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Top 10 Tips for First-Time Homebuyers

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Deciding you are ready to buy a home is exciting and overwhelming at the same time. There are many new terms you must know and facts you must consider. Before you let yourself get overwhelmed, consider the following top 10 tips for first-time homebuyers.

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1) Know how much home you can afford

You should do this before you look at homes. You need to know what you can afford. This isn’t the number a lender throws at you, based on a few figures you verbally provided. This is after you sit down and look at your budget closely.

Remember, your mortgage consists of more than just principal and interest. You’ll also owe real estate taxes and homeowner’s insurance. If you put less than 20% down on the home, you’ll also pay Private Mortgage Insurance. If you have a concrete number in your head regarding what you can afford, you’ll resist the urge to take a larger mortgage.

2) Know your credit history

Knowing your credit history will help you know what type of loan and/or rate you deserve. The more information you have, the better! Pull your free credit report and look it over. Is everything accurate? If not, file a dispute.

Once you know everything is accurate, look at your history over the last 12 months. Do you have any late payments? Are your outstanding balances close to your available credit? Do you have too many credit cards? Each of these issues can negatively affect your credit score.

Aim to have no late payments in the last 12 months and have only 20% of your available credit outstanding. Also, the older your accounts are, the better it is for your credit score. When your credit is in good shape, you have a better chance of securing a good loan program.

3) Explore all of your loan options

If there’s one thing you do, shop around! Don’t let one lender tell you that you won’t find a program anywhere else. There are FHA, VA, USDA, and conventional programs to explore. Each offers its own benefits.

For example, you may qualify for a conventional loan, but if you don’t put 20% down, you’ll pay PMI. The FHA loan might provide a better option for you depending on the cost of the PMI on the conventional loan. You won’t know which loan is right until you shop around and compare.

4) Get a pre-approval before shopping for a home

Bidding on a home without a preapproval will not win you the bid. Sellers only want qualified buyers. Otherwise, they could be wasting their time on someone that can’t even afford the loan. Do yourself a favor and shop around for lenders and programs before shopping for a home. Not only does it give you the leg up on the competition, it lets you know what you can afford before you start shopping for a home.

5) Estimate high for your down payment and closing costs

You likely know how much money you have for a down payment, but don’t forget closing costs. They can cost as much as 6% of your loan amount. If you don’t have any more cash, the money may have to come from your down payment. This could affect the loan program use.

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When you determine how much you will need, estimate high. Closing costs are usually between 3-6% of the loan amount, but take the higher amount. This way you are prepared for anything when it comes time for the closing.

6) Determine if paying points makes sense.

Paying points may sound good to get a lower interest rate, but it depends on your circumstances. If you won’t stay in the home for at least 5 years, it may not make sense. Consider your long-term plans and go from there. Calculate how long it would take you to make up the cost of the point based on the monthly savings. If it will take too long, it doesn’t make sense to pay the point. You’ll move before you ever see the benefit of the lower rate.

7) Have contingencies on your purchase contract

Unless you know without a doubt that you can get a mortgage, include a financing contingency on your purchase contract. This gives you around 2 weeks to secure financing with no conditions. If your financing falls through, you can cancel the contract and not lose any money.

8) Compare rates and closing costs

Don’t focus only on the interest rate the lender quoted. Look at the closing costs too. Sometimes a higher rate makes more sense in exchange for lower closing costs. Looking at the APR provided on the Loan Estimate will give you a better idea of the cost over the loan’s life. Choosing the lower APR will save you the most money in the end.

9) Don’t take an adjustable rate mortgage for the low rate

An adjustable rate loan may seem tempting at first. That lower teaser rate looks good, but you have to think of the long term. That teaser rate will only last between 3 and 5 years. Then what? You’ll have a higher rate and payment that you may or may not be able to afford.

Compare the fixed rate and the adjustable rate side-by-side. Then ask the lender what the payment would be on the worst-case scenario (the maximum the rate would adjust). Only then can you make the right decision.

10) Plan for what you don’t know

When it comes to a mortgage and real estate, there are no givens. Always plan for the unexpected – have more money than necessary at the closing. Respond quickly to underwriter’s requests. Work closely with the seller. This way you are always in the loop and know what is going on.

