For months, maybe even years, you’ve dreamed of owning your own home. As you move forward towards that direction your first step should be to determine how much of a home you can comfortably afford. Even if you’ve taken steps to ensure you have a respectable credit score and saved for your initial investment, it’s completely normal to feel anxious about your mortgage application being approved. Use the following as a guide to ensure a smooth loan approval.
Calculate Your Mortgage Budget
Before you start shopping and fall in love with a house you can’t afford, you need to do some math. You know your financial situation and your spending habits better than anyone. What monthly mortgage can you reasonably afford given your current income and debt obligations? After you’ve done your homework, consult with a reputable loan officer and get their opinion on what a lender is likely to loan you. It will generally take about 15-20 minutes over the phone to find out. Having a good understanding of your finances will ensure your success as you shop for your home and apply for your mortgage. As a general rule, your total monthly house payment (PITI and HOA dues if any) should be between 30% – 33% of your gross monthly income. Your house payment plus all of your other debts should not exceed 36% – 42% of your gross monthly income.
Ascertain Your Available Funds for Down Payment and Closing Costs
As you consider homes to purchase, determine if the potential house payment will be within your budget and check to make sure you have cash on-hand that is necessary for the down payment and closing costs. The larger your down payment, the lower your monthly house payment will be. Most loan programs will require a minimum down payment of 5 percent of the sales price of the home. In addition, you’ll have to plan to pay closing costs and “pre-paid expenses” which usually run between 3% – 4% of the sales price. (There are loan programs available that have a minimum down payment of 3% if you can qualify.)
Avoid These Actions
Lenders examine every aspect of your financial history. From your credit to your income, no stone is left unturned. As you prepare to submit your mortgage application, talk to your loan officer before you do any of the following:
- Buy or lease a new car
- Change Jobs
- Get Married
- Transfer large quantities of money between bank accounts
- Close credit accounts
- Open new credit cards (Don’t let anyone pull your credit – it can make the difference between qualifying and not.)
- Make any unusual deposits in your bank accounts
Basically, any unusual financial activity could hinder your chances for mortgage approval.
Get Your Documentation Together
There are some documents your lender will need to collect from you to submit your mortgage application.
- Complete copies of bank statements for the most recent 2 months from checking, savings, investment, and retirement accounts.
- Complete Personal Tax Returns including all schedules and W-2s for the most recent 2 year period.
- Paystubs for each borrower for each employer the most recent 30 day pay period.
- Driver’s licenses for each borrower.
- Complete tax returns, W-2s, and 1099s for most recent 2 years
Depending on your particular circumstances the necessary documentation you must provide will vary. Your loan officer will give you a customized list of everything required.
Get Expert Advice
After you’ve done your homework, consult with a reputable loan officer and let her help you put all the pieces together. It will generally take about 20-30 minutes over the phone to give you a good idea of what you can expect to be approved for. (Face-to-face meetings are always a good idea when possible.) She will probably want to check your credit to make sure there aren’t any unforeseen surprises. She’ll review different loan programs which might be a good fit for you and explain the pros and cons of each. She will give you estimates for different loan scenarios so you can see what your monthly payment will be and how much of an initial investment each scenario will require. When you feel comfortable with the loan officer it helps to provide her with the supporting documentation listed above and ask to be formally “pre-qualified”. She will review everything for any potential issues and advise you how to correct them. She will be able to give you a rock solid Pre-Qualification letter so that a seller will consider your offer when you find a home. (If you’re in need of a good Realtor, she’ll be able to refer you to a tried and true professional.)
For over three decades, Dorothy Erminger has been helping Texans buy homes. When you’re ready to get in the game give her a call. She will give you professional, reliable guidance so you can set yourself up for a smooth loan approval. Contact Dorothy today.