Investing in a new home is a significant milestone, and while it’s an exciting journey, it comes with its own set of responsibilities. Here are some essential tips to make the process smoother:
- Understand Ownership Responsibilities:
Owning a home involves more expenses compared to renting, and it’s crucial to recognize this shift in responsibility.
As a homeowner, you are responsible for property upkeep, unlike renting where the landlord typically handles these expenses.
Be mindful that the expendable cash you had as a renter may now need to be allocated for homeowner expenses.
- Avoid Overbuying:
Don’t solely rely on ratios or approvals to determine your home purchase. Overbuying can lead to payment shock.
Recognize that homeownership involves additional costs, and saving for these expenses is essential.
- Pre-qualify Before Shopping:
Before starting the home search, get pre-qualified for a home loan to understand your affordability.
Know the requirements of any assistance or grant program you plan to use.
If using a down payment assistance program, complete any required courses and obtain certificates before making an offer.
- Plan Ahead:
Planning is key when buying a first home. Begin preparations months or even years ahead of the search.
During the application process, maintain stability by avoiding large purchases, opening new credit lines, or moving cash without proper documentation.
Ensure financial readiness, and be cautious about ‘mattress money’—undeclared cash deposits.
By following these tips and planning ahead, first-time homebuyers can navigate the process with greater ease and set themselves up for a successful homeownership journey.
Understanding Income and Assets
Regardless of the program you choose, a comprehensive review of your income and assets is likely required. Understanding how lenders assess income and assets is crucial for a smoother and less stressful home buying process, benefiting both you and the lender.
Income is generally categorized into two types: W-2 and 1099. If you’re a salaried employee, you should receive a W-2 at the end of the year for tax purposes. This document includes essential details about your income, withholdings, and deductions. Most lenders typically require two years’ worth of W-2s to evaluate a borrower’s income. However, there are exceptions. For instance, if you’re a student or have completed an unpaid internship, you might be able to leverage that period, along with an “employment offer letter” and two months of pay stubs, to demonstrate income. This flexibility means that even if you lack a full two years of employment history, you may still qualify.
On the other hand, 1099 or self-employed income poses a bit more complexity in determining average income. Self-employed individuals often have varied income and various tax write-offs. Business owners, in particular, may need to provide a Schedule C to outline write-offs and determine actual income. Similar to W-2 borrowers, 1099 borrowers typically need a two-year history of income to meet lender requirements. Understanding these nuances can be pivotal in navigating the mortgage application process effectively.
TIP – Do not move money around without tracking it
One significant pitfall that can arise during the loan processing stage is the transfer of money between accounts. Borrowers may maintain multiple checking or savings accounts, and the act of moving funds without proper documentation can lead a loan underwriter to disallow the use of those funds. To mitigate this risk, it is crucial to obtain statements from both the account where the money originates and the account where it is being deposited. This should be done both before initiating the fund transfer and after completing the deposit.
For those receiving a gift to assist with closing costs or a down payment, a similar meticulous approach to tracking transfers is essential. It involves obtaining statements from the individual providing the gift, ensuring transparency and documentation throughout the entire process. This thorough tracking of financial transactions is vital to maintaining the integrity of the loan application and preventing complications during the underwriting process.
Guidelines for Home Buying Using Assistance & Grant Programs: Dos and Don’ts
Don’t proceed with making an offer on a home without obtaining pre-qualification for financing.
Do obtain pre-qualification to determine the affordable amount for your home purchase. This step can provide a competitive edge when presenting offers for a property.
Don’t open new accounts or additional trade lines during the home buying process. While the excitement of acquiring new home furnishings is understandable, it’s advisable to wait until the home purchase is finalized before making significant purchases.
Do refrain from making substantial credit-based or large-item purchases using the funds earmarked for closing. Additional trade lines can impact the Debt-to-Income (DTI) ratio, a crucial factor in loan eligibility. More trade lines may decrease the qualifying amount, and new accounts might negatively influence your overall qualification.
Don’t attend a home buying course without first discussing which assistance program you may be eligible for.
Do consult with an approved lender to discuss your qualifications and requirements for any assistance program before attending a home buying course. Different programs may mandate attendance at specific courses and obtaining a certificate of completion. It’s essential to be informed, as requirements can vary for different assistance and grant programs.
