Getting Your Financial House in Order
When you’re ready to buy a home, you’ll more than likely need to get a mortgage loan. To do that, you’ll sit down with a mortgage lender and discuss your finances so they can help to qualify you for a loan. Once you’re pre-approved, you’ll know how much loan you qualify for, which is vital when you start your home search so you stay within your budget.
As part of the home loan process, your lender will need to understand your financial profile. This includes things like your credit history (and score) and your bank statements and assets. Your credit score is a summary of your credit history, and reflects your debts owed, any new credit, the length of your credit history, your mix of credits, and your payment history.
Your score will range from 580 (poor) to 800+ (exceptional) and will dictate what loan products you qualify for.
When it comes to your bank statements, your lender will look at things like late payments, overdraft charges, large deposits, and big withdrawals. Usually, your lender will ask for the last 2 or 3 months of bank statements and, depending on your closing date, you may have to provide the most recent bank statement when it comes out, too.
This Mortgage Application Checklist may be helpful when you’re starting to organize your documents. More or less, these are the things your lender will ask you for to fully evaluate your finances for a home loan.
Let’s talk about the breakdown of your bank statements in a little more in detail.
Late payments and overdraft charges
When your lender looks at your last two months of bank statements, they’re determining how big of risk you are as an investment. After all, when they give you a home loan, they’re counting on you to pay it back. If you have a history of late payments (which will also affect your credit score), it may indicate that you’re not going to be a trustworthy borrower. Overdraft fees may indicate the same thing — you sometimes have trouble managing your finances.
Large deposits and withdrawals
A large deposit (or several) in your account may be another warning sign to a lender. It could signal to them that there is suspicious activity going on, or that Mom and Dad are helping you financially. While there’s no problem with getting a little help, that occasional help from outside sources may be saying to the bank that you aren’t stable financially.
The same can be said for large withdrawals. If you’re making spontaneous purchases or recently put a large down payment on a car, this may show financial instability as well. Around the time you’ll be applying for a mortgage loan, try not to make any large, unnecessary purchases. We understand that you can’t help it if your car needs $1,000 of repair or you have unexpected healthcare bills, but you don’t need a new plasma TV right now, do you?
If you are going to be getting gift funds from your parents or a relative, documentation is required.
That means your lender will need a copy of their bank statement, showing the money coming out of their account. You may also need a gift funds letter, which your lender will be able to guide you through. Different loan types have different rules about gift funds, so talk with your lender about what you need to do.
Prepare your finances before applying for a home loan
If you know you’ll be applying for a home loan in the next few months, get your finances in order.
It’s also important to keep your finances organized throughout the home buying process. Your lender will double check your finances once more before closing, to make sure everything is relatively the same and stable. You don’t want to make a big purchase (like a car) during the process, either. That way, when you find your dream home, you’re ready to put in an offer and move forward.
Don’t forget about your assets and savings
Your lender will also be interested in any assets and savings you have, so they’ll want copies of those accounts, as well. When you buy a home, for most loan types you’ll need a down payment and cash to cover some or all of your closing costs. Your lender will want to know that you’ll be able to pay these items. Make sure these accounts are in order, too. They’ll want to see that you have the amount you say you want to put down in your accounts prior to closing.
When it comes to a down payment, talk with your lender about your loan options. There are many different loan programs, some with low and no down payment options, so discuss what you qualify for. You can also talk about closing costs with both your lender and your real estate agent. In many situations, you can ask the seller to cover some of the closing costs in your offer. You real estate agent will be able to guide you in the right direction.
Buying a home is an exciting life step, but it’s important to make sure you’re financially prepared. Once you’ve straightened out your finances and gotten pre-approved through your lender, you’re ready to find your dream home and become a home owner.