Buying a home can be thrilling and nerve-wracking at the same time, especially for a first-time homebuyer — it’s difficult to know exactly what to expect. The learning curve can be steep, but most of the issues can be resolved by doing a little financial homework.
Take these five steps to help make the process go more smoothly.
The homebuyer’s credit score is among the most important factors when it comes to qualifying for a loan these days.
So you don’t owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month, or are you on a shoestring budget? A first-time homebuyer should have a good idea of what is owed and what is coming in.
When applying for mortgages, homebuyers must document income and taxes. Typically, mortgage lenders will request two recent pay stubs, the previous two years’ W-2s, tax returns and the past two months of bank statements — every page, even the blank ones.
Ideally, as a first-time homebuyer, you already know how much you can afford to spend before the mortgage lender tells you how much you qualify for.
By calculating debt-to-income ratio and factoring in a down payment, you will have a good idea of what you can afford, both upfront and monthly.
Though there’s not a fixed debt-to-income ratio that lenders require, the old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs. This percentage is called the front-end ratio.
The back-end ratio shows what portion of income covers all monthly debt obligations. Lenders prefer the back-end ratio to be 36 percent or less, but some borrowers get approved with back-end ratios of 45 percent or higher.