This is a common question, and most people probably think my response would be to say “Start Looking” or “Find a realtor you enjoy working with.” But in all reality, the very first step is to find out how much house you can buy. In the real estate industry, we call this “pre-qualifying.” It is an important first step, because you learn what range of homes you can afford to buy, preventing you from future disappointment.
To get “pre-qualified,” I would recommend that you make an appointment with a lender for a face-to-face meeting, but it can be done over the phone as well. Your lender will ask you for some important financial data. It is crucial that you be honest with them, because once you have a home identified and have an accepted offer, your loan will go to the “underwriting” department, where all the information you gave earlier will be scrutinized to assure the lender that the risk is worth it.
Typically, your lender will require that you bring in the following:
- 2 current pay stubs
- Past 2 years W-2 forms
- Bank statements for checking & savings accounts
- Statements for investment & retirement accounts
- Loan numbers on vehicles (and other mortgages, if not a 1st-time buyer)
- Consumer credit card balances and account numbers
If you are self-employed, add the following:
- 2 years of tax returns
- Current Profit & Loss Statement
The lender will look at your credit history and your ability to pay the loan back. This is where your credit score becomes important, as well as job stability. The lender looks at the entire scenario and determines what dollar amount you could qualify for, and will probably recommend the type of loan that would be the best fit for your situation. Often, there are choices available that your lender will discuss with you. At the end of your session with your lender, you will have a pre-qualification letter in hand, and know just how much house you can afford to buy.
Occasionally, a lender will tell the client that he isn’t in a position to buy due to past credit issues. I recommend visiting with your lender about what specific actions you could take to improve your credit score and your ability to get loan approval. If you are pro-active, you can frequently improve your situation within 3 – 6 months.
Your payments will be determined by the amount of the loan, the interest rate, and the term (or number of years used to pay it back). Other factors include the amount of the real estate taxes on the property and the cost of homeowner’s insurance and possibly flood insurance. Your realtor can plug in many scenarios and give you an idea of what your payments will be.
Now that you know how much house to shop for, you can call your favorite real estate agent, let them know your price range, and what other features are important to you, and let the search begin!