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- According to the Internal Revenue Service (IRS), first-time home buyers are taxpayers who have not owned a principal residence in the three years prior to the purchase date.
- If you are not prepared, the excitement of buying your first home can fade behind a pile of paperwork. If you are considering buying a home, planning is key. Having on hand the appropriate documentation and a reservoir of cash will help ease the process, saving you, your lender and your realtor time and money along the way.
When it comes to qualifying for a mortgage, first-time home buyers should be prepared with either a a letter of pre-qualification or pre-approval. Pre-qualification provides your lender and realtor with a letter or certificate that outlines how much money you are qualified to borrow, based on your monthly income, credit score and debt ratio. This helps narrow your house-hunting to a certain dollar amount, helping you secure a manageable monthly payment.
A pre-approval, on the other hand, provides a more thorough assessment of your financial situation. This letter shows that a lender has closely verified several key factors, including your credit references, employment status and income-to-debt ratio.
- As you begin the mortgage application process, examine carefully how much house you can afford. A lender may be willing to lend you more so that you can buy a more expensive home, but you will be the one making the monthly payment. Consider all the costs that go into home ownership: mortgage payment, property tax, maintenance costs, utilities, mortgage insurance, homeowner's insurance and other relevant costs.
- Long before you begin the mortgage application process, you should get organized. Organizing documents and clearing potential credit hazards can take weeks or months, and preparedness can prevent snags along the way.
Before you begin shopping for a new home, check your credit report. You can purchase a copy from one of the major credit reporting agencies (Transunion, Experian or Equifax). Check it for accuracy, and clear up any errors that may have been reported against your name or your spouse's name. Errors typically take 30 days to be erased from a credit record, and you will need to request a written letter from the creditor. Under federal law, you may receive a free copy of your credit report each year from the three major credit report agencies (see Resources).
Credit scores are important because they reveal a borrower's track record in repaying loans. A low score does not necessarily mean you won't be approved, but it can lead to a higher interest rate on the loan.
Your lender will also require copies of checking and savings account statements for the previous six months, as well as evidence of other investments, like stocks and retirement accounts. Also, keep a file of paycheck stubs as proof of your monthly income, as well as a list of all credit cards, their balances and monthly payments. Other outstanding debts, such as automobile loans, will also need to be included. And finally, provide copies of the last two years' income tax returns.
- When it comes to financing your home, the larger the down payment you can make, the better your financial outlook will become. A higher down payment can lead to a lower mortgage interest rate and can possibly prevent a monthly PMI (private mortgage insurance). And with a higher down payment, your principal drops, leaving you with a lower monthly payment.
Lending programs vary, with eligible buyers required to make as low as a 3 percent down payment. Under certain guidelines, qualifying buyers may not be required to make a down payment.
When you make an offer on a home, you will be required to sign a contract and pay earnest money. The amount of this payment varies--typically as low as $1,000--and is used to help validate the contract. This money is usually held in an escrow account and will go toward the down payment at closing.
Closing costs range from 3 to 4 percent of the home price, but these expenses are often negotiable between buyer and seller and even with the lender through special lending programs.