Buying is a great idea with interest rates and pricing at historical lows. However, the obstacle for many first-time buyers is getting a loan. Lending rules are getting tighter every day. Here are a few tips to help you prepare to be prequalified by a lender to buy a home.
Downpayment – You can get downpayments for as low as $0 with a VA loan or $100 with qualified HUD homes. But for the most part 3% with Homepath loans and 3.5% with FHA loans. Lenders look for “cash to close”. They want to be able to see a paper trail of your downpayment. They need to see where they money is coming from. You can get a gift from a close relative, but they also need to be able to see where this money comes from. Either way either you or your relative needs to produce a bank statement or other assets like a retirement account, stocks, etc. Wherever you are getting the downpayment from, the best thing is to get it in your bank account. Lenders usually want to see it be in the bank for at least 60 days. Sellers can not contribute to down payment.
Income – You need to be able to qualify for the mortgage with a debt to income ratio of usually around 50% based on your gross income and your debts. They will base your income on your past few months pay stubs and consider your last 2 years tax returns. (You can not get a loan if you have not filed tax returns for at least the last two years.) If you are self-employed or in sales, you are going to need to produce a paper trail to show that is what you make. Other income like child support or state support must be clearly documented and show consistency for 12 months.
Employment – You have to be employed or show a steady income in order to get a loan. You also need to have “stability”. To show this, lenders want to see that you have been employed with the same company or same industry for at least 6 months. If you have re-entered the workforce, you need 6 months at the same employer. The only exception sometimes is a college graduate who landed a job in their field of study. That can be as little as 4 months.
Credit – You need to have a credit score of at least 640 in most cases. There are some programs with certain lenders that will go lower on an FHA loan, but there are other factors involved.
Cash to close – Closing costs can vary and your Realtor or Lender can give you an idea of what you will need. Lenders want to see you have cash to close just like your down payment. And they need to see the papertrail of where it came from. BUT sellers can contribute to all or some closing costs. Your contract must be written that way.
Property – For VA or FHA loans, the property must meet the minimum standards as a usable functional home. Dated or cosmetic upgrades are not an issue, but it must have a roof that will be good for 2-3 years, must have hot and cold running water, heat, and at least one working toilet. And NO MOLD. If you like a property that doesn’t meet these standards, negotiate with the seller to fix them as part of the contract. They will inspect these things.
Co-signers – You can get a cosigner to help you qualify, but they need to go through the same process as you do and the same criteria. The lowest credit score must exceed the minimum and any debts they have will also count against their debt to income ratios as well.
Paperwork – Lenders will want a ton of paperwork from you and they will be very picky. To begin with, they need 2 months of bank statements, 2 years of tax returns, and 2 months of payroll statements(pay stubs). And they can ask for more particular paper.
As I tell my buyer clients, GIVE the lenders whatever they need ASAP. Tell them everything, don’t hold back. Yes, it is personal and yes it is intrusive, but they are loaning you a lot of money. You can save yourself a lot of time, effort, money and heartache if you are completely up front and cooperative.
If you are in the south, southwest or western suburbs of the Chicago area and you have particular questions about buying or obtaining financing, contact me at firstname.lastname@example.org and I would be happy to help or refer you to someone who can answer your question.