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The Steps in the Home Purchase Mortgage Process
First time home buyers are different in only one way from other purchasers; they have never bought a home before. The home purchase process can seem complicated and confusing for buyers who have never been through it, and this can create unnecessary stress.
First time home buyers that use our checklist will eliminate the stress and worry of this very complicated process. . Our focus on mortgages and our detailed, easy to follow checklist will put the emphasis on a smooth transaction. . Take a minute to follow the steps listed below and get ready to own your first home!
Budget, Budget, Budget. .
This is arguably the most often most neglected step in the process. It’s also the first step and the one you should spend the most time on. How do you know you can afford to purchase a home? Are you aware of the expenses required for responsible home ownership? Most important, can you buy the home that will fit your families needs? It won’t do you any good to purchase a home that you’ll have to sell or move away from in just a few years.
Establish financial goals. Be realistic about your needs, your plans, and your financial capabilities. If you don’t have a budget, make one. Analyze best and worst case scenarios. What will you do if you lose your job? How will you pay for unexpected expenses, such as medical bills?
It’s important that you answer all of these questions. This is all part of the process of determining how much money you can afford to borrow.
Options, what loan programs will help you meet your financial goals and provide a long term investment?
Even though the media will make it sound as if there are very few options available to first time home buyers, that is misinformation. Some of the best mortgages products are available to first time home buyers. Our checklist will prepare you for all loans.
FHA is the probably the most widely used loan product available to both first time buyers and individuals whom have purchased before. FHA is a government indorsed loan administered by the US Department and Urban Development (HUD). These loans are designed to assist first time home buyers who don’t have substantial down payment or equity to rely on and offer many benefits.
For an overview of the FHA loan program, visit the HUD’s loan page.
Determine how much you think you’ll need to purchase the perfect home.
This is the most important step in the process. This is easier than it sounds. Based on the type of home you’re looking for and the area where you plan to live, calculate a range of home prices and approach your lender with these figures. If you’ve already found the home you plan to purchase, you’re a step ahead, though it’s wise to plan and budget before you even begin your home search.
If you’re planning to take out an FHA loan, find out what the FHA loan limits are in your county. These limits establish the maximum amount you can borrow with an FHA loan. If you know this, you’ll know the range your home price must fall into. The HUD provides an interactive FHA loan limit tool that allows you to find limits in your area.
Check your credit score.
Do this as early as possible. You should do this before you even start looking for a home. If your credit score is bad, you may not be able to qualify for the mortgage you need. If you’re afraid you may not qualify due to your credit, take the time to repair it before you pursue a mortgage. It will be worth the wait. With your credit cleaned up, you’ll qualify for a lower mortgage rate, and this will save you tens of thousands of dollars over the life of your loan.
Check your credit and repair it if you need to.
Gather the documents you’ll need to prove your income and employment status.
This part is easy, assuming you’re stably employed and making enough money to cover your expenses. Gather at least two months of pay stubs, two months of bank statements, and your W2 form. The exact paperwork you’ll need will vary depending on your lender. Different lenders may request different documentation. For the most part, though, these are the items you’ll need as a first time home buyer.
If you’re self employed, this step is a bit different. Rather than pay stubs, your lenders will want to see your income tax returns for the previous two years.
Get pre-approved for a loan.
Pre-approval is one of the most important steps to take. If you skip this step, it may prevent you from closing your loan, and if you’re not careful, you may lose out on the home you want to purchase. How? It’s simple.
The mortgage approval process takes time. If you start this process from square one after you find your home, you may get stuck waiting for approval and the seller may offer the home to another buyer. Worse still, you may discover that you don’t qualify for the loan you need. If this occurs, you’re right back where you started. This risk creates major uncertainty, which leads to stress.
The solution to this issue is pre-approval. Pre-approval is like a promise. The lender agrees to provide the borrower with the funds he or she needs to purchase a home, contingent upon the nature and value of the home. You’ll need to allow the lender to check your credit score, and you’ll need to provide proof of income and employment.
Once this is done, though, you can rest assured that you’ll get the mortgage you need as soon as you need it. This is a valuable step to take before you start searching for a home.
Evaluate your financial situation again.
This is similar to step one, but now that you’re actually dealing with a lender, you’ll need to look at your financial situation a bit differently. There are two primary financial ratios that lenders care about. These two ratios are loan-to-value (LTV) and debt-to-income (DTI).
Your LTV is simply the amount of the mortgage weighed against the value of the home you’re purchasing. If the home is worth $300,000 and you’re taking out a loan for $225,000, your loan to value is 75%. Literally, the amount of the loan is 75% of the value of the home.
The lower your LTV, the happier your lender will be. A low LTV also improves your odds of qualifying for the loan. This is a crucial ratio for first time home buyers to understand, since many buyers just starting out don’t have high cash reserves to apply to the home price.
The second ratio, your DTI ratio, is simply a comparison of the debt you’ll pay each month against the income you’ll make each month. Your future mortgage payment is included in this calculation. Lenders want to see a DTI ratio of no more than33%
Know what the closing costs will be.
Obtain a fees worksheet from your lender as early as possible in the process. This document explains all fees and costs connected with the mortgage and provide a summary of the closing costs. Many first time home buyers are caught off guard by the closing costs on their mortgages. Don’t let this happen to you.
Secure your down payment funds.
This is the tricky part for many first time home buyers. Conventional loans require a down payment of at least 20% of the purchase price if you want to avoid paying for private mortgage insurance (PMI). On a $300,000 home, this amounts to $60,000. That’s a lot of money to store in the bank. But there are other options available.
FHA mortgages, for example, require a minimal down payment of just 3.5% in most cases. This solution may solve the down payment funding issue. You can also ask friends and family for gift money that can be put toward the down payment price. Your lender may be willing to provide a lower down payment requirement in exchange for a higher rate on the mortgage. Determine all your options before you make a final decision.
If you follow each of these steps, you’ll be ready to purchase your first home. No stress. No worries. Refer to this checklist as often as needed to help you get through the home purchase process as a first time home buyer.
Our staff is friendly and eager to help with any question you may have. Also, HUD provides a list of first time home buyers Q and A on their website.