mortgage

5 tips for first-time homebuyers

So you've decided to go for it. Buying a home can be thrilling and nerve-racking 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 at the outset.

Take these five steps to help make the process go more smoothly.

Check your credit

The credit score of the buyer may be the most important factor when it comes to qualifying for a loan these days.

"In addition, the standards are higher in terms of what score you need and how it affects the cost of the loan," says Mike Winesburg, mortgage planner with McKinley Carter Wealth Services in Wheeling, W.Va.

To get a sense of where your credit stands, go to AnnualCreditReport.com to get your free credit report from each of the three credit bureaus. For an extra fee you can find out what your numerical score is, but just checking the reports should give you an idea of what lenders will see. Scour the reports for mistakes, unpaid accounts or collection accounts.

Just because you pay everything on time every month doesn't mean your credit is stellar, however. The amount of credit you're using relative to your available credit limit, or your credit utilization ratio, can sink a credit score.

"Lenders determine all of the available credit that you have on all of your cards added up and how much your balances are. So if you have $10,000 credit available to you and you have $5,000 on there, you have a 50 percent credit utilization rate," says Winesburg.

The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used.

Repairing damaged credit takes time -- and money if you owe more than lenders would prefer to see relative to your income. Begin the process at least six months before shopping for a home.

Evaluate assets and liabilities

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.

"You should understand a little bit about monthly cash flow," says Winesburg.

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"If I were a first-time homebuyer and I wanted to do everything right, I would probably try to track my spending for a couple of months to see where my money was going," he says.

Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending.

For instance, some professionals, such as the self-employed or straight-commission sales person, may have a more difficult time getting a loan these days than others. Gone are the days of the no-doc loan, thanks to the abuses of a couple years ago.

A stated income loan was available to non-W-2 wage earners in previous years, but today's standards are much more stringent.

According to Winesburg, the self-employed or independent contractor will need a solid two years' earnings history to show.

In short, how you receive and report income as well as how you write off expenses can make a difference to lenders.

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