Get Your Finances in Order: To-Do List
Develop a household budget. Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills and groceries.
Reduce your debt. Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income.
Look for ways to save. You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often.
Increase your income. Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.
Save for a down payment. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.
Keep your job. While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.
Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance promptly.
What Your Lender Will Need
- W-2 forms or business tax return forms if you’re self-employed for the last two or three years for every person signing the loan.
- Most recent pay stubs covering last 30 days from every person signing loan papers.
- Copies of two to four months of bank or credit union statements for checking, savings and asset accounts.
- Copies of personal tax forms for the last two to three years.
- Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value: a boat, RV, or stocks or bonds not held in a brokerage account.
- Copies of your most recent 401(k) or other retirement account statement.
- Documentation to verify additional income, such as child support, pension, etc.
- Names, addresses and account numbers of all your creditors and the amounts of any outstanding balances.
- Lender, loan number and amount owed on other installment loans — student loans, car loans, etc.
- Addresses where you lived for the last five to seven years, with names of landlords, if appropriate.
- Certification of Eligibility (VA only).
Loan Types to Consider
Brush up on these mortgage basics to help you determine the loan that will best suit your needs.
Mortgage terms. Mortgages are generally available at 15-, 20- or 30-year terms. In general, the longer the term, the lower the monthly payment. However, you pay more interest overall if you borrow for a longer term.
Fixed or adjustable interest rates. A fixed rate allows you to lock in a low rate as long as you hold the mortgage and, in general, is usually a good choice if interest rates are low. An adjustable-rate mortgage (ARM) is designed so that your loan’s interest rate will rise as market interest rates increase. ARMs usually offer a lower rate in the first years of the mortgage. ARMs also usually have a limit as to how much the interest rate can be increased and how frequently it can be raised. These types of mortgages are a good choice when fixed interest rates are high or when you expect your income to grow significantly in the coming years.
Balloon mortgages. These mortgages offer very low interest rates for a short period of time — often three to seven years. Payments usually cover only the interest so the principal owed is not reduced. However, this type of loan may be a good choice if you think you will sell your home in a few years.
Government-backed loans. These loans are sponsored by agencies such as the Federal Housing Administration (www.fha.gov) or the Department of Veterans Affairs (www.va.gov) and offer special terms, including lower down payments or reduced interest rates to qualified buyers.
Common Closing Costs
The lender must disclose a good faith estimate of all settlement costs. A check to cover your closing costs will probably have to be a cashier’s check. The escrow company or other entity conducting the closing will tell you the required amount for:
- Down payment
- Loan origination fees
- Points, or loan discount fees, you pay to receive a lower interest rate
- Appraisal fee
- Credit report
- Private mortgage insurance premium
- Insurance escrow for homeowners insurance, if being paid as part of the mortgage
- Property tax escrow, if being paid as part of the mortgage. Lenders keep funds for taxes and insurance in escrow accounts as they are paid with the mortgage, then pay the insurance or taxes for you.
- Deed recording fees
- Title insurance policy premiums
- Notary fees
- Proration for your share of costs, such as utility bills and property taxes
How To Find A Reputable Lender
Finding the right lender for you is the most important part of purchasing a home. The decisions made at this time could affect you for the next 30 years of your home loan!
After working so long in the home-buying business, I have found a few lenders who have proven to be very reputable, knowledgeable and hard-working. Beyond that, they will not charge you “junk fees” that some other lenders may charge. I am happy to refer them to you and let you pick the one who works best for you.
Information provided by National Association of Realtors and RealtorMag.