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Are you currently renting and dreaming of home ownership? Many families dream of owning a home and often want to buy a house at some point during their lifetime. Home ownership has its advantages and disadvantages over renting. If you are planning on purchasing a home soon, then you will need to read these tips to make your home buying experience easier. Buying a home is often a tedious and stressful process but it doesn’t have to be if you are prepared.
Owning a home should be considered a long term investment and it is very important that you make sure that you choose the right home before making your final decision. Do ask your lender or mortgage any questions that you may have about the loan or any of the documents before you sign them. You don’t want to be surprised down the road. There are a ton of different loan options available and you need to pick the right one for your circumstances. For more information on buying a home check out Capital One Home Loans Online Neighborhood.
Pull a Current Credit Report From All Three Credit Bureaus
If you are planning on buying a home soon, you need to pull your credit report and see what creditors are reporting on your credit report. Banks usually use two or three reports from different agencies so you will want to check all three reports for discrepancies. If you do find any discrepancies on your credit report, you need to resolve these issues immediately and get them fixed before you consider applying for a home loan. Pulling your credit report won’t reduce your credit score significantly. Here is a list of things that affect your credit score:
- payment history
- age of the accounts in your credit history
- new accounts opened
- types of credit
Even if your aren’t buying a home soon, you should still pull your credit report at least once a year to check for identity theft and mistakes.
Reduce Your Debt to Income Ratio
If your debt is more than 36% of your income, you need to take immediate steps to reduce your debt to income ratio. Take a look at all of your accounts that you are currently paying. Total up the monthly minimum payments so that you know how much you are paying out towards debts each month. Then take your total income and multiply it by .45 or 45%. This will give you the amount of money that lenders typically use to determine the amount of money that you can afford for housing costs. Then you need to subtract your current monthly debts. This will give you the real income that you have available to put towards a house payment.
The better your debt to income ratio, the more likely you are to be approved for a home loan. Banks look at your cash flow to determine how much house you can afford. They also use your credit history to determine the interest rate too. According to Credit.com, it takes $2 of income to offset $1 of debt because debt erodes income (ability to borrow money) at a ratio of 2:1.
Avoid paying off all of your debt out of your savings account. Many lenders want you to keep a cushion and have enough money to pay cash for your down payment. See more information below about moving money around.
Don’t Open or Close Any Accounts
It is usually best not to close any credit accounts before you apply for a loan, even if your balance is $0. Closing accounts that have been paid off even if you haven’t used the account in a while could impact your credit score.
The same holds true for opening new lines of credit. Hold off on opening any new lines of credit when you are trying to buy a home. Even credit inquires (such as shopping for a new car, appliances, ect) could trigger a red flag to your lender and possibly cause potential problems getting a home loan.
Moving Money Around Will Cause Your Lender to Raise a Red Flag
Before you apply for a home loan, you need to leave your finances alone. Now is not the time to cash in investments, CDs, savings bonds, or retirement accounts. You should leave these accounts alone. Also if you have a large amount of money in your savings account, now isn’t the time to invest it in investment accounts, stock market, CDs, ect. If you end up doing any of these activities, it will cause your lender to raise a red flag and you will be required to give your lender a paper trail of all of your activities.
Save Up a Down Payment
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Many people often can’t come up with the 20% down payment that most lenders require to purchase a home so banks are required to add mortgage insurance to your monthly mortgage in case you default on your loan. There are programs such FHA, VA loans, and other types of loans that offer reduced down payments.
Even if your lender, such as Capital One, doesn’t require 20% down to get a home loan, you still can put additional money towards your down payment. The more money you can put down on your home, the less money that you have to finance and the quicker you will build equity in your home. If your purchasing a home that the seller or builder has offered to pay for the closing costs, make sure that you get the Good Faith Estimate (GFE) so that you can include it with your loan application.
Gather All of Your Documents and Keep Them Organized
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You will need to gather the following items and keep them in one location so that you know where they are at all times.
- W-2’s – Depending on the lender some might require one than one tax year.
- Paystubs – Print off and keep your paystubs for the last two months.
- Self Employment Income – Don’t forget to include any self employment income if you are self employed. Depending on the lender, you might have to produce your business tax documents too.
- Copies of your bank statements.
- Cancelled Rent Checks or any previous mortgage documents
- Property Tax Documents for any additional property that you may own.
- Proof of Child Support – if you want it considered as additional income
If you have access to a scanner, I highly recommend that you scan the documents and store them in a secure location on your computer. It is best to scan them as pdf documents so that you can email them to your lender or mortgage broker.
Home Equity Conversion Loan (Reverse Mortgage)
A home equity conversion loan are specifically designed to assist older people who are in need of immediate funds. So, if you are at least 62 years of age, you may be able to take advantage of an HECM, which is also called a reverse mortgage. However, you must understand that reverse mortgage pros and cons both exist. For example, you can use the money for anything you wish, but if you move or pass away then your lender will have the right to sell your home to retrieve the debt you still owe unless the debt is otherwise paid. For that reason you may not want to enter into a reverse loan agreement if you plan to leave your home as a bequest to your family.
Always Get Pre-Approval for a Home Loan Before Searching for Your Dream Home
Before you begin shopping for a home loan, you should always get a pre-approval. It will help you determine the amount of home that you can afford to buy. Then you can work with a builder or real estate agent to find your dream home (or close to it) in your preferred neighborhood. Plus a pre-approval letter will give you negotiating power when it comes to bidding on a home.
I hope that these tips helped make the home buying process easier for you and your family. Home ownership is very rewarding and it is a great investment. Don’t forget to check out my other tips on how to find the perfect neighborhood or finding the right contractor for any home renovation projects that you might have after you buy your new dream home.
Do you have any additional tips for making the home buying process easier for first time home buyers? Are you currently living in your dream home?
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