Buying a home is different from other purchases. Because the purchase is so expensive, it almost always requires financing. Thus getting ready is the first step in buying a home, particularly a first home. To prepare yourselves, you need to be focusing on what the lender will ultimately need to know to reassure themselves that this loan will be repaid with interest. There are four basic things that all lenders look at:
Your past behavior in paying your bills, on time and in full, is scrutinized. This is generally considered the first indicator of the risk involved in lending to you. You may have had a period of unemployment, or other hardship, that caused you to miss a payment. Be prepared to explain it if it occurred in the last 2 to 3 years. While you may not qualify for the best interest rate or loan, there are loans for people who had a temporary setback.
Capacity To Repay
Your current income plays a huge part in your ability to make your monthly payments. As a result, every lender will look at this most closely when they are getting ready to make you a loan. Income needs to be documented. If a large part of your income is from tips or other cash payments, it needs to show up in your tax returns.
This refers to the money you have available to pay the fees involved in buying a home. Such fees range from the credit report needed at the beginning all the way through to the escrow and title fees you have to pay at the end of the process just before you get the keys to your new home. While there are many fees (loan origination, appraisal, home inspection and hazard insurance to name a few), there are special loans that allow you to finance most of these fees, particularly if you are a first time buyer.
Most simply, the home you are buying serves as the collateral on the loan. The lender will need to make sure that the home is worth at least as much as you are borrowing. In most cases, a lender will expect it to be worth a bit more than the loan. This difference between the value of the home and the amount of the loan is your down-payment.
Getting ready does not need to be difficult. Gather the last 2 – 3 years’ tax returns and W-2 (if employed) and the last two months paystubs. If self-employed, you will need to show tax returns, Profit and Loss Statements and 1099s. From here, the lender will consult with you on your ability to qualify, perhaps even explaining what you can do to improve your chances at qualifying.
If you’d like to informally discuss this or your situation, contact me on my cell-phone at 760 622 5087 or at [email protected]