First-Time Home Buyers: What Lenders Want to Know

So you’ve decided to buy a home. Congratulations! That’s a big decision. Reaching this decision means you have probably been talking to realtors and attending open houses, which is sort of putting the horse before the cart, but then again, there’s no harm in looking. However. there are few realtors out there who will give you the time of day without pre-approval for a home loan. If you are seriously considering a home purchase, it’s time to talk with a lender. Here are some tips for choosing a lender, and what to expect when you finally do.

Choosing A Lender

There are many different types of organizations you can look into when shopping for a loan such as traditional financial institutions (banks, thrifts, and credit unions), internet lenders, mortgage banks and brokers, and real estate agencies. Here are some tips for choosing a lender that’s right for you:

  • Choose a lender that best suits your current financial situation.
  • Ask for recommendations from friends or family members.
  • Check the institutions credentials to ensure they are in good standing with your state.
  • Learn as much as you can about mortgages, and ask questions about anything that is unclear.
  • Research online deals, but exercise caution. If it seems to good to be true, it probably is.
  • Be sure the lender is not quoting you false rates or charging you extra costs during peak home buying seasons.

Also, knowing what kind of borrower you are will help you make a decision. If you have excellent credit and a stable job history, consider internet lenders, banks, or mortgage banks. If you are self-employed, a mortgage broker may be a good option for you. If you have multiple bank or investment accounts at one financial institution, it may benefit you to talk to your current bank about a loan.

What Lenders Want to Know

Once you have decided on a lender, you can go apply for a loan. Here are a few typical questions lenders ask when considering an applicant:

What does your job history look like?

Most lenders want to see at least a two-year job history. If you change jobs but stay in the same line of work, you should not have a problem—especially if the job change is an advancement or increase in income. Some lenders may ask you for contacts to verify employment. Some may even ask you for your high school diploma or college transcripts.

How much money do you make?

Lenders want to know that you have a reliable source of income, and that you can meet the financial responsibility that accompanies home ownership. In addition to making monthly mortgage payments, you will need to pay for utilities, maintenance and repairs, property taxes, and homeowners insurance.

If this seems overwhelming, don’t worry. Typically, lenders don’t mind if your income comes from multiple sources like primary, secondary, and part-time jobs, overtime, bonuses, and commissions. You can even use retirement or veteran’s benefits, disability payments, alimony, child support, and rental or investment income as payment provided they can be verified as reliable and likely to continue for at least three years.

Go into the lenders office prepared with the required paperwork. When you make your appointment, ask the lender what documents to bring with you. Typically, lenders require the following information:

  • Social security number
  • Current address
  • Recent paycheck stubs
  • W2s
  • Bank account statements
  • Investment account statements
  • Income tax returns
  • Evidence of income from other sources (retirement, disability, child support, investments, gifts, etc.)
  • Consumer debt information (credit cards, car loans, student loans, etc.)

Lenders will require this same information from your co-borrower if you have one. Make sure they gather all of their information prior to the meeting.

How much debt do you have?

Lenders want to know if you can pay your bills, and if you pay your bills on time. Your payment habits will factor into whether or not they loan you money. Lenders will pull your credit score, so it’s a good idea to check it out beforehand. You may be able to clear up small debts prior to your meeting if you prepare far enough in advance. It can take anywhere from 30 to 90 days to remove information from your credit report.

What is your credit rating?

Your credit history is an important part of your loan application. Lenders will use your credit score to determine if you are a safe bet or a risk. The FICO score is the most common credit score used by lenders. FICO scores range from 300 to 850; the higher your score, the lower your interest rates.

In general, lenders prefer to loan money to borrowers with low credit card balances, timely payments, and varied credit utilization (car loans, student loans, credit cards). They will consider your outstanding debt, your outstanding debt to available debt ratio, the length of your credit history, and any new credit inquiries.

Do you have a down payment?

The down payment you need depends on the type of mortgage you choose, and typically ranges from zero to 20 percent. However, there are loans available, like FHA loans and VA home loans that do not require high down payments, usually 3% or less.

In addition to down payment assistance, these programs may have more lenient approval guidelines, such as allowing a higher ratio of payment to income or debt to income. They also may accept alternative forms of credit history if you have not established credit.

There is a lot to think about when buying your first home, but these tips should help you get started with the process. Take your time and educate yourself about the process. The more you know, the less stressful it will be, and the more likely you will be to get the house you want for a price you can afford.

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