Buying your first home can be one of the most exciting times in your life. It’s the moment in which you have finally reached your full independence. You’re no longer spending your money on rent payments that in the end, will give you nothing. Buying a home means you’re making payments towards something tangible. Buying your first home can be a bit overwhelming if you’re not prepared enough, so here are a few tips that will hopefully make this a smoother process.
Check your credit
Your credit is one of the most important factors when trying to secure a home loan. If you don’t know your credit score, it is best to use one of the many free credit score tools that can be found online. Just because you make your payments each month does not mean your credit is stellar, credit scores factor in the amount of credit you use versus your credit limit. It’s best to find out your credit score now than when you are shopping for a home loan. Fixing a credit score does take time, so if your credit is low, start working on it six months before you begin house hunting.
Evaluate assets and liabilities
You should start tracking your spending and figure out where your monthly income is going. Even if you don’t have too many liabilities each month, cutting costs anywhere will be beneficial in the long run. Also, it’s best to look at your assets versus liabilities the same way lenders will be. If you’re a private contractor or straight-commission sales person, be prepared to have proof of income from the last two years for lenders.
Throughout the home buying process, staying organized will help keep your sanity. There is a lot of paperwork that has to be processed and it can easily just be lumped into one pile. Lenders are going to want to see two recent pay stubs, the previous two years’ W-2s, tax returns, and the last two months’ bank statements. Collecting and organizing all this paperwork will help keep the lending process smooth.
At this point, you should already have an idea of what you can afford. Before you meet with any lenders you should use one the of the online calculators to figure out your debt to income ratio. Although many lenders don’t have a specific ratio, old standards say no more than 28% of your monthly income should be spent on housing costs. This ratio is called the front-end ratio. Your back-end ratio shows what percentage of your monthly income covers your debt. Many lenders like to see 36% or less, but some even accept 45% or higher.
Figure out your down payment
In years past, 20% down was the standard, but recently, many lenders are accepting payments as low as 3% down. Find a lender you can trust and work with them to figure out what is best for you to put down. There are even programs that can assist buyers with certain incomes or situations. Check out the HOME Investment Partnership Program to see if you qualify.