How does someone get financially ready when buying their first home? What type of things are needed?
I cannot stress enough how important it is to ensure that you are financially ready before you start looking for a home! That means understanding how much you can afford, ensuring your credit score is as good as it can possibly be, and being pre-qualified for a loan.
Getting your pre-approval letter may seem a little daunting at first, but if you wait until you make an offer it will leave you scrambling to find and submit all of your documents and stressing whether the lender can get your pre-approval done in time – especially if there are multiple offers on a home you really want! Starting this process before you need it affords you the opportunity to fix any glitches on your credit report and the time to gather everything your lender will need.
A simple first step is downloading a free credit monitoring app, such as Credit Sesame or Credit Karma, where you can access your credit score. It’s a quick and easy way to get an idea of where you stand. In some instances, you may realize that perhaps you should wait a little while and build your credit in order to successfully qualify for a mortgage. You’re entitled to a free credit report from each of the agencies every 12 months (you can get it through annualcreditreport.com), so it’s worth checking for any potential issues or concerns as disputing inaccuracies can increase your score quickly if a negative item is resolved in your favor.
A FICO (credit) score is calculated using a variety of data and is classified into five categories: payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%) (myfico.com). Late payments are factored into your credit history, so making sure that all your bills are paid by their due date is important. Consider paying down any balances you may be carrying on credit cards too as lenders will look at how much credit you have versus how much you owe. Do not cancel any credit cards at this time – a credit card that you never use but have had for a while could help your “length of credit history” score. And just as you shouldn’t cancel a credit card, you also shouldn’t apply for a new one either as lender inquiries can impact your “new credit” score too (however, checking your own credit with a credit monitoring app does not affect your score). A “very poor score” ranges between 300-579, a “fair” score from 580-669, a “good” score between 670-739, a “very good” score from 740-799, and an “exceptional” score ranges between 800-840 (experian.com). Although every lender may differ, typically the higher your credit score is the more options you will have and the more favorable your interest rate will be.
Once my clients have an idea of their credit score, I suggest that they meet with a few different lenders in order to compare interest rates and closing costs. Once you’ve decided on a lender, a loan officer will help you determine what your maximum purchase price is and how real estate taxes will affect your monthly mortgage payment. There are three main criteria that lenders look for when applying for a mortgage: income, credit, and down payment. All three will need to be within the lender’s mortgage guidelines, and a loan officer will go over those with you. They’ll require some basic income documents to verify your income, such as your last two years of tax returns, W2’s, and paystubs. If you are self-employed you may need to provide business tax returns as well. Once you’ve submitted all the required documentation and the lender has issued an approval, your loan officer will provide you with a pre-approval letter that indicates you have been vetted and will qualify for a mortgage. When your agent presents an offer on your behalf, that pre-approval letter can strengthen your offer as it signals that you’re a serious buyer.
Millions of new homebuyers go through this process each year. If you take the time to make sure that you are financially ready when you first start house hunting, you’ll be in great shape when your agent submits that offer on your dream home!
John Messina, GRI, SRES
Associate Real Estate Broker
Global Real Estate Advisor
Gold Circle of Excellence
Daniel Gale Sotheby’s International Realty
Cold Spring Harbor Office
5 Main Street, Cold Spring Harbor, NY