By  Charlestien Harris

Buying a home can be overwhelming, but if you understand what you need before you start the process you can be better prepared for it. Every person that plans to purchase a home has to complete each of these steps to become a homeowner. Let’s look at each component and how it plays an integral part in purchasing a home.

1.The down payment is the first requirement to buy a home.

This is the money you pay upfront to reduce the amount you need to borrow. The amount you need for a down payment can depend on the type of loan you’re hoping to get. Usually, a conventional loan requires 20 percent of the purchase price. FHA loans can require at least 3.5 percent of the purchase price for a down payment. USDA and VA loans require no down payment. There are also some options available if you’re having trouble saving the money for a down payment.  Down payment assistance programs can offer financial help with down payment and closing costs for eligible borrowers. You could also ask for a down payment gift from a family member. Keep in mind that there may be limits on down payment gifts and you will probably be required to provide a down payment gift letter for documentation.

2. Choosing the right lender.

To find the best mortgage lender, you need to shop around. Consider different options like starting at your personal bank, then you may want to try a local credit union or search the internet for online lenders.  Be sure to ask about rates, loan terms, down payment requirements, mortgage insurance, closing cost and fees of all kinds, and compare these details on every offer.

3. Provide an accurate credit score and payment history

Mortgage lenders consider your entire financial history when applying for a loan. Your FICO score can be one of the most important numbers you provide during the process. Your credit scores indicate to the lender how likely you are to repay what you borrow. Therefore, having a good credit score is important. If you have a bad credit score or no credit history at all, it will be very difficult to qualify for a mortgage. Credit utilization has an enormous effect on your credit score.   Try to keep the utilization percentage below thirty.

4. Calculating your debt-to-income ratio.

This is the percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk. It is also most known as your DTI. To simplify the meaning, it’s the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt. Most loan products offered by your lender has a DTI requirement. If you have a high DTI ratio, you may need to reduce your DTI to meet the requirements for a mortgage. Paying down some of your debt is one way you can reduce that number. Make sure you understand what the DTI ratio is for the loan product you are applying for. It determines how much house you can afford to buy, how much the lender is willing to finance and which loan product you qualify for.

5. Paying the closing costs.

Closing costs are defined as fees and expenses you pay when you secure a loan for your home, beyond the down payment. These costs are generally three to five percent of the loan amount and may include title insurance, attorney fees, appraisals, taxes and more. If you don’t pay these fees, the loan documentation can’t be signed, and the mortgage process isn’t complete. Your lender should provide you with a detailed estimate of what you’ll have to pay at closing. On average closing costs run from 2% to 5% of the home’s purchase price.

6. Have the proper documentation.

Your lender should have a full and complete checklist of required documentation to support your loan application depending on your employment and income circumstances. The underwriting process is very thorough, and some documents may bring up questions or concerns that require additional documentation. Don’t panic, just be ready to provide additional information when requested. Incomplete applications can make or break the decision-making process, so make sure you provide all the documentation that the lender asks for.

Before you can think about buying your dream home, you need to be sure that your finances are in order and that you’ve prepared thoroughly before the mortgage-approval process begins. Going through a checklist of requirements to buy a home can help ensure that you’re as prepared as possible when you’re ready to buy. You can email me at Charlestien.harris@southernpartners.org or call me at 62-624-5776 to learn more about this and other financial topics of interest. Until next week—Stay financially fit!