When you decide to buy a house, it can be exciting and fun to plan what life will look like in your new place. Simultaneously, it can be daunting; you may wonder if you have all your ducks in a row to make that plan actually happen.
It's important to have the right foundation on which to begin your search. Here are four things you should assess before you contact a real estate agent or a mortgage professional, so you know you are indeed ready to make a house your home.
Lenders want to see that your income has been consistent and will be in the future. If you have had fluctuations in your yearly income (such as commission-based income) or gaps in your employment, it may be seen as a red flag to an underwriter. If you made $70,000 one year and $45,000 the next, that can significantly change how you will be able to handle mortgage payments along with other monthly expenses. You should have a two-year work history and documentation of a fairly consistent salary. This includes W-2 forms and recent paycheck statements.
Not only is having money saved a good idea for your future, it is also a risk reducer for underwriters. Buying and maintaining a home costs money, and if you don’t have adequate savings for a down payment, closing costs, escrow account and monthly utilities, it’s going to be hard to prove you can still make your mortgage payments should unexpected costs pop up in your life. A good practice is to have six months’ worth of mortgage payments accessible across all of your assets should you need to liquidate them under hardship.
Your credit score is important because the better your score is, the more you will qualify for the best interest rates. A score above 700 is preferable, but there are still great options out there for folks with credit ranging from 620–700. FHA loans even allow for a credit score of 580, but it is best to keep it as high as possible.
Aside from the score, you should review your entire credit profile to make sure there are no errors. You may have a bill that is marked outstanding when you actually paid it but it never came off your profile and is hurting your score. You should contact the three main credit bureaus – Equifax, Experian and TransUnion – to correct any reporting errors before trying to qualify for a loan. Going to a free credit report site allows you to see your score and understand what you will need to do to improve it if necessary so you can proceed with home financing.
The property type you select has an effect on your financing abilities as well. Many lenders do not offer financing for houses on farmland or manufactured homes, in which case a local bank or credit union may be your best option. Co-op financing is easier to obtain in states where that type of housing is more prevalent. If you are buying a condominium, there are occupancy requirements, especially if it is a new development.
Not only is it important to talk to your lender about the type of home you’re interested in, it is also necessary to indicate how you intend to use the property. Whether it will serve as a primary residence, a second home or an investment property can affect qualification, interest rates and more.
If you have a good understanding of your credit score and the type of home you would like to buy, and if you can document your income and assets, you’ll be able to create a smooth home loan process that can get you into the house of your dreams, faster.