1) Research All Options: If you are on this page, then you are taking the first step already. Research your options and do your due diligence on what mortgage fits your needs. You will spend a lot of time deciding what house suits your needs, why would you not take the same time when deciding how to obtain hundreds of thousands of dollars. Making a small mistake could mean the difference between paying thousands of dollars extra that you should not have to pay.
2) Check Your Credit: The first step to preparing to buy a home is take a look at your credit report a few months before you are ready to start looking at houses. This will enable you to make sure you are in good standing credit-wise and able to secure a loan at the best possible rate and terms.
If your credit score is below a 680, you should consider taking steps to improve your credit score (link to the credit score page that provides tips to improve a score). The reason for this is to give yourself enough time to take any needed actions, such as correcting mistakes, satisfying any unresolved collections, pay down debts that are negatively impacting your credit, and other actions that can help improve your credit score.
Doing this proactively will eliminate the need to take these actions when you are in the middle of the home buying process, possibly delaying the purchase of a home. Nothing good comes from delaying the purchase, especially in a hot real estate market because someone else with better credit can swoop in and steal your dream home from you. By being proactive, you are setting yourself up for a smooth closing and removing any obstacles before they can become obstacles.
3) Pay Down Your Debts First: Pay down the debts listed on your credit report first, before you begin saving for a down payment. The reason to do this in the order listed is because you will lower your debt balances, which report positively on your credit report, increasing your credit score and once your debts are paid off, this will allow you to save more money each month, resulting in a larger down payment because you are not saddled with debt payments each month. Because your credit score is higher and you have more for a down payment, you will show you are committed to purchasing a house and appear less risky for lenders, which will enable you to receive the best terms and rates available. For many people trying to get a loan, one of the main reasons they are unable to get approved is because they have too much debt.
All of this means your monthly payment will go down and the total cost to borrow the money is reduced as well. What is more appealing? Paying $30,000 extra over 30 years to get less house, but right now or paying $30,000 less over 30 years to wait 6 months and you get more house for your money.
4) Organizing the Required Documents: To get pre-approved, you will need:
- Pay stubs to support your monthly income
- Bank/asset statements to show you have enough for closing costs and a down payment
- Personal identification information to prevent fraud and someone taking a loan out in your name. This is also used to run your credit report.
To ensure a smooth loan process, you should begin organizing the following documents to have ready to send to the lender:
- 2 years of Federal tax returns and W-2 statements
- Pay stubs – at least 30 day’s worth
- Bank/asset statements
- If necessary, documentation of where your down payment is coming from if it is a gift or is coming from money that cannot be traced back to your monthly income.
- If necessary, documentation of additional income from alimony, child support, etc.
- If necessary, documentation on the amount of child support or alimony you are required to pay each month.
- If you are self-employed, you will need 2 years of Federal tax returns (all schedules) to be eligible for a mortgage. If you have been self-employed for one year, you are not eligible for a mortgage and need to wait an additional year. The reason for this is to show to the lender that you can show stability being self-employed and will not go bankrupt or be unable to repay the mortgage if the business goes south.
- If you own rental property and would like to count the rental income in your monthly income to qualify for a larger loan, you will need to provide 2 years of federal tax returns that shows the rental income received.