Where do you start when thinking about buying your first home?
I love to help people purchase their first home. I still can remember the excitement and anxiety I had when I went through that process many years ago. We all have to take the plunge at some point, if we want to realize the dream of owning a home. It is fun to spend the time upfront to explain all the different parts of a mortgage and what you qualify for. If you have had visions of owning your own home or condo, it is totally doable. But, you will have to work for it.
Let’s see how the process works and how you can make this happen.
If you are a young buyer, you may not have a lot of credit experience. Buying a home will most likely be the biggest investment and payment you will make in your lifetime.
Take time upfront to do your research. Make sure to get all your questions answered. Before you meet with a lender, think about the maximum payment you are comfortable with. It is good to be clear about that.
Don’t max out what you qualify for. A lot of times, buyers just go with the maximum amount they qualify for. Sometimes this is not the best strategy. If you know what you want, it is easier to stay within those boundaries. Your first home, does not need to be your last home or a dream home. This is a process and once you purchase your first home, the next one will be much easier. Don’t bite off more payment or mortgage than you can handle.
Find a great, reputable lender. Once you have an idea on what payment you will be comfortable with, the next thing to do is to get connected up with a good, reputable lender in your area. If you are purchasing in Colorado, I happen to know a great lender for you! I recommend for your first mortgage, to meet face-to-face with your lender, during the initial Pre-qualification meeting. There is a lot of information that we will go over and it seems that the transaction usually will go much smoother when we can sit down initially and discuss all your questions and any concerns or possible speed bumps we may run into.
When we do a mortgage there are 4 parts we evaluate (I call them the 4 C’s):
The 4th piece is the actual property, or collateral. The initial Pre-qualification process will show you what price range and mortgage program best fits with your individual situation. There are many loan programs available. It is important to work with a lender that will explain what is available, what they recommend and why.
The first three pieces that we look at, compensation, credit and cash, are what we will review at the pre-qualification meeting. Let’s break them down here:
Compensation – For this part, we look at how much income you have to make your mortgage payments. Where do you work and how much money do you earn? Lenders have very strict guidelines on what income we can use and count and what type of supporting documentation we will require. We will look at what your employment history has been for the last two years. If you have not been on your job for 2 years, that’s ok. We will want to know who you worked for, what was your job title, and how long did you work there. If you are just graduating from college or school, we can use that as job history to fill in the 2 year gap. If you have any gaps in the 2 year period, make sure to discuss this with your lender.
Credit – This is probably the biggest area where we will spend time on during the first meeting. We will need to look at your credit report to determine what type of loan program you qualify for. Many loans have credit score requirements. We pull three credit bureaus, TransUnion, Equifax, and Experian and get a mortgage FICO score from each of the bureaus. Whichever is the middle score of these three agencys, will be the score we use for your qualifying. You have to have a mortgage company pull your credit to obtain the correct FICO score. There a many misleading aps and models out there that claim to give you your score. Most of the time, this is not the score we use. So be careful and make sure you are being evaluated on the right score. Your credit report will be a history of how you have managed and paid things in the past. Since you are about to embark on borrowing hundreds of thousands of dollars, we place a lot of our decision on your credit score and profile. We will go into more detail on what makes up your credit score in a different blog post. We are currently seeing the minimum credit score requirements dropping from many lenders out there. That seems to be a moving target. You should be fine with a credit score in the 600’s. The higher your score is the more options and better rates you will get. It really pays to have good credit when it comes to mortgage financing.
Cash – How much money do you have available to buy a home with? There are many loan programs out there and some of them are very low money down such as $1,000 or sometimes even zero money down. When I am qualifying you, I like to know about all the money you have available. Sometimes, you may be surprised at the different terms you will get with different down payments. I like to compare apples to apples. So many times when I qualify you we will look at maybe two or three different loan programs. Don’t just assume that if you don’t have any money down, you cannot buy a home. But, as with your credit score, if you have more assets, you will have more options for lower payments and better mortgage terms. In addition to the down payment, you will need to factor in the loan closing costs. You lender will give you a detailed cost worksheet that will itemize all the fees required. Many times you can ask the seller to pay these, or some programs will let you build that into the rate or program.
It is a lot of information! Sometimes during the first meeting, you may not be ready. But a good lender will go over where you are now, discuss what your goal is, and develop a strategy to help you get there. Remember, this is a big investment. Take time upfront to understand what is available and what you are most comfortable with.
Here is a list of things to have prepared for that first meeting:
- Most recent 30 days worth of pay stubs
- Most recent year (or 2 years if you have them available) of complete tax returns, including all of your W-2’s
- Most recent bank statement
- Your payment and or purchase price goal
- That will get you moving!