements to determine the eligibility of the funds being used for closing.
Avoid the pitfalls of purchasing a home. With proper planning this can be the most important and successful investment you will ever make. Understanding these three factors will make the process of purchasing a home much less complicated. Giving yourself one year to plan the process is key, not waiting until the last minute. I would recommend working with a Mortgage Consultant as soon as you have made a decision on purchasing a home. Feel free to contact me with questions or comments.