The steps to buying a home go from intimidating to simple with a little organization. With these simple steps, you’ll feel prepared to buy a house and will learn how to work with your lender to find the most affordable loan for your home.
This includes understanding the documentation you’ll need, how much home you can afford, and what lender qualifications mean to you.
With these three simple steps to buying a home, we’ll help you get organized so you can get the home you want with a loan you can afford.
1. Gather your documentation
Documentation helps a loan officer make recommendations on what loan options will work best for you, as well as what they can approve you for without taking on too much risk. Often the more financial history and consistency you can prove, the better.
As there are many unique financial situations for homebuyers, each area that affects your income, employment, assets, and liabilities needs documentation to support it. Specifics will differ for every homebuyer, so check with your lender about their requirements.
Income and Employment
Proving you have stable income helps to show that you can afford monthly mortgage payments. A lender will often request the following documentation:
- Pay stubs showing proof of income for at least the past month
- Employment history, likely for the past two years, including contact information for former companies and an explanation for employment gaps
- Proof of employment from your current employer, confirming your hire date and employment status
- Proof of additional income, especially if it will be used toward paying your mortgage, such as child support, a pension, assistance, or Social Security benefits
- W2s from the past two years
- If you’re self-employed, a contractor, or earn income outside of what is shown in a W2, you’ll at least need to provide your last two tax returns
An understanding of how you earn and manage income helps a lender see that you have reliable finances. They’ll likely request to see:
- Bank statements for the past month to two months
- The past two months worth of statements for other assets, such as investment and retirement accounts, stocks, bonds, and other securities
- If you currently own a home or another property, or you owned real estate in the past, you’ll need to provide proof or ownership or sale
You’ll also need to show your existing debts:
- Recent statements that show what you owe in credit card debt, another mortgage, auto loans, or any other debts
- Account numbers and payment amounts for these debts
2. Determine what you can afford
Assessing your income, assets, and liabilities helps you understand your current finances. From here, look at what new expenses you’ll take on by purchasing a home, including two major costs – a down payment and monthly mortgage payments.
The down payment ranges from as low as 3% to as high as 20% of the cost of the home. Using these percentages, you can calculate that, for example, purchasing a $200,000 home could involve a down payment of $6,000-$40,000, depending on your loan. With this range, speaking to a lender can help you understand what loan options you’re eligible for to help you decide how much home you can afford.
Typically the more you can put down, the cheaper your monthly payments will be. If you put less money down, you may take on higher monthly payments to cover costs such as mortgage insurance premiums.
Monthly mortgage payments
Calculating the affordability of monthly mortgage payments is important for understanding the ongoing expense of owning a home. This involves understanding your loan options, potential interest rates, and closing costs, which you can gain more specifics on by speaking with a lender.
Outside of the mortgage costs, you’ll need to compare the amount you pay each month to the amount you earn to understand how much income you can put toward a mortgage payment.
Factor in additional costs of owning a home, such as property taxes, utilities, homeowners insurance, and potential homeowners association fees.
3. Understand lender qualifications
Beyond the documentation you provide, your lender uses several qualifiers to assess your eligibility for a mortgage. To understand how you qualify, start by getting familiar with your credit score and debt-to-income ratio.
When it comes to getting approved for a mortgage, a higher score will likely get you a better interest rate and chance of approval.
Credit score requirements for mortgages can fluctuate, but there are many loan programs available or you can work to improve your score.
Using a free site like CreditKarma, CreditSesame, or CreditWise can be a quick way to get an idea of how you’re doing with your credit. Keep in mind that when you go to qualify for your mortgage the lender needs to request your actual credit report and score, which will give official credit scores and the full details of your credit history.
Your debt-to-income (DTI) ratio* is the equation that compares how much you earn, to how much you owe each month. Lenders use it to assess their risk when lending you money for a mortgage.
A DTI ratio of under 50% is commonly accepted. If your DTI ratio is lower, you might be able to borrow a larger amount. If it’s higher, you might have trouble getting approved for the amount you want. In this case, it’s best to see where you can pay off debts and earn more income to improve your ratio. To learn more about your DTI ratio and how it will effect your loan talk to one of our loan professionals.
* Debt-To-Income (DTI) ratio is monthly debt/expenses divided by gross monthly income
By getting organized, you can start the homebuying process with clarity and confidence. From here, you’re ready to speak with a loan officer for their recommendations on how to get approved for a loan you can afford.
If you’re interested in buying a home, we can help. Reach out to discuss your specific needs and loan options.