5 things to know before Applying for a Home Mortgage

Buying a home is an exciting time, full of hope and promise for your future. But it can be an equally daunting and frustrating task. When you begin to understand that buying a home is the largest purchase you’ll likely ever make, you will easily grasp why preparing for such an event is so important.

It’s no surprise to hear people say that purchasing their home was one of the most nerve racking experiences they have encountered; and what everyone will agree on is the relief they felt when they finally ‘closed’!

With stories like this being the most common experience from home owners, it is important that you start to prepare for this event early on. From the moment the thoughts begin to swirl around in your mind about home ownership; that is the very moment you need to start getting your plan together. Buying a home can sometimes take years, from the inception of planning, to the time you actually start looking for a property, to the loan approval. I know it sounds like a long time, but the challenges most people face when they want to buy is handling the unexpected surprises that come up in the process. Many of these unforseen mishaps could set you back months even though some things could have been avoided early on with proper planning.

I’ve put together 5 critical steps you should take before you apply for a home loan.  If you follow these tips, you can avoid pitfalls and disappointments, and be well on your way to home ownership in no time!

  1. Pull your credit!
    You’ve heard it a million times, you’ve seen the commercials, you know credit is important. But do you really know? Well, that’s why its number 1 on the list! CREDIT IS KEY! Your credit is the doorway to the home of your dreams. Don’t get caught off guard about it. Credit reports are updated every month, so what you thought was perfect credit this month, maybe not be case the next. If you are thinking about purchasing a home, enroll in a credit monitoring program, for less than the price of your daily a Starbucks coffee habit, you can have access to your credit report and alerts. Review and monitor everything for accuracy. You want to ensure you have had no late payments for at least the last 24 months. Although your “score” is important, what’s actually on/in the report is more crucial. Think ‘the proof is in the pudding’ method.
  2. Pay off your credit cards!
    Pay off or pay down your credit card balances and any other revolving debt you have. Yes, even the ones that have zero interest. Lenders want to see on average less that 41% debt in relation to your income. Also carrying high balances on credit cards can lower your score, and could be seen by lenders as a credit-crisis-issue to come. Lenders look at how long you have been carrying large balances, they wonder why haven’t you paid them off, and that maybe you can’t handle a bigger amount of debt. So show them you are credit worthy, and have your credit card balances with 50% or less.
  3. Check you’re saving account balances!
    Know where you stand as far as a down payment is concerned, most mortgage lenders require a down payment of anywhere between 3%-25% I know thats a big variance, but i’m not here today to discuss the many different loan programs out there. What you need to simply understand is that at a minimum you are looking at 3% down plus closing costs for first time homebuyers, if you qualify. Anyone else, you are at the higher end of the deposit requirements. Today, I did the calculations for a client; she was interested in purchasing a Condo i/a/o $385,000. She is required to put 25% down on that property (again not getting into loan programs here) that equals $96,250.00 Now do you see why sometimes buying a home can take years to accomplish? But if you qualified for only 3% down on that same amount, that equals $11,550. More manageable right?
  4. Start a savings plan
    If after you have reviewed your balances you find you may be short on the cash you need to buy, put a saving plan place. Start with making a household spending budget and review where you can cut costs. For example making coffee at home can save you $25 a week, that’s a total of $100 a month, you can be saving; in one year you will have $1200! There are a lot of budgeting tips available online, and plenty of ways to save. The trick is to stick to it. Keep your vision clear, and the goal in mind. Set a weekly or monthly savings target, try to have a specific amount in mind that you want to save consistently; then reward your self with a small treat when you hit that goal. You need to stay motivated, this is one of the toughest items to stick to!
  5.  How much money are you making?                                                                        Review all your income sources and make sure that you tax returns are reflecting your top earnings. Its important that you show all income in order to increase your chances to qualify for your loan, especially because the amount you qualify for relies on it. If you work and are issued a W-2 at the end of the year, lenders will you use your “gross” income. That’s the amount you make before taxes are taken away. However, if you are self-employed the plot thickens. Lenders want to see two years consistent income and that each year, you are making more money than the year before. Sharp dips in income and excess tax deductions hurt your chances for a higher loan amount or maybe even obtaining an approval, period. While no one wants to pay Uncle Sam, you need to put yourself in a position to win. Speak to your accountant. Let him/her know you want to buy a home in the coming year, and you need your tax returns to reflect solid and consistent earnings. Having your accountant leverage deductions such as “depreciation” when possible with help you with those tax breaks you like, and lenders add back “depreciation” to your income, so it’s a win/win for both

Everyones financial situation is different, some of you could be farther ahead in the game than others, while many of you could be starting from scratch. Home buying has enough peaks and valleys to deal with, So try to control what you can in the pre-home buying process. Being prepared for the biggest purchase you will face is crucial to your success in obtaining the American dream of home ownership.

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