There are specific steps a firsttime homebuyer can take before entering the real estate market that will greatly improve his or her chances of getting financing and being able to purchase a starter home. Here are three proactive steps you should consider taking before you contact a real estate agent or mortgage broker:
1. Check Your Credit Score
If there is a single factor that can help or hurt your foray into the world of financing a new home it is your credit score, according to mortgage-finance experts.
So, if you want a good idea of what your chances are of obtaining such financing, you should first order a credit report from each of the three credit bureaus, Equifax, Experian and Transunion. Just use one of the many online credit monitoring companies that provide the reports, as well as your current credit score for a small fee.
2. Repair Your Credit
Once you get the reports you should carefully examine them to make sure there are no mistakes. If there are any errors, you should contact the credit bureaus and take the necessary steps to have them corrected. You should also look for any unpaid or collection accounts. If there are any unpaid or collection accounts you should settle them immediately, or set up some sort of payment plan. At the very least, this will show that are willing to pay your debts.
A copy of your credit report will also show all of the credit you have available in relation to your credit lines. This is something lenders consider carefully before making a loan. It’s known as your credit utilization rate. For example, if you have total credit availability on your credit cards of $30,000 9 and you owe $20,000, then your credit utilization rate is 67 percent.
This rate has a great effect on your overall credit score. The lower the percentage, the higher your credit score will be, vice versa.
According to industry experts, a good credit utilization rate for a first-time homebuyer is less than 33 percent. If your rate is higher than this, you will have to make a serious effort to pay off as much debt as possible and satisfy any unsettled notes. On average, it takes about six months to improve your credit score.
3. Get Documentation in Order
As we mentioned, today more than ever, mortgage companies by law are requiring documentation of a potential borrower’s income and taxes. The day of the so-called no-doc loan, where no such documentation was required, is gone. In general, a mortgage lender will ask a first-time homebuyer to produce two recent pay stubs and the last two year’s W2 forms in order to apply for a loan.
In addition, the lender will require the applicant to provide two months of bank statements. The exception to this rule is the documentation lenders require of first-time homebuyers who are self-employed or are in commission sales. If you fall into one of these categories, you should be prepared to produce up to three to four years of W2s.
Lenders are looking for steady income and to make sure your last two years or earnings were not an anomaly.
While taking these steps may seem like a lot of work, getting your credit score, working to improve it and gathering your documentation will greatly increase your chances of acquiring a mortgage for your first home when you are ready to buy.