If you are thinking about buying a house for the first time, take a look at our first article in this series that offers an overview of how to buy a house with some specific tips if you’re looking to buy in Hawaii. We also covered the first step to buying a home– deciding whether now is the right time to buy. Once you know that you are ready to buy a home, it’s time to get your finances in order.
Get Pre-approved for a Mortgage – Having a pre-approval letter signals to sellers and real estate agents that you are able to obtain financing and are a serious buyer. To obtain a mortgage you will need to show the bank the following documents:
- Proof of assets- You will need to show bank and investment account statements to prove that you have the money to cover your down payment (10-20% of the cost of a new home) and closing costs (estimate 3% of a purchase price for these fees).
- Proof of income- W-2 wage statements from the previous 2 years, recent pay stubs, and proof of any additional income such as alimony or bonuses, as well as tax returns from the previous 2 years.
- Good credit- Most lenders require you to have a FICO score of at least 620. The lowest rates are usually available for borrowers with a score of 760 or higher. Having a lower credit score may require you to have a larger down payment.
- Employment verification- In addition to requiring to see pay stubs, your lender will likely call your employer to verify your employment and salary. If you recently changed jobs, your previous employer may also get a call.
If you are self employed- you will likely need to provide significantly more paperwork showing business income including at least 2 years of tax returns.
- Drivers license- You will need to provide a copy of your driver’s license, as well as social security number and signatures that allow the lender to pull your credit report.
Once you have your financials in order- don’t be afraid to shop around for a mortgage. Compare rates with three or more lenders to be sure you get the best rate with a bank you trust. This could be the largest purchase you make in your lifetime- small savings on mortgage interest rates can add up to thousands in the long term. Make sure you compare closing costs across lenders as these can vary as well.
Banks consider multiple factors when deciding whether to approve a mortgage. When banks make mortgage loans they are looking for a safe bet. They are looking for borrowers that have a low debt-to-income ratio, reliable income, a secure employment history, and good credit. All of these factors together tell the bank a story about whether you can be trusted with a loan and for how much. If you are wondering how much house you can afford, this calculator will help you estimate that. Best of luck in your journey to home ownership.