There’s no better feeling than checking off every item from your to-do list. It’s smart to try to take that same approach to homebuying.
First, you worry about how much home you can afford and whether you’ll even qualify for a mortgage. Then, comes the fun part: going on a house hunt to try and find your dream home.
But the business end of buying took a more serious turn after the credit crisis. Lenders now are asking borrowers to fully expose their financial life and are tougher on credit and other financial factors before making a loan.
It can be intimidating, especially for first-time buyers. Here, a look at your to-do list, a step-by-step guide to finessing financing:
Evaluate the Lender
Yes, a lender will scrutinize your financial life. But before that happens, make sure the lender passes your test.
Lenders are in the service business; they should be attentive to your questions, keep you informed about the status of your application and keep the loan on track for a timely closing.
Ask for the name of a loan officer at a lending or banking firm from a real estate agent who sells a lot of homes, suggests David Reed, author of “Decoding the New Mortgage Market” (AMACOM, 2009).
“Good loan officers rely on steady referrals from top agents, and they know that if they mess up a transaction they no longer get that agent’s business,” Reed says.
If you’re already banking with an institution you’re happy with, apply for a mortgage there, suggests Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine.
Applying where you bank often means you don’t have to gather records showing your savings, since the bank has the information, adds Jim Linnane of Wells Fargo Home Mortgage in Chicago.
Before you walk into a lender to apply for a loan, do a little comparison shopping, suggests Barry Zigas, director of housing policy for the Consumer Federation of America. Study mortgage ads in the newspaper, says Zigas, call a few firms and ask about their rates on a mortgage of a certain size, and ask about fees.
If you have limited funds for a down payment, you may only qualify for a government-insured FHA loan, which only requires a 3.5-percent down payment. Find FHA-approved lenders at www.hud.gov. Moreover, first-time buyers with limited incomes may qualify for mortgages backed by states or localities, says Linfield. Many of these programs are listed on the HUD site.
Some real estate agents won’t take you out to look at homes unless you’re “pre-approved” for a mortgage of a certain amount and can confidently submit an offer on a home, explains Brian Seibert, president of the Michigan Association of Mortgage Professionals.
Often, a pre-approval is free or available for a minimal fee. A lender will take your financial vitals – credit score, income, savings – and then provide a preliminary idea of the amount you’ll be able to borrow.
Some potential borrowers will be advised that they need to improve their credit standing or other factors before pre-approval. A lender should be able to give some guidance on how to boost your financial profile in order to eventually qualify.
Know the Loan Terms
While pre-approval means that a lender has confidence in your ability to borrow and repay a loan, remember it’s only a preliminary judgment.
Your lender may ask for verification of your income and assets, including documents like your income tax returns, W-2 forms, pay stubs and bank statements.
The pre-approval offer doesn’t stretch out forever; it usually must be renewed after 90 days.
Once you find a home and formally apply for a mortgage, make sure you understand all the papers you sign, Zigas says. You will receive a document outlining all the fees associated with the loan when you close. You may, for example, be charged a fee for an appraisal the lender orders. The fees outlined in this document should closely match what you actually pay at closing.