2016 is a great year to buy a home. Mortgage rates are forecasted to increase, home prices are rising and rent is quickly outpacing wage growth. Set yourself up for the best home buying and financing experience by accomplishing these six major homebuyer resolutions.
1. Get (and Keep) Your Credit Score in Shape
If you have applied for any type of loan or credit card in the past, you know that your credit score and history are a determining factor of approval and what interest rate you are eligible for.
A minimum FICO score of 620 is required by all mortgage loans delivered to Fannie Mae. If you know your score falls short, there are several ways to improve your credit, including:
- Paying down high credit card balances
- Paying bills on time
- Disputing any errors on your credit report – you can get a copy of this from any institution that runs your credit
Meeting with a mortgage banker is essential in determining what loan option is best for your homeownership goals and financial standing. Determining the best loan option is dependent on how long you plan to stay in the home, mortgage rates, available funds for down payment, mortgage insurance premiums, income, home price and more.
Government-insured loans aim to assist those who may not otherwise qualify for conventional financing and typically allow little to no money down, gifted down payments and more flexible credit guidelines.
Convention loans adhere to guidelines set by Fannie Mae and Freddie Mac. They require a 3 percent minimum down payment, have interest rates varying by borrower credit score and loan term, and mortgage insurance premiums set by loan-to-value.
Determining the best loan option can set aside many mortgage misconceptions about down payment and credit score requirements.3. Save for Your Down Payment
Contrary to common belief, you no longer need the standard 20 percent down payment to purchase a home, but homebuyers still cite saving for a down payment as one of the biggest hurdles in their journey to homeownership. The following loan programs require these down payments:
- FHA – 3.5% minimum
- Conventional – 3% minimum
- USDA – no down payment, 100% financing
- VA – no down payment, 100% financing
Conventional and FHA loans allow cash gifts from family members to cover down payment costs. For those financing with other loan types, many allow the use of down payment assistance programs.4. Organize the Items on Your Loan Application Checklist
To complete a loan application, your lender will ask for supporting documents to verify your identity, employment, debts, finances, etc. The faster you can provide your lender with these items, the more likely your loan will process on time. Some items may include:
- Last two years W-2’s and federal tax returns
- Last 30 days paystubs
- Last two months bank statements for all financial accounts (including investments)
- Loan payment information (car, boat, etc.)
- Evidence of alimony or child support (if applicable)
- Drivers license and social security card
- Two-year residency history
You don’t need to be completely debt-free to purchase a home, but paying down high balances can improve your credit score and increase your mortgage affordability, as part of that is determined by your debt-to-income ratio.
Most debt experts recommend keeping your balances on revolving credit below 30 percent of the credit limit; 10% credit utilization is ideal. If you’re torn between paying down debt and saving for a down payment, see the pros and cons of each here.
6. Meet with a Mortgage Banker for a Pre-Approval or Loan Commitment
Most importantly, the first step to homebuying is meeting with a mortgage banker before you start looking at houses to purchase. Ask your mortgage banker about a loan commitment, which takes the norm of pre-approvals a step further.
A loan commitment is what is issued after the items on your loan application have been verified with the documents mentioned in the section above. A loan commitment states that your lender has agreed to provide you with financing for a specified amount, interest rate, loan type and loan period.
A loan commitment gives you a head start against other buyers, allowing you to:
- Present the best offer on a property. A loan commitment shows you are a serious and reliable buyer.
- Have peace of mind. You are already fully approved, pending property conditions.
- Act quickly. Your loan has already been through the lengthiest portion of the process, allowing you to expedite your purchase.
Interested in learning more about the home buying and financing process? Our Mortgage 101 Handbook is a great starter reference for first-time buyers. Download your free version below!