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Whether you’re a first time home buyer or a seasoned buyer, the first thing you need to do when purchasing a home is get pre-approved. People often confuse pre-qualification and pre-approval, and the difference is very easily explained: Pre-Qualification means that one meets basic qualifications on stated information, such as stated income, stated assets, etc and a hard credit pull has not necessarily been done. A Pre-approval means that income and asset information has been collected, credit has been pulled, and meets basic criteria. Getting pre-approved will tell you how much home you can reasonably afford, and your lender will cover things such as your Front-End Ratios (Housing Ratio) and Back-End Ratios (Debt To Income). Your Front End will include items such as your mortgage payment, insurance, and any HOA dues, while your Back End includes any revolving and installment as well as the housing payments. FHA and Conventional Housing Ratios can vary, with conventional being more lenient and FHA having a hard stop at 50%, while the Debt to income can go up to 43%.
Most lenders have online applications and will ask for several items, so its a good idea to keep these handy:
Driver’s License
A digital and paper copy of the last 2 years tax returns
A digital and paper copy of the last 2 years W2s
2 Most recent pay stubs
Most recent 2 months bank statements – all pages, even the blank ones, with no redacted info
If you draw disability, the most recent award letter from the SSA
If you draw from a 401K or IRA distribution, most recent distribution letters and proof of enough funds to continue for at least the next 2 years.
Be prepared to explain any large deposits that are not payroll related.
Once approved, your lender will send you disclosure paperwork and a form that indicates your estimated closing costs. Because a specific property has not been selected yet, these are rough figures and not exact, but they will give you an idea of how much your closing costs will be, which will include your down payment. Depending on the loan program you’re using, your closing costs can be anywhere from 3 – 20% of the loan amount and this is something that should be discussed with your lender. Your lender and/or specific program may also have requirements that need to be met as part of the loan agreement. Don’t be afraid to ask questions.
Earnest money is typically 1% of the sales price of a home. Once you get an offer accepted, you’ll need to be prepared to have that amount available to be sent to a closing attorney of your choosing to be held in escrow until closing, where it will then be a credit back to you at closing. This money is essentially putting “skin in the game” and showing sellers that you’re serious about the purchase of their house.
Stay tuned for Due Diligence.
