Buying your first house can be both thrilling and nerve-wracking at once. The American dream of homeownership is so tantalizingly close, but success all depends on your finances and the kind of loan you can access. Your financial preparation and presentation make all the difference to the quality of the house you end up living in. With this in mind, here’s how to finance a house in Houston, Dallas, Austin, or anywhere else in Texas.
7 Keys to Financing Your First House
1. Stabilize Your Income
Every lender needs to see a stable source of income going back at least two years. You’ll be asked to provide recent pay stubs and a W-2 form. For self-employed individuals, your tax returns and other income-related documentation will be requested.
Lenders are expecting to see a consistent source of earnings with no gaps, mysteries, or surprises. So whether you’re an employee, freelancer, or business owner, stabilize your income in the years and months leading up to your loan application.
2. Beautify Your Bank Statements
Your recent bank statements will also be scrutinized, so make sure they’re as attractive as possible. The lenders are checking your statements to verify whether your regular income will cover your monthly loan payments.
They also want to see enough cash for the down payment, closing fees, and various other costs a loan entails. On top of this, they expect to see a healthy buffer of reserve funds: enough to cover a few months of mortgage payments should you suddenly lose your job.
3. Season Deposits Nicely
A lender also wants to see funds that are clearly sourced and seasoned. “Sourced” means they know exactly where your funds have come from. “Seasoned” means your funds have been there for a while rather than suddenly arriving the night before.
Lenders want your funds to be sourced and seasoned to mitigate the chance that you’re using a loan for your down payment, which would make you a very risky borrower. This also helps them to prevent fraud and money laundering. So if you’re moving funds between accounts for your down payment or accepting a down payment gift from someone, it’s best to wait at least 60 days for your funds to season before approaching lenders.
4. Bolster Your Credit Score
Checking our credit report can feel like visiting the dentist after a long break: you know you should do it, but you’re worried about what you might find. But your credit score is one of the most important factors in obtaining a loan. So summon your courage and pull your report at Experian, Equifax, or TransUnion. If you find a problem, you can always take steps to remedy it, so the earlier you check it, the better.
How To Boost Your Credit Profile
If there are any errors on your report, you can dispute them at the credit reporting company. If you have bad credit, consider hiring a credit repair agency to help. You can also contact the credit report companies for their advice on fixing your score, including how to deal with any past-due accounts that went to collectors.
For each credit card or overdraft facility you have, try to keep your balance under 30 percent of the total limit. In the build-up to purchasing your house, focus on paying down excessive debt and meeting your bills on time. Unfortunately, there’s no shortcut to better credit, but with a little frugality, persistence, and patience, you can become a far more attractive prospect to mortgage providers.
5. Budget for Reality
First-time homebuyers are often unaware of the sheer number of costs involved in purchasing a house. On top of the down payment and the start of your monthly interest and loan repayments, you have valuation fees, surveyor’s fees, solicitor’s fees, estate agent’s fees, various closing fees, building insurance, council tax, stamp duty, the costs of repairs, refurbishment, maintenance, and more.
Budget realistically for all the costs you’ll face. Only then will you know what you can truly afford. You’re also far less likely to run into financial trouble down the road. If you’re in doubt about this, consult a financial advisor, and once you’ve determined a realistic budget, stick to it like glue.
6. Find Loan Aid in Houston, Dallas, and Austin, Texas
On the brighter side of things, there are many programs to help you finance a house purchase, especially for first-time homebuyers. Take the time to investigate all of your loan-support options, both federal and local. You might be able to shrink your down payment or even find help with renovation costs. You can ask lenders if any of the following programs back their mortgages:
The Federal Housing Association (FHA) guarantees some private loans, allowing the lender to lower the down payment to as little as three and a half percent. You can apply for an FHA loan even with a lower credit score, but you’ll need to take out mortgage insurance.
These loans are backed by the US Department of Agriculture (USDA), lowering down payments for buyers in rural areas. But with USDA-backed loans, there are various income limitations.
Existing military members, veterans, and surviving spouses can benefit from loans backed by the Department of Veterans Affairs (VA). If you’re fortunate enough to be eligible for a VA-backed loan, they even allow for larger mortgages.
Fannie Mae and Freddie Mac
These two behemoths of the mortgage world provide loans with down payments of as little as three percent. You’ll need decent credit and also mortgage insurance, but there are some options to cancel the insurance once you’ve paid off enough equity later on.
Down Payment Assistance
A huge number of federal and local council programs exist to offer an additional loan that helps you meet your mortgage down payment. Ask lenders you approach which of these programs they participate in and how to apply.
Finance a House Renovation
Believe it or not, there are even loan programs that help you handle the renovation costs of fixer-uppers. So if you’re planning a bit of remodeling after you buy, see if one of these programs can bring your expenses down.
7. Nail It Down With Pre-Approval
Before you start house hunting in earnest, it’s wise to gain official pre-approval from a few selected lenders. This serves several purposes. For one, a mortgage pre-approval letter provides you with a concrete loan amount so you’ll know exactly what you can and can’t afford. This prevents you from wasting time viewing houses out of your price range and getting emotionally attached to the idea of buying a property that’s simply beyond your means (for now, at least).
To grant pre-approval, a lender thoroughly investigates your credit score, bank statements, and other documents. Anything before this is only an estimate and not worth the paper it’s printed on. Once pre-approved, you needn’t fear the unexpected surprise of being turned down by previously positive lenders. With a pre-approval letter in hand, you can also make stronger offers on properties as the sellers know for certain you can buy.
These seven tips will hold you in good stead as you financially prepare to buy your first home. But navigating the world of home loans can be an overwhelmingly complex affair. Contact Home Loans with Gary today for support and guidance through the various financing options. We provide personalized service for first-time homebuyers in Houston, Dallas, Austin, and any other town in Texas.