Preparing to buy a home? What to factor in to your decision

Can you afford the home?

The first step for the buyer is to consider whether there is a realistic opportunity for purchasing a home. Important considerations include:

• Can you afford the potential home? Using one of many available online mortgage calculators, there is a chance to weigh whether a particular home is within reasonable financial reach as it pertains to the down payment required and your monthly mortgage payments.
• Can you qualify for the home loan? Along with these items, a lender will require several attributes in the buyer.

Let’s look at some of those items in further detail:

Get your finances in order

Before even thinking about starting the process, you should make sure the following are all true:

• Sufficient and reliable income – every level of home loans as it pertains to purchase price carries with it minimum income amounts.
• Impeccable credit history – lenders will heavily weight credit history in both the acceptance/denial decision and in the interest rate and points offered for the loan.
• A good debt-to-income ratio – for lenders, that equates to the lower, the better. This ratio is derived by dividing the monthly debt payments by monthly income.
• Enough cash for the down payment – the important loan-to-value ratio comes down to how much money the buyer can use for the down payment, with lenders generally looking for LTV ratios close to 80% depending on the specific circumstances.

What can the buyer do to maximize the chances of a successful loan application? The steps relate to each of the items listed above:

• Do everything possible to have a job that not only pays well, but also produces income that is steady and reliable. The main ways of achieving this are through excellent education and/or career training. Reliable and punctual bill payment – it’s as simple as that, because late or, even worse, missed payments result in a lower credit score, and that results in either loan denial or higher payments due to higher interest rates and/or points.
• Pay down credit card debt as much as possible – paying anything less than most of the monthly balance will lead to the highly undesirable consequence of a high debt-to-income ratio, which is one of the main reasons that otherwise credit-worthy applicants get rejected for home loans.
• Save, save, save – having enough cash shows the lender two things that are vital: 1) Fiscal responsibility, meaning that the buyer has already shown good sense in money management, and 2) Sufficient liquidity for the required down payment.

Get your paperwork in order

Lenders will want the following documents at a minimum:

• Two forms of identification, including a picture ID
• Three to six months of bank statements
• The most recent two to four paycheck records
• Federal tax returns for the past two years
• Balances on any other asset accounts, such as stocks, IRA’s, 401K’s, etc.

By preparing wisely, the buyer can greatly improve the chances of a smooth and successful loan process.