You never know when you’ll have to provide more documentation or pay for another service. Planning for the worst can help you handle the speed bumps a little easier throughout the home buying process.

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Eyes On The Prize: Ways To Save For a Down Payment On a Home

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Since the moment you decided to buy a home of your own, you have probably heard it all by now. Save for a down payment, plan ahead, gather all the paperwork, increase your income and all that jazz. And while you go through all that process and preparation, there are a few struggles that you need to deal with as you go on.

For starters, applying for a loan can be quite strenuous. Getting approval means you need to go through the necessary steps to qualify and that has its own hurdles. House hunting is another thing, too. You need to look for the perfect house that fits your needs. You need to know that the property you’re about to purchase is something that you can live in for the long haul. These are only some of the few things you need to go through when buying a house.

Along with those things, there’s definitely no denying that saving money for a down payment could be a little tricky especially if you aren’t very particular about it. Sure, there are home loans that come with lower or no down payment required. But on the surface, buying a house doesn’t come cheap. But there are simple ways that could help meet your goal in saving enough money to put down for a house. Here are some ways:

Try a side hustle

If you have extra time on your hands, you might want to monetize a skill that you are a master of. If you are a crafty person, maybe it’s a good idea to put your creation out there. Sell a product you know how to do. These days, people are into homemade and/or products that are easy to learn. If you like that, you can make some and sell it to your friends too.

Other than that, your side hustle could be something like tutoring, copywriting or even dog sitting. If you are willing, profits from extra income could help add up to your savings.

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Prioritize your expenses

Know where your money should go. List things of importance. Sacrifice some of those that you don’t really need. The goal is to end up with more money saved than spent.

These could come from the simplest things. If you already have a lot of clothes, maybe you could forgo the latest fashion sale in the market. Subscriptions could be cut down, too. For example, if you don’t need cable subscription because you spend most of your time at work or you’d rather watch your favorite shows on your phone then you can cut that down from your expenses, too.

Try not to add up more debt

This is something you hear quite a lot. But then it bears repeating, too. Minimize your credit card usage as much as possible and don’t add a new credit card on your account. That would only encourage you to spend some more. This doesn’t only make you owe more money. It could also put a dent in your credit score which could lessen your chances of qualifying for a home loan.

Write it all down

It’s quite helpful if you track all your expenses and savings. This way, you would know where your money is going. It’s also a good strategy if you want to evaluate and restructure your spending habits. In the end, it pays to be on top of all your finances.

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What are Some Mistakes First Time Home Buyers Make?

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Buying your first home is exciting. It’s so exciting, in fact, that you can easily get wrapped up in the emotions. Before you jump in head first, learn the common mistakes some first-time homebuyers make. This way you can avoid these issues and enjoy your new status as a homeowner.

Forgetting About Other Costs

Buying a home is more than about paying the cost of the home. Let’s say you bid $150,000 on a home and the seller accepts it. You have many more expenses outside of that $150,000 to consider. For starters, there is:

  • Homeowner’s insurance
  • Property taxes
  • Maintenance
  • Homeowner’s association fees
  • Utilities
  • Furnishings
  • Appliances
  • Repairs

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When you figure out your budget, account for any potential expenses. Have an emergency fund for unexpected repairs. You should also account for rising taxes and insurance. First-time homebuyers may overlook the fact that home’s appreciate. This usually means higher taxes and insurance. Year-round maintenance and furnishing the home should also play a role.

Not Thinking About Other Debts

Your debt ratio plays an important role in your ability to secure a mortgage. With a high ratio, you may not be able to secure an approval. Two of the common debts that hold borrowers back from approval are student loans and auto loans. Student loans aren’t something you can help. If you took them out several years ago, you just have to work on paying them down. Doing what you can to minimize those payments may help, though.

Consider your options for debt consolidation or even student loan forgiveness. There are many ways the government helps you make your student loans more affordable. You have to ask for the help, though. Talking to your current loan servicer can help.

Car loans, on the other hand, you may be able to control. While you probably need a car, you don’t need a fancy one. If the car payment is too high, consider a cheaper car. One you can pay cash for or that will have a lower loan payment. This way you can lower your debt ratio and possibly afford more home. In some cases, it makes the difference between a loan approval and denial.

