First Time Buyers Financing Guide
Buying your first home is an exciting time and something you've likely been building towards. However, without the proper guidance and steps taken, it can quickly become an overwhelming experience. The key is to have a lender you trust as well as a reliable agent to walk you through the ins and outs of any potential challenges. As your creative agent I’ve developed a little study guide to the finances of home buying.
First things first: How well do you know your money? It's crucial that you have an accurate assessment of your budget, including not only the purchase price, but monthly mortgage amounts, origination fees and closing costs. You need to take a close look at your budget and expenses before you decide what you can pay each month and what you can afford for a down payment. Check out a mortgage calculator to get a better idea of what your potential mortgage payments would look like.
Mortgage rates are a little bit more competitive with a bigger bank, and some buyers (including creatives and sole proprietors) may need to go a different route and choose a lender who can put together a loan based on self-employment and/or a freelancer's finances. That’s where I come in…
Lets go over the difference between pre-qualification and pre-approval
A pre-qualification is an estimate of how much someone can afford to spend on a home, but a pre-approval is much more valuable. In a bustling Los Angeles market where multiple offers are prevalent, it’s not uncommon for listing agents to require a pre-approval, proof of funds and credit or fico score submission as part of the offer guidelines. It reveals that the lender has run your credit and verified all of the provided documentation to approve a specific loan amount based on all variables and debt-to-income ratios (the approval usually lasts for a particular period, such as 60 to 90 days). Final loan approval occurs when the appraisal has been performed, the property comes in at or above value - and is issued by your lender of choice. The loan is applied to a property in the final stages of the escrow period (the escrow period can always fluctuate but is customarily written into the terms of the offer.)
Information you will need to provide for the pre-approval process:
Proof of Income: This includes pay-stubs, all income, w-2 and/or tax filings
Proof of Assets: This will provide evidence that you will be reliable for the down payment and closing costs.
Good Credit: Most lenders/banks will require a fico score of 620 or higher. Better credit will give you a better (lower) interest rate and allow for a lower down payment.
FHA guidelines allow approved borrowers with a fico score of 580 or higher to pay as little as 3.5% down
Proof of Employment: For many in Los Angeles who freelance or work as sole proprietors - tax filings and proof of income for 2 years as the business owner will work.
Other Documents: Copy of driver's license, social security card and any additional verifications you may need based on your lender.
Make sure to gather all of these items before your appointment with the lender so they can provide the answers you are looking for and get a view on what to expect once the loan process begins.
If you can’t obtain a pre-approval, don’t give up so fast, here are some ways to improve your chances in the near future to prepare for the financial responsibilities of home-ownership:
Work to improve your credit score: Your credit score is impacted by payment history, outstanding debt, the length of your credit history, recent credit inquiries, types of credit used, and more. Generally a score of 720 and higher will get you the most favorable mortgage rates.
Correct any errors on your credit report: This could help to raise your credit score. The lender will analyze your credit report for any red flags, such as late or missed payments or charged-off debt. Even if you are deemed to have bad credit, there are ways to still get pre-approved for a mortgage.
Improve your debt-to-income ratio: In general, a debt-to-income ratio of 36 percent or less is preferable; 43 percent is the maximum ratio allowed.
Grow Your Savings: Putting together a larger down payment, will only improve your chances. You can learn more about down payment options from your lender. Also, if you can put together a large down payment (20% or more) you will avoid paying the PMI (primary mortgage insurance) and save yourself a massive amount of money over the term of your loan.
As a first-time home buyer there are a number of grants and programs to help you that your lender should be able to walk you through. Keep in mind that many grants have terms that could dictate how you move forward, so make sure to understand those terms when discussing options with your lender. Some programs require working with certain lenders or buying in certain areas while some grants can only be used for certain things like down payment or closing costs. Pre-approval is going to be essential when you are ready to submit your first offer on a property, if you want the offer to be taken seriously.
Just remember a pre-approval letter is not your final mortgage, it’s only an estimate of what your lender is willing to loan you. The greatest part of a pre-approval means you can start looking at houses with the confidence of purchasing power. Open houses and online listings are a great way to get an idea of what that purchasing power can buy.
As your agent, I am your chief advocate, as well as your dedicated guide through the entire home-buying process. I want to be sure that we find the right fit. I’ve learned solutions for all contingencies in the Los Angeles real estate market, and while the process might seem complicated, with the proper expertise you’ll be able to navigate all of the moving parts of the transaction.
I can ensure that shopping for your home home is a breeze, and with the proper guidance we can even facilitate compliant and safe in-home viewings even throughout the pandemic.
At Compass we provide world-class tech with a state-of-the-art search engine that offers off-market exclusives and coming soon properties which you will not see anywhere else!
I will be right here to answer any and all questions and get you moving forward!
