Getting your financial house in order is critical if you’re interested in buying a home. Here are some steps to take if you want to secure the best financing for your single-family home, townhouse or condo.
▪ Determine your price range: First, meet with a loan officer and give them your tax return and bank statements, said Daisy Gomez, branch manager at American Bancshares in Miami, a mortgage lender.
“A qualified loan officer will be able to tell you what price range you can afford and ask what kind of monthly payment you feel comfortable with,” she said. “For example, you may qualify for $2,500 a month, but you only want to pay $2,000 … so instead of buying a $350,000 house, you have to stay at $260,000 and under.”
Michelle LaPiana, a loan originator with Universal Mortgage & Finance in Miami Lakes, said the allowable ratio of how much debt you carry to how much you make varies by loan type. For Federal Housing Administration, or FHA loans, your debt-to-income ratio can go as high as 55 percent of your gross income. For conventional loans, you can go up to 45 percent, she said.
▪ Examine your credit record: There are steps to take besides saving money for a down payment, said Danielle Blake, senior vice president of government affairs and housing for the Miami Association of Realtors. Look at your credit reports and make sure they are correct, and that there is nothing on there that you’re not aware of, she said. “For example, a medical bill could have gone to a wrong address and then to a collector, and now it’s on your credit report,” Blake said.
Correct errors such as accounts listed on your report that don’t belong to you. Often this is mistaken identity; sometimes it’s a sign that you’re a victim of fraud. Look for notations that say an account is open, when you have paid it off and closed it. Review details regarding credit limits, amounts owed or account opening dates.
▪ Maintain good credit: If you are going to apply for a mortgage loan, keep your credit card balances to a minimum, and don’t apply for new cards. “Every time someone runs your Social Security number to check your credit, it takes points off of your score,” Blake said.
A loan originator can review your credit score to see if there are ways to improve it to help qualify for a lower interest rate, Gomez said. “We also run your credit through a credit simulator and we can tell them if they’re ready to buy now, or if they should wait three months or six months to give them time to do things to raise their credit score,” she said.
Credit simulators from the credit bureaus can determine how to boost a score by paying down an account or taking other actions. “Not all loan originators do this, but the ones who specialize in new construction do because you’re getting the person ready to buy within a certain period of time,” Gomez said.
If you have good credit, don’t head to the furniture store yet, LaPiana said. “Just because you have a preapproval doesn’t mean you should go trade in your car for a bigger one, open a new credit card or go shopping at Rooms To Go,” she said. A credit score is pulled the day before a closing, and it can affect a loan.
“One customer had a credit card with a $100 balance. A few days before closing, the balance was up to $600. It brought her credit score down to 618,” LaPiana said. “Two days before the closing, she had to rush to pay down the credit card balance and then pay $65 to have her credit rescored up to 620, because at 618 her interest rate would have been crazy.
“A few points can kill a deal, make a deal, or break a deal,” LaPiana said.
In terms of credit score, aim for a score of 580 or higher for a Federal Housing Administration, or FHA, loan, she said. For conventional loans, strive for a 660, LaPiana said. “Anything under that, and you will face higher premiums on mortgage insurance,” which protects the lender if a buyer defaults on a loan, she said. Private mortgage insurance, or PMI, premiums are dependent on credit score and down payment.
▪ Get prequalified: “It’s really important,” Blake said. “There’s a prequalification and a preapproval. The prequalification is a phone call, and you can get prequalified in five minutes. A preapproval means you’ve already turned over some of your financial records. It holds more weight.”
Most Realtors don’t even want to take people out if they aren’t prequalified or preapproved, LaPiana said. “To get prequalified, we run your credit. To get preapproved, we get more financial information to see if they qualify for a certain loan amount,” she said.
▪ Consider the extras: LaPiana said closing costs are about 5 to 6 percent of the purchase price.
After you sign a contract and turn it over to a lender to process, you are going to get a closing estimate up front, so you will know all the fees, such as points, attorney fees, closing costs, insurance and taxes, Blake said. “And they can’t go any higher than what was disclosed to you.”
Gather these documents before you apply for a mortgage loan:
▪ W-2 forms from the previous two years, if you collect a paycheck.
▪ Profit and loss statements or 1099 forms, if you own a business.
▪ Recent paycheck stubs.
▪ Most recent federal tax return, and possibly the last two tax returns.
▪ A complete list of your debts, such as credit cards, student loans, car loans and child support payments, along with minimum monthly payments and balances.
▪ List of assets, including bank statements, mutual fund statements, real estate and automobile titles, brokerage statements and records of other investments or assets.
▪ Canceled checks for your rent or mortgage payments.
Learn before you shop
The Miami-Dade Economic Advocacy Trust has a Homeownership Assistance Program that offers a free eight-hour class on how to buy a home, and down payment and financing assistance on a sliding scale by income to first-time home buyers. For information, visit www.miamidade.gov/economicadvocacytrust or call 305-375-5661.