Making Large Purchases After Signing the Contract

Don’t make the mistake of thinking you can do what you want once the lender pulls your credit. If you only have a pre-approval, the lender will pull your credit at least two more times. The first is when you sign the contract. Unless you sign one within a few weeks after getting the preapproval, the lender needs to make sure nothing changed. Many lenders also pull credit right before the closing, again for the same reason.

Once you sign a contract, don’t charge your credit cards or open a new one. Wait until you close on the loan to buy furniture or make any other large purchases. This way you can preserve your credit score and not put your approval at risk.

Not Shopping for a Lender

Many first-time homebuyers use their current bank for their mortgage. This may work great for you. But, how do you know what other options are available? Shopping around with at least 3 lenders is ideal. This way you know what is available to you. Different lenders may have different interest rates, terms, and closing costs. Remember, this is one of the largest investments of your life. You want to pay as little as possible and have the best terms. Don’t take what your current bank provides at face value. Have something to compare it to so you know what is a good deal and what isn’t.

Shopping for a Home Without a Preapproval

This occurs all too often. Buyers are excited to see what is out there. They start looking at homes before they talk to a lender. This is bad for two reasons:

  • You don’t know what you can afford. So how do you know which homes to look at?
  • Sellers often don’t want to waste their time on buyers without a preapproval.

The preapproval process may only take one day. You provide the lender with personal identifying information, such as your address and social security number. You also provide your financial documents. Things like your paystubs, W-2s, and bank statements are all they need. Once they pull your credit and ask questions about your employment, they can determine what you can afford.

The preapproval letter can help you stay within your budget when you shop. What’s the point of looking at homes you can’t afford? You waste your time and that of the seller.

Skipping the Home Inspection is One of the Biggest Mistakes

We know buying a home is expensive. It seems like every time you turn around lenders are asking for money for something else. There are certain expenses you just shouldn’t skip, though. The inspection is one of them! While many loan programs make the inspection optional, we consider it more of a mandatory thing. It helps you know what is wrong with the home. Sure, the appraisal can give you a basic idea, but that’s only at the surface. The appraisal doesn’t get the nitty gritty details that the inspection may provide.

The inspection could stop you from buying a home that would otherwise drain you financially. What if the foundation is cracked or the roof needs replacing? You may not know these things. The inspector looks at hundreds of aspects of the home to make sure it is suitable for you. Once you get the report, you can decide if you still want to purchase the home. If you have an inspection contingency in your contract, you would have a way out without losing your earnest money.

Not Thinking of the Future

Again, getting caught up in the excitement of buying a home is so normal. When it affects your future homeownership, it could be a problem, though. For instance, let’s say you fall in love with a home that only has 2 bedrooms. You don’t think about how long you plan to stay in the home. You don’t think about whether you will start a family either. After a few years in the home, you have 2 kids. You may already start to outgrow the home. You may not have any choice but to move. If you thought about this beforehand, though, you may have skipped the 2-bedroom home and looked for a bigger one that could suit you for the future.

Using the Seller’s Agent

As a buyer, a real estate agent costs you nothing. It pays for you to find one you trust. This way the realtor can represent you in the sale. If you use the seller’s agent, they are still bound to act ethically for both parties, but that’s difficult. At some point, you may feel slighted by the decisions made. It pays to have two separate parties representing the buyer and the seller. The buyer’s agent still gets paid from the seller’s agent. If you don’t use an agent, the seller’s agent keeps 100% of the agreed upon commission. If you use a realtor, the seller’s realtor must split it with your realtor.  Again, it is no cash out of your pocket. Yet, your interests are better protected.

Being a first-time homebuyer is scary and fun at the same time. Before you jump in, stop and think. Get your affairs in order so you get the best deal available to you. Your first few steps should be to find a realtor and a lender. This way you will know what you can afford and a realtor can help you find it. Plus, the realtor can represent your interests in the transaction. Of course, make sure you keep your financial affairs in order before and after you sign the contract. Lenders are watching how you conduct your financial life.

With the right help, being a first-time homebuyer can be a smooth process without any mistakes!

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What Different Paperwork is Required for Stated Income Loans?

