Buying new homes involves steps and requirements that may confuse first-time home buyers. Mortgage lenders may require pre-approvals, financial history information, down payments, and more. Here is what you'll need when buying a house:
Financial Records and Proof of Income
Lenders will want to know your monthly income, financial history, and outstanding debts. A mortgage lender examines your financial records to determine whether you pay your bills on time. This shows whether you'll be a good mortgage loan candidate. The lender also compares your debt to your monthly income to establish a debt-to-income ratio. There is no minimum income requirement. Mortgage lenders consider other financial factors including your savings, down payment amount, and co-signers.
You may have to provide your lender with proof of employment. This includes documents like pay stubs or W-2 statements. A job offer document can be used as proof of employment if you haven't started the job yet.
Lenders assess your latest credit report to see what type of mortgage you qualify for. Although a lower credit score or no credit history doesn't prevent you from getting a mortgage, it can lead to higher interest rates. If you have a low credit score but want to qualify for a mortgage, make sure you haven't defaulted on any loans in the past year. Any late payments in the past year can also disqualify your mortgage loan application. If you have recently filed for bankruptcy, you may have to wait a few years before applying for a mortgage.
If you don't have a credit score, proof of cell phone, insurance, rent, and utility payments can help prove your credit history.
In the mortgage pre-approval process, a lender assesses your credit, income, and the value of your potential home. They will give you an estimated maximum loan amount and the forecasted interest rate. An approximation of the monthly mortgage payment is also included.
Mortgage pre-approval is not mandatory for buying new homes. But once you have the pre-approval, you can shop with confidence, knowing that your final mortgage application will go through.
Mortgage pre-approvals are only valid for a few months. You may need a new pre-approval if mortgage rates change before you purchase your home.
You'll need to provide a down payment to get a mortgage unless the lender provides 100 percent financing. The down payment amount depends on both the mortgage value and your credit score. Various government-backed loans, such as VA loans and USDA loans, don't have down payment requirements for new homes. The FHA loan is a government program that requires a minimal down payment for home buyers.
A common myth is that home buyers must have a down payment of at least 20%. Today the average down payment for all home buyers in the U.S. is 13%. Lower down payments are common for first-time home buyers, but with a larger down payment you can get a larger loan with a lower interest rate. If you make a small down payment, you can qualify for a mortgage but may face the following challenges:
- Higher interest rates because lenders regard you as a high-risk borrower.
- The need to purchase private mortgage insurance to protect the lender if you fail to pay the loan.
- Little or no equity in your new house.
When purchasing a new house, you'll have to put some money aside to cover closing costs. Closing costs depend on the mortgage value, type of loan, and state of residence. The costs include applicable transfer taxes, insurance, title search fees, attorney fees, and underwriting fees.
Real Estate Agent
A real estate agent can guide you through the journey of buying a new home. The agent can show you properties that fit within your budget and size requirements. Your real estate agent can also help you come up with a competitive offer. They also act as a negotiator with the seller on your behalf.
Be Prepared When Buying New Homes
Make sure you have access to all your financial records. Save enough money to make a down payment and cover the closing costs. Hire a real estate agent and get pre-approved for a mortgage. The more prepared you are before buying new homes, the easier the process will be.