3 Things to Know Before Buying a Home
Buying a home is a big decision so you want to be prepared before you even apply. Work through these three questions before you fill out your application.
What’s Your Debt to Income Ratio?
Your debt to income (DTI) ratio is an important number to your lender. It compares your total monthly debt payments (including your potential new mortgage payment) to your total monthly pre-tax income. You can also look at your DTI of just your mortgage payment to monthly pre-tax income (commonly called the front-end or housing DTI ratio).
Calculate your DTI using our DTI Worksheet.
What’s Your Credit History?
Credit history is a critical part of applying for a mortgage. Underwriters look at both your credit report and credit score when making a lending decision.
Think of your credit report as your financial report card. It is a record of your credit history, bad and good. When did you last pull your credit report? If you’re like most Americans, you haven’t done so in over a year. Mortgage decisions are based heavily on your credit history.
Through the Fair Credit Reporting Act, you are legally allowed to pull your credit report for free once a year from each of the three credit reporting bureaus (TransUnion, Equifax, and Experian).
To get your free credit report, go to the government sponsored site at annualcreditreport.com and go through the steps to pull your report. You can pull all three at the same time, or space them out.
If your credit report is your financial report card, your credit score is like your financial grade point average. Using the data from your credit report, a number is calculated that lenders use as an indicator of risk and to determine your interest rate.
Your credit score is based on five major factors: payment history, amount you owe, length of credit, types of credit, and new credit. Each is weighted differently when calculating your score with payment history (35%) and amount owed (30%) having the two largest weights.
How Much Can You Afford?
You don’t want to buy a home that you can’t afford. Before you buy, know how much you can afford. Use the Monthly Payment Worksheet from the Consumer Financial Protection Bureau to:
- Assess current income, spending, and savings
- Estimate your financial responsibilities after buying a home
- Determine how much of a monthly payment you can afford
Ideally, you want your total monthly housing obligations to be no more than 28% of your pre-tax monthly income.
Your Home Loan Toolkit
The Consumer Financial Protection Bureau’s entire reason for existing is to protect the finances of consumers, so yeah, we trust them.
They’ve put together a home loan toolkit that goes into great detail to help you understand the ins and outs of loans, how closing works and how you can choose the best loan for your situation and goals. All in clear, understandable language.
Understanding Mortgage Documents
Mortgages and paperwork go hand-in-hand. But it’s important to know what you’re getting and what you’re signing.
The Loan Estimate must be sent within three business days after the loan application date. Included in the Loan Estimate:
- Interest rate
- Fees for both lender and third-party services
- Estimated closing costs
- Terms and costs for the life of the loan
- Lists prepayment penalties or future expected changes in interest rates
The Closing Disclosure must be delivered three business days prior to closing. Included in the Closing Disclosure:
- Final figures for closing costs, prepaid taxes and insurance, payments, fees, and mortgage terms
- Costs paid by buyer and seller
- What is paid to each real estate company involved
Both the Loan Estimate and the Closing Disclosure are standardized forms that every lender must use. This makes it easier to compare loan offers between lenders.
In addition to the Loan Estimate and the Closing Disclosure, there are important documents you will sign at your closing.
The Promissory Note is the document you will sign indicating your promise to repay your mortgage. Included in the Promissory Note:
- Details of your loan including amount you owe, the interest rate, payment due date, length of time for repayment, and the place to send payments
- Consequences of being late on your payment
The Mortgage/Security Instrument restates the information of the Promissory Note and explains your responsibilities and rights as a borrower. Upon signing this document, you give the lender the right to take your property by foreclosure if you fail to repay your mortgage as agreed.
Initial Escrow Disclosure
The Initial Escrow Disclosure indicates how much you will pay into escrow each month as part of the mortgage agreement. It also shows how your escrow payments will be used to pay taxes and insurance.
Buying a home is a big step and with A+, you don’t have to do it alone. Whether you’re ready to buy now or just interested in seeing how much home you can afford, submit the loan application and an A+ Mortgage Loan expert will reach out to answer questions and discuss options.
The following documents are typically requested to fully process your application. Your Mortgage Loan expert will let you know exactly what you’ll need.
Items required for all borrowers:
- Driver’s license(s)
- Social Security card(s)
- Most recent pay stub(s) covering last 30 days
- Two months statements for all checking, saving, and investment accounts outside of A+FCU – all pages required
- Last two statements on all retirement accounts (or last quarterly statement) – all pages required
- W-2 and/or 1099 for the last two years
- Last two years of tax returns – all pages required
- Proof of Homeowner’s Insurance policy – must include insurance agent’s full contact information and dwelling coverage detail
Items required if applicable:
Your Mortgage Loan expert will let you know what is required.
- Proof of Student Loan Repayment Statement – regardless of deferment status
- Divorce decree
- 24 months child support payment history is used as income or debt
- Copy of Green Card (front and back) – required for Resident Alien
- Copy of HUD I or Settlement Statement from previous closing
- Copy of Note
- Copy of Deed of Trust
- Copy of most recent mortgage statement
- Signed copies of complete tax returns for last two years including all schedules
- Signed copies of business tax returns for last two years
- P&L/Balance Sheet for year-to-date