Guest content contributor, Amy Sims, shares with us her insight on getting financing for your dream home. Read all about her four step approach below.
One of the first steps you should take if you plan to buy a home is to get financing in order. Many buyers, especially first-time buyers, want to skip over this step in their excitement to begin looking at homes. However, you may suffer much disappointment and many delays if you don’t work on financing first.
WHY FINANCING FIRST
Buyers often justify their inclination to visit open houses or tour homes without financing in place because they just want to see what’s available or they are still trying to decide if they want to buy. What often happens is they fall in love with a home and end up losing out on an offer to someone who has already obtained financing. Another problem is they look at houses that end up not being in their budget, so everything they can afford pales in comparison.
Talk to a lender and get pre-approved before you even think about beginning a home search. This step will save you heartache and headaches along the way.
The first step is to be prepared before you talk to a lender. Get all of your information together and present it at one time. This often helps expedite the process and gets you approval faster. While each lender will have their own specific set of documents which may depend on your particular situation, you can expect to be asked for the following:
- Last two months of paystubs or W-2s
- Last two bank statements
- Previous two years’ tax returns
- List of all assets and debts
The lender will also pull your credit report, so you should also check it beforehand. You can request a free copy at annualcreditreport.com, which will allow you to look for errors. You can also work to improve your credit if you see problems before you talk to a lender. If your credit is good and you provide the necessary documents, getting approved for financing will be simple and straightforward.
DISCOVER YOUR OPTIONS
Numerous loan products exist for the home buyer. It’s important to know what options you have so you can decide which product best fits your needs. Since many first-time buyers don’t have a lot of money for a down payment, they can benefit from government programs, such as the FHA loan or VA loan. Conventional loans are better for those who have a significant down payment, at least 20%, and a higher credit score.
- FHA loan – backed by the Federal Housing Administration, this loan requires only 3.5% down, which may be gift funds. You generally only need a 620 credit score, and may even qualify with a lower score in certain circumstances.
- VA loan – designed for veterans, this loan also provides a low down payment and credit score.
- USDA loan – backed by the US Department of Agriculture, this loan is for homes purchased in rural areas, but you may be surprised at the locations where this loan is applicable. Requires a 640 score for most applicants.
Many programs exist to help with financing, so it’s important to talk to your lender and find out what’s available. Remember that not every lender provides all loan products, which is why you should shop around.
KNOW YOUR BUDGET
Just because you qualify for a certain amount, it doesn’t mean you want to buy a house for the full amount. Your lender will determine your debt-to-income ratio, which is the amount of debt you have compared to your monthly income. You’ll be limited to a house payment that is a percentage of your total income, such as 28% for an FHA loan or sometimes higher for specific products or situations.
If you’re the type of person who likes to take vacations, buy the latest electronics, or go shopping, you may not want to have a mortgage payment as high as what you’re allowed. You must look at your own budget to determine how much you feel you can afford. A good rule of thumb is to not increase a mortgage payment too far above what you’re paying in rent.
For those who don’t have a rent payment, it’s helpful to practice for one by putting aside that amount in savings for several months before you buy. This allows you to get used to the added expense and start or increase your savings at the same time. Lenders also look more favorably on buyers with several months’ of expenses in a savings account.
Buying a home is a fun experience, but only when you have the financing portion of the process in place. Avoid frustration and delays by talking with a lender before you begin your home search.
::: About Amy Sims:::
Amy Sims is a HAFA & CDPE certified Realtor in Orange County, and is the founder of Amy Sims Real Estate. With 10+ years of experience buying and selling properties in Orange County, Amy has developed expert negotiation skills, and has been recognized as a leader in her field. A born and bred Orange County resident, currently residing in Ladera Ranch, Amy takes a personal approach to real estate, and goes a step beyond the normal expectations clients have by educating and coaching clients on each step of the home buying or selling process. Specializing in short sales, buying, and selling in Orange County, Amy prides herself in working with her clients to identify the individual needs of each person she works with to ensure their homeownership goals are not only met, but exceeded.