You should have a clear understanding of your financial situation
before beginning your search for a home. You'll have a much better idea of how much real
estate you can really afford and how much you'll need to borrow by thoroughly reviewing
your debts, expenses and projected income.
Lenders will verify all your financial information. You should have records available
for each person who will be an owner of the real estate. Before you begin to apply for a
real estate loan make certain that you'll be able to provide copies of these important
documents:
Paycheck Stubs
Remember that lenders are most interested in your average income. Not only will they want
to see this month's paycheck, but also how much you've been making for the past two years.
Steady employment is also more attractive to lenders, so if you've been hopping from job
to job, be prepared to discuss the reasons why.
Bank Statements
Most lenders will ask you for copies of your bank statements in order to qualify for a
loan. Ideally, they'd like to see a steady history of savings or at the very least, that
your checks are not bouncing.
Tax Records
It's always a good idea to save copies of your tax returns, especially if you're
self-employed. If you own your own business, it's important to note that lenders generally
consider your income as the amount you paid taxes on and not the gross income of the
business.
Dividends & Investments
When evaluating your income lenders will usually consider long-term investment dividends,
as well as your investment portfolio.
Alimony and Child Support
If you receive steady payments as part of a divorce settlement or for child support, you
can also include this as part of your gross income. Lenders will want to see a copy of
your divorce court settlement verifying the amount of the payments.
Credit Report
Virtually every lender will want to see a copy of your credit report as part of the loan
application process. The report lists all of your long-term debts, as well as your payment
history. In general, they will require you to pay for the credit report.
Saving for the Down Payment
Saving funds for a down payment should be part of an overall program to get your finances
in order prior to shopping for a home. This includes rounding up financial records,
examining your spending habits, and setting a budget you can live with. Remember, too,
that the down payment is not the only up-front expense. An allowance for closing costs
should also be included in your savings budget.
How much is required?
The down payment is usually expressed as a percentage of the overall purchase price of the
home, and varies depending on the lender, the type of financing and amount of money being
lent. In the past, the typical down payment was 20%, but in recent years lenders have been
willing to offer conventional financing with as little as 3% down. U.S. Government
financing programs, such as those offered by the Dept. of Veterans Affairs (VA) or the
Federal Housing Administration (FHA), also require minimal down payments.
Private mortgage insurance
Typically, if your down payment is less than 20% of the purchase price, lenders will
require you to carry PMI, or private mortgage insurance. This insurance protects the
lender in case of loan default, and usually involves an up-front payment at closing, as
well as a monthly premium. However, once you have paid off 20% of the loan, you can
request the policy be canceled. Some lenders cancel the premium automatically, while
others require you to make a request in writing.
Gifts
If you are having trouble saving enough money, many lenders will allow you to use gift
funds for the down payment--as well as for related closing costs. The gift may come from
family, friends or other sources, but remember that lenders usually require a "gift
letter" stating the gift doesn't have to be repaid. In addition, some lenders will
also require you to pay at least a portion of the down payment with your own cash. Thus,
if you plan to use gift money to purchase your house, ask your lender about their policies
regarding gifts.
Earnest money
Buyers are usually required to deposit earnest money with the seller when they make an
offer. If the offer is accepted, the earnest money is then credited towards the down
payment. The amount varies widely depending on the seller and local custom, but be
prepared from the outset to have funds earmarked for this purpose.
Don't forget closing costs
In addition to the down payment, you will also need to save for additional fees associated
with the loan. Known as closing costs, these charges cover items such as title insurance,
documentary stamps, loan origination fees, the survey, attorney's fees, etc. When you
submit your loan application, lenders are required to supply you with a good faith
estimate of your closing costs.
Some buyers are surprised by the amount of the real estate closing costs, which can easily
run into the thousands of dollars. Remember, though, that closing costs can be negotiated
with the seller. For example, you may agree to pay the full asking price in exchange for
the seller paying all the allowable closing costs. |