First things first, before you begin your house hunt, you’ll need to have your financial ducks in a row. Do your best to pay off old debts, improve your credit score, and build up a healthy savings to put down a 20% down payment. At the very least, most banks will require 5% down. Just know that lenders will typically require you to pay private mortgage insurance (PMI) if your down payment is less than 20%.
You will want to financially prepare your paperwork for the homebuying process. A “green file” contains all your important financial documents that you will need to secure financing for your property. The typical green file should contain the most recent copies of your:
- Income verification
- Tax returns for two years
- Financial statements for bank and investment accounts
- Credit card statements
- Auto loans
- 401K statements, life insurance, stocks, bonds, and mutual account information
When you are ready, you’ll contact a reputable lender to get pre-approved for a home loan. Keep in mind that pre-approval and pre-qualification are two different things:
- Pre-Qualification: A mortgage prequalification is only an estimate of how much house you can afford based on minimal financial information about you.
- Pre-Approval: A pre-approval considers your credit report, debt-to-income ratio, and a more in-depth analysis of your financial landscape. Once you complete a mortgage application and the lender has verified your information, you’ll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days. Be sure to avoid making any sudden career changes or large purchases during this time as it could affect your status with the lender.
When you schedule a home visit with a pre-approval letter in hand, the seller knows that you are a serious buyer. Plus, knowing exactly how much you are approved for can help focus your search and save crucial time when you’re ready to make an offer.
Once you have identified a home for purchase, the lender will begin processing your loan, assessing other factors that impact your final approval:
- Preliminary title report
- Any homeowner or community association dues
- Appraisal report
- Homeowner insurance payments
- Property taxes
The combination of your financial profile (income, debt, credit, etc.) and the property you intend to buy (condition, value, etc.) gives the lender a complete picture of the risks and benefits of providing you with the loan.