Friday, October 16, 2009

Getting your Financial House in Order

It occurred to me that I had blogged about pre-construction activities that the architect and builder do, but I have neglected to write about what the buyer needs to do ahead of time. If you are planning to buy a house, your work begins six months to a year before you're ready to go house-hunting. Your most important task is to get your financial house in order first. Then you can start dreaming about that house.
The first thing you should do is to check your credit report. You can get a free credit report online. This report and the FICO score generated by the report are your keys to getting a mortgage. FICO scores are between 300-850...the higher the better. A score above 650 usually assures you of obtaining a good interest rate.
The biggest component of your credit report that determines your FICO score is the length of your credit history. You need to show the lenders that you are a good risk. You need to have a history of paying on time and using just a few credit cards. It can work against you to apply for every credit card you're offered. Limit your options, pay on time, and carry a low or zero balance.
Once you get your credit report, review it carefully and clear up any questions or discrepancies. This may take time so don't wait until you're ready to apply for your mortgage to fix any errors.
The house you can afford depends on your current income and your current debt. Check out an online mortgage calculator so see what price range fits your budget. It's possible to have a great salary, but lots of debt and the bank will reject you. The lender wants a complete picture of your financial situation.
Another major consideration as you get your financial house in order is to make sure you have easy access to your down payment. You'll probably need 20% of the appraised value of the house you want to buy. The lender won't want that in the form of a gift from a family member. They need to know that YOU have the money. Increase your saving program and make sure your money is where it needs to be.
You're almost ready to start house-hunting, but first you need to meet with a lender. This is a good time to get "pre-approved." The bank will take your information and run the numbers to give you a snapshot so that you know in what price range you can afford to shop. This is the time you'll need your financial paperwork in order. Find all of those statements and pay stubs in this early stage of the house-buying process, and you'll save yourself a lot of stress later on.
Here's a list of things the bank will probably need:
1. Bank statements from the last 3-6 months
2. Pay stubs from the last 2-3 months
3. Monthly loan statements for cars, other real estate, etc.
4. W-2's and tax statements
5. Property tax information
6. Transcripts if you're a recent graduate
7. Proof of current balances from utility companies
8. Other income information such as alimony, social security, child support
9. Driver's license, social security card
10. Car titles if you own the car 100%
11. Retirement, 401-K statements
12. Statements for stocks, mutual funds, IRAs
13. 1099 Forms if you received any
14. Your last 3 credit card statements--with low balances (I hope)
Don't get nervous if the bank wants more information. The current "credit crunch" has resulted in much closer scrutiny of lenders and their procedures. Many new regulations are in place to protect both the lender and the borrower so extra cooperation is required of all parties as you work your way toward finding your dream home and closing on the property.

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