First Time Homebuyer Basics – Where Do I Start?
Start at the Beginning
Buying your first home is one of the most exciting things you will ever do. It can also be a very daunting experience trying to keep track of all of the moving parts, paperwork, and qualifying guidelines.
The home buying journey is traveled one step at a time. Familiarizing yourself with the process will help to prevent surprises along the way, and give you the opportunity prepare for each stage of the process as it unfolds.
Let’s start at the very beginning by addressing the question that almost all homebuyers have “Where do I start?”. The first step to buying a home is getting approved for a home loan.
4 Things Every Lender Will Ask You
Being prepared to provide your lender with the information and documents they need is the very first step toward demystifying the qualifying process. There are 4 things that every lender will require before you can be pre-approved.
Employment History – On the mortgage loan application, you will be asked for a recent 2 year history of employment. If you have not been steadily employed for the past 2 years, speak to your lender about options that might be available to fulfill this requirement.
Prior Students and Military personnel are common examples of homebuyers that may not have a full 2 year’s employment history. If you are self employed, or are paid with a 1099, you would need a full 2 year history of employment with 2 year’s tax returns as evidence.
If you experienced gaps of employment due to disability, maternity leave, lay-off or any other reason, speak to your lender about the reason and the length of time you were out of work. You may be required to write a letter of explanation and ask for an exception to the 2 year employment history requirement.
Credit History – Your credit history is everything that shows up on your consumer credit report. A lack of credit, recent late payments, judgements and tax liens are a few of the issues that could require some attention before you would be eligible for a home loan.
Depending on which loan program you are trying to qualify for, the credit score may or may not have a big impact on your approval. In some cases, as long as you meet the minimum allowable credit score you should be eligible for the loan program.
In other cases, lower credit scores can affect your ability to qualify and increase your closing costs and interest rate.
Document Income – Consistent income is one of the most important factors considered when applying for a home mortgage loan. If you are a W2 employee, you will need to give the lender your last 2 year’s W2’s.
If you are paid by 1099, self employed, receive more than 25% of your income from tips or bonuses, receive income from other sources or if you write off non-reimbursed employee expenses (Form 2106), then you will need to provide your lender with 2 years of tax returns, including all schedules.
Income from second, or part time jobs can only be counted if you show a pattern of receiving that part time income for the past 2 years. If one of the borrowers just started working a second job to help with the household income, and had never had a second job prior to that, the income would not be able to be used for qualifying for the loan.
Document Assets – Documenting where the money is coming from for your down payment and closing costs will always be required by the lender.
If you do not have all of the money for your down payment or closing costs, and you intend to borrow or get a gift from a blood or marriage relative, make sure you alert your loan officer right away.
There is a right way, and a wrong way to handle gift funds – not properly documenting the source of all funds to close could postpone or even cancel your purchase transaction.
Avoid These Common Mistakes
Avoiding common mistakes is as important as making the right decisions. There are three mistakes that I see far too often:
Making Offers without a Loan Approval – I know this one sounds like a “no-brainer” but I assure you, this is the most common cause of headaches that I see. Inexperienced real estate agents may jump in a car and start showing you homes making the actual financing of the home a secondary concern.
While no permanent damage can be done by making offers on homes that you do not qualify for, the emotional roller coaster you have just boarded can unnecessarily create stress, and potentially cause you to miss out on an opportunity to purchase the dream home that you do qualify for.
Getting Pre-Qualified instead of Pre-Approved – There is a huge difference between getting a pre-qualification and a pre-approval. A pre-qualification is typically less in depth, and not supported by documentation.
With a pre-approval, the lender will complete a loan application (this can be done over the phone or online), run your credit and ask for supporting documentation for all of the items above.
Too many times we see borrowers with a pre-qualification letter that some lender gave them without even making sure that the homebuyer qualifies. It’s mind boggling that a lender and/or real estate agent would do business that way, but it happens.
Correctly Documenting Gift or Downpayment Funds – The reason why this particular mistake is so devastating is that an inexperienced lender may not identify this issue until you’re trying to close escrow.
Making this mistake will, at the very least postpone the purchase of your new home, and at the very worst, could cause you to not qualify for the home.
If you are borrowing or getting a gift for any of the money you are using for down payment or closing costs, contact your lender immediately and discuss the proper way to document and track the paper trail.
Building Your Buying Team
A referral from your real estate agent or lender is a great place to start when building your home buyer team.
Communication between your lender and agent is the single most important factor in a smooth transaction. Finding a lender and agent that has worked together before is a good start, but not a guarantee that things will go smoothly.
If you are not able to reach your lender or agent by phone, email or text when you have a question that is most likely a sign that it could be a bumpy road further along in the process.
If you have been a reader of ours and have questions about finding the right lender and real estate agent team, feel free to leave a question/comment below, give us a call or shoot me an email.