The Ultimate Money Checklist to Complete Before Buying a Home
So, you’ve decided to buy a home. Congratulations, you’re leaving the world of renting behind and investing in an asset you’ll come to cherish. But before you start researching homes, you’ll want to make sure your finances are in tip-top shape. After all, it’s next-to-impossible to pay for a home if your credit is in the gutter and/or you can’t afford a down payment. With those factors in mind, here’s a financial to-do list that will make the home-buying process easier.
1. Get a Steady Income
If you’ve spent the past few years bouncing from job to job, now’s the time to look for something more permanent. The reason: Changing jobs, especially at the last minute between the time a loan is approved and the close of escrow, can kill the deal, according to Joe Parsons, senior loan officer with PFS Funding in Dublin, California. Lenders always perform a verbal verification of employment within 24 hours of funding a loan, so the last thing you want to do is change your employment status and wreck your chances of having it go through.
2. Calculate Your Debt-to-Income Ratio
Every would-be homeowner should understand their debt-to-income ratio, or DTI, which has gross monthly income on one side and total debt on the other, Parsons said. Whether you owe money on taxes or a credit card balance, it’s important to see the big picture. DTI can affect borrowers’ ability to get approval for loans if their debt outweighs the money coming in. And, in some cases, a lender may say that in order to approve the loan, you’ll need to work on clearing your debt or even close an account.
3. Pay Down Debts
Knowing your debt-to-income ratio is one thing, improving it is another. If you crunched the numbers and don’t like the result, you’ll need to make changes, Parsons said. That may mean putting your credit cards on ice, learning the difference between wants and needs, and sticking to a budget to help prevent overspending. Not only will your credit improve over time, your DTI will look a lot better — to you and your lender.
4. Watch Credit Card Payments
A recent change to Fannie Mae’s automated underwriting system on June 25 means trended credit card data plays a bigger role in mortgage approval. The new data shows not just your loan balance but whether you’ve made payments on time. So, if you’re known to slack on paying your bills, work on breaking the habit. You want to be considered a “transactor” — a borrower who pays their balances in full every month — not a revolver, who carries a balance.
5. Take a Look at Your Credit
When considering a new line of credit, it’s important to know where your credit stands so you don’t find any surprises that throw a wrench in the loan-approval process, Heather McRae, senior loan officer with Chicago Financial Services, said via email. Your credit score helps determine your eligibility for various rates, so if you need to improve it, you’ll want to know sooner than later.
6. Determine Your Monthly Housing Budget
Knowing how much you want to spend on your monthly housing payment is part of any good financial plan, McRae said. She added, “if you are renting right now, can you use your current monthly rental payment as a guide? Ask yourself, ‘am I comfortable with how much I pay? Do I want to go up or down?’ ” This limit will prevent you from buying more house than you can afford.
7. Determine Your Down Payment
You’ve got to know how much money you need to buy a home. “As a general rule of thumb, I would advise to have at least 5% of the purchase price saved,” McRae said. “There are programs that require as little as 3% for a down payment,” but remember, you will also have to cover closing costs. Other programs even require a higher down payment. Each situation is different.
8. Get Pre-Approval
Filling out an application with all the requisite documents — think pay stubs, tax returns, bank statements and so on — is part of the mortgage pre-approval process, Parsons said. When the loan officer pre-underwrites your loan application, you’ll find out how much home you qualify for.
9. Gather Proof of Income
From recent pay stubs to tax forms like W2s and 1099s, your lender will want to see proof of income, writes A.J. Smith. Some applicants are even required to provide the names and addresses of their employers from the past two years. Documents accounting for Social Security and/or disability payments, pension incomes, child support, alimony, bonuses and overtime may also be required, depending on your situation.
10. Gather Proof of Assets
Got assets? If you have savings accounts, stocks, bonds, mutual funds, CDs, retirement accounts, a car and other real estate, for example, you’ll need to provide their documentation as well. This is so you can verify that you can cover a down payment, writes Smith, and that you are being honest about the source of your money.
11. Gather Tax Returns
“If you’re self-employed, the only way a lender can determine your income is by examining your tax returns,” writes Sheldon. “As a self-employed worker, these documents show how much you took home versus your net income.” Occasionally, you can get away with using just one tax return, such as when you go from working full-time to being a contractor, but most lenders will ask for two years’ worth.
12. Research Down Payment Assistance
If you’re light on cash, you may want to seek down payment assistance to get your foot in the door. This can be sponsored by a local, state or government entity or entity grant, according to Scott Sheldon, a Credit.com contributor. Though these programs are scarce, you may still have a shot at qualifying if you can find one. Just be sure to do your research to see which option is best for you.
For information on buying and selling in Santa Barbara contact South Coast Real Estate Expert Karen Spechler.
By Jill Krasny