Congratulations on deciding to buy your first house, that’s a very big deal. But the process you face is an even bigger one.
If you plan to pay for your house with a suitcase full of cash, this article isn’t for you. But if you’re like the rest of us and are about to look into mortgages, there are some things you should know. Financing a home is a process but these 5 crucial tips will help you breeze past the stress and into the comfort of your brand new home.
Follow these five tips to help you prepare now for when you submit your application.
Start your file now, because things can move fast! You just found your dream home... But so did the couple who came in after you. Fortunately, the seller’s on your side as long as you can meet the standard 30-day mortgage contingency to get your approval and 15 days to finalize. Don’t waste that precious time scrambling to get your file together. Do it now.
• Renting now? Grab 12 months worth of rent checks. The bank will need you to verify 12 months of rent and you’ll be glad you’ve already put it in your file. I know this sounds like a hassle but, trust me, you’ll be happy you did.
• Already got your preapproval? Great. Now make sure it’s real. A letter from a bank isn’t a guarantee. Get something with a definitive number so you know how much you’ll be covered for and you won’t come up short.
• Save records of bank deposits. Your bank is going to ask you to explain those deposits on your bank statements. If you put copies of the checks in your file, you’ll have less to look for when you’re busy with inspections, contracts and other aspects of the purchase.
Limit how many times you let people run your credit. Letting someone run your credit score hurts your credit and can cost you real dollars. Don’t get that extra credit card, that discount at the mall or t-shirt at the stadium …. it just isn’t worth it. Every time you authorize someone to run your credit, your scores decrease. So if you’re shopping around for a mortgage at three banks, don’t let them all request the scores. You’ll need to let one do it, but you’re better off if you decide who you want to use and keep it to that one.
I recommend pulling your own credit score now so you have an idea of where you stand and if there are any issues you need to address. Pulling your own score won’t hurt your credit so it’s worth going to www.annualcreditreport.com to get your report. Your report will be free, although the actual score will cost a few dollars. Be stingy with your credit, especially right now. And this applies even if you have great credit. Even a reduction from 780 to 770 could potentially hurt the rate you’ll get. Your credit may end up being one of your most valuable pieces of currency in this process.
Think carefully about including spouses on the application. Like TV, bankers will often look for The Weakest Link, and in our case, that means the applicant is only as strong as the borrower with the lowest score. It may be touchy but I’d recommend excluding a spouse with a low credit score if they could hurt the application. You can absolutely still put them on the title of the house but if the spouse with the higher score has enough income to qualify for the loan, I’d honestly recommend leaving the other person off the mortgage.
Deal with Student Loans now before they become a headache. Most people have student loans and they can be an easy enough point to work around—as long as you address them upfront. I’ve seen many times where a credit report will overstate the monthly payments you have to make. When this has been brought to my attention early enough we were able to address the problem and get a letter from the lender stating the actual payment. But like everything else, this takes time. And if you don’t deal with it now, it might be too late when you do.
Thinking about starting a new business or becoming a consultant? It might pay to wait... As part of the process, most banks require two years of work experience. If you are a W2 employee, it doesn’t matter if the experience comes from one employer or five. You can even have a lapse in time so long as there are a total of two years in a similar field of work. However, if you start a new business or become self-employed as a consultant and get paid with a 1099 rather than W2, you will not be able to provide two years of self-employed income, which is required. This is a very tough issue to get around. In certain scenarios, we can make do with one year of returns, but if you have none to show, you’ll likely be declined. If you are thinking of going out on your own or changing how you get paid or quitting a second job, speak to a lender first to discuss the ramifications.
Finally, talk to your lender and make sure you have everything in order before it’s too late. And then get excited, because your dream home is waiting for you.
David Siegel is a Home Lending Specialist with Citibank in Englewood, NJ. He is also a Bankruptcy attorney and has helped many people resolve consumer, mortgage and student debt related issues. You can reach David at david.siegel_citi.com.
By David Siegel