Guide to Buying a Home
Preliminary Financing Concerns
Most homebuyers find that they need to finance at least part
of their home purchase. Therfore, the first stage in finding the
right home is to review your personal financial situation and
make an informed estimate of your true purchasing power. Your
purchasing power will depend on:
• Your Income
• Your Credit Rating
• Other Monthly Expenses
• Your Down Payment
• Available Interest Rates
How Much Home Can You Buy?
The next four steps discussed will help you review home
financing and get you prepared to speak in detail with a lender.
A more thorough overview of the financing process is covered
later in this guide.
Step 1: Make a rough estimate of how much home you can
afford based on your income.
Here are a few methods that will give you an approximate
starting point for how much home you can afford.
Method 1: The price of your home shouldn't be any more
than 2.5 times your annual salary.
Method 2: A house payment should be
no more than 25% of your gross monthly income
Keep in mind that these are guidelines. There are many other
factors that determine how much home you can afford.
Step 2: Take a close look at your credit report.
Credit History is one of the principal measures used by a lender
to determine your interest rate. The better your credit, the
better lending terms your bank or lending institution will be
able to offer you. A higher interest rate translates into a
higher monthly mortgage payment, and so your credit score will
directly affect how much money you can borrow and at which homes
you should be looking.
You should be aware of what information is on your credit report
by obtaining and reviewing copies of your credit report from the
three main credit report agencies.
Remember that there are several factors that affect your credit
report including your payment history, your current ratio of
debt to income and signs of responsibility and stability. And
since not all creditors report to all three agencies, it's best
to order a report from all three institutions. Your goal in
ordering all three credit reports is to make sure that all of
the information stated on each report is accurate and correct.
If there are any discrepancies on your credit report, it's
important that you contact the rating agencies and have those
records corrected. Taking the time to verify and correct your
credit report before you speak to a lender will help eliminate
hassles later on.
Step 3: Gather the Documents / Take a look at your
Assets and Monthly Expenses
Your lending institution will ask you to give a complete profile
of your financial situation. In addition to your income, your
existing assets and debts will determine how much money that you
Below you'll find a list of documents you may be required to
produce regarding your financial situation when you speak to a
lender. It is a good idea to gather these things now and have
them on hand. You will need to provide this information for all
primary and coborrowers.
• Social Security Number
• W2 Forms from the previous two years
• Pay Stubs (most recent months)
• Employment History Summary
• Bank statements for checking and savings accounts (past 3
• Creditor Information. This includes debts like:
• Student Loans
• Auto Loans
• Credit Cards
• Child Support Payments
• Federal Tax Returns (for the past 2 years)
• Complete Record of Assets
• Stocks, bond, and investment accounts
• IRA / Retirement plan
• Life insurance policies
• Automobiles owned
• Construction loan
• Gift letters
• Documentation of other income
any of these areas will help you qualify for better lending
terms, so keep that in mind before you speak with a mortgage
professional. If it's possible to pay off a car loan or a credit
card balance before you seek financing for your new home, the
preferential financing terms that you could receive may save you
thousands of dollars over the life of your mortgage.
Step 4: Talk to a Qualified Lender
After looking at this information for yourself, it's time to
speak to a qualified lender. A professional advisor will not
only be able to give you information on the best rates and terms
available in the current market, but he or she can also explain
to you what options you have given your unique financial
There are a few actions that you can take that will negatively
affect your credit score and therefore
your home purchasing power. If at all possible, you should avoid
making a major purchase or
changing your job if you're seriously considering buying a home
in the next few months.
Talking to a lender at this time will help you get a more
accurate idea of what you can afford. When we begin to look
seriously at homes you'll go back to the lender and shop around
for the best loan available.