As a first-time homebuyer, you probably have a lot of questions about getting ready for a mortgage. Buying a home is one of the biggest purchases people will make in their lives. To make this purchase, most people will need a mortgage. There are many common misconceptions and questions when it comes to mortgages. The industry has changed and there are many different options in the journey to becoming a homeowner!
#1 – Credit
“My credit’s not great, so I’ll never qualify.” We hear this often, but do you really know what a credit report shows? A mortgage credit check is essentially a summary of your financial reliability. They are looking at debt and payment history. Did you know that FHA loans will allow you to have a credit score of 580 and still qualify in certain circumstances? Even if your credit isn’t spotless, you may still be able to qualify!
It’s often heard that pulling your credit report will hurt your credit. While this may be true, the effect could be very minimal. The first time your credit is pulled will not affect your credit as much as the second, third, and fourth time it is pulled. This could affect your credit anywhere from 2-3 points up to 15-20 points. These multiple “hard” inquiries may give the impression you are desperately choosing credit which most would view as undesirable. By contrast, a “soft” credit pull (like when you do your yearly check on your credit) would have no effect. Speaking of, make sure you check your credit report periodically. From time to time you may catch an error that you need to work on correcting!
Did you know that there is a window for mortgage shopping? You could have up to 45 days from the first time a mortgage company pulls your credit to “shop around” at other mortgage companies without it hurting your credit. So, if you have a mortgage company pull your credit on September 1, you can then go to Mortgage Company #2, Mortgage Company #3, and Mortgage Company #4 and have them pre-qualify you without it affecting your credit… as long as it’s before October 15! During this window, all mortgage inquiries will usually be treated as one single “pull”.
Note – when you are shopping around, be sure to ask about loan origination fees or discount points. Different companies offer different options and charge different amounts!
#2 – Down Payments
We hear the word down payment and some of us want to RUN! Don’t do it – Listen up! Years ago, 20% was the standard down payment, but that is not true today. You can put down as much as you like, but if you’re going for the lowest down payment possible, there are options! Some loan programs offer 0% down! Conventional loans allow a minimum down payment of 3% as long as you are a first-time homebuyer (defined as someone with no homeownership in the last 3 years) but is usually found as the most attractive option to borrowers with a strong credit score or low debt to income ratio. FHA loans offer a down payment as low as 3.5% and can be a great option with less than stellar credit or someone with more debt that wants to purchase a home. VA and USDA loans both offer 0% down programs, but these are only available to a small segment based on the geographic location of purchase (USDA) and military service (VA).
The thing about down payments is you must have proof that you have the funds. You can’t have your money stored under your mattress or shoved in a box at the top of your closet. If you have cash, put it in the bank! The mortgage company will need to see proof that you have the money. Down payments do not have to be scary. Plan ahead!
#3 – Paperwork and Time Consumption
What is the difference between pre-qualified and pre-approved? Pre-qualified is a good indication of creditworthiness, but pre-approved means you have provided documentation to support it. What is required of someone to get pre-approved? It is so simple – only 3 things are needed!
- Paystubs for the last 2 months
- Two years of tax returns and W-2s
- Two months of bank statements
In the end, all the mortgage company is trying to do is paint a picture of you for the past couple of years: job, income, payment, and debt history. Make sure you can explain any gaps in income, any change of jobs, and any reason for debt delinquencies. You can call, walk-in, or do the necessary paperwork online and get pre-qualified in as little as 15 minutes, and pre-approved very quickly as well! AMAZING!
#4 – But… how much can I afford?
There are all kinds of tools and gadgets on the internet to can help you estimate how much you can afford or for how much you qualify. A basic rule for calculating how much you can afford is (Annual Income/2) – Monthly Liabilities (this includes all debt payments) = Your monthly mortgage payment. You can also use the 28 percent/36 percent rule, which says you shouldn’t spend more than 28% of your gross monthly income on home costs and not more than 36% on total debt (including mortgage, credit card, vehicle…). It’s always best to have a conversation with your mortgage lender and let them help you. They are the experts on this and this is their job!
#5 – I’m pre-qualified – Now what?
So, you took the time and got pre-approved. Congrats! Now’s the time to shop for a home. This will require a whole different post, as shopping for a home is a big deal! Congrats again for taking the first and often scariest step!