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What Different Paperwork is Required for Stated Income Loans?

Stated income loans are not a thing of the past – they still exist, and in fact, are making quite a comeback lately. More and more people are becoming self-employed thanks to the downfall that the economy took, making fewer jobs available, which forced people to look outside of the normal ways of making money. This, in turn, has forced lenders to open up the door to stated income loans in order to keep the housing history thriving. So what is different about these loans when it comes to qualifying?

No Tax Returns

In most cases, you will not need to provide your tax returns for qualifying purposes. Some lenders might want to see them just to see that you do make money and that your write-offs are the only reason that you do not qualify since the lender can only use the bottom line income on your tax return, not the gross income. In some cases, lenders are able to add back specific expenses into your net income, making it easier for you to qualify for a fully documented loan. In the cases that the tax returns do not help your case, however, the tax returns do not need to be used – the lender can ask for alternative documentation to provide to the underwriter.

Bank Statements

In almost every case, bank statements are necessary in order to qualify for a stated income loan. This might seem strange since you are “stating” your income, but the lender has to have some type of verification that you physically receive the money, which is usually done with your bank statements. You will have to decide which type of bank statements to provide the lender though – either business or personal bank accounts. If you choose business accounts, you cannot also provide your personal accounts because there is the risk of using the same funds twice (receiving them in your business account and transferring them to your personal account). In addition, if you do not own the business by yourself, you will have to split the amount of assets in the business bank account, which could lower the income that you are able to claim, so choosing the right bank account is a crucial step.

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CPA Letter

If you are choosing a stated income loan, it is likely because you are self-employed. Because this means you will not have W-2s and paystubs to prove your income from a reputable source, lenders require that you obtain a letter from your CPA stating that you are in business for yourself. This letter must be on the CPA’s letterhead and include the following information:

  • The name of your company
  • The date you started your business
  • The date the CPA started handling your finances and taxes for you
  • Any other pertinent information he has about your business

The reason behind the CPA letter is to have a non-interested party verify your self-employment. Just having you say that you are self-employed is not enough verification for a lender; they need to diminish their risks as much as possible.

IRS Form 4506

Even though you do not provide your tax returns for qualification purposes, some lenders require your tax transcripts just to prove that you filed taxes. They will not use the income reported on the transcript, but will just use it for verification purposes. It is another layer of protection for the lender as they are taking a chance on you by providing a loan without fully documenting your income. The Form 4506 is just a form you need to sign and provide your social security number, giving the lender permission to obtain your tax transcript.

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Rental History

If you have not owned a home in the past, the lender will require some type of housing history from you in order to qualify for a stated income loan. This does not mean if you are a first-time homebuyer that you will not be able to get a stated income loan – but you will have to show financial responsibility with housing payments in the form of rent. Lenders typically want a 12-month history of your rent payments. The verification must either come directly from your landlord on an official Verification of Rent form or from your bank account in the form of canceled checks to show not only that you paid the rent, but the date that the landlord cashed it and that they were always on time payments.

The Remaining Documents

The remaining documents needed for a stated income loan are those that are also needed for a standard loan. These documents include:

  • Uniform loan application
  • Standard appraisal
  • Gift letter for any gift funds you receive from family, friends, or your employer
  • Title documents
  • Credit reports and proof of any liabilities
  • Proof of homeowner’s insurance
  • Proof of flood insurance if the home is in a flood zone
  • Any letters of explanations for unique circumstances surrounding your loan

The stated income loan might require you to get a little more creative with your documentation to obtain a loan, but it is worth the effort. The stated income loan is looked upon a little stricter than a fully documented loan because of the higher level of risk you provide the lender when you cannot fully verify your income. The lender needs to make sure that all of the bases are covered in order to minimize the risk they face.

Every lender requires different documentation for any type of loan, but especially the stated income loan. Because this is a non-qualified mortgage, the lender does not have to abide by the standard QM guidelines, but can add their own requirements, called lender overlays to ensure that the loans they provide are low risk and profitable for them. As stated income loans continue to increase in popularity, lenders will begin to open up the possibilities for a variety of borrowers, but for the time being, you might have to search a little harder to find a lender willing to provide you with a loan.

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