Buying a home can be an exciting, exhausting, amazing, stressful process. Being confident in how much you can afford, what to expect, and how the process works can make things easier. Here are some things to start thinking about before you buy. And when you’re ready, we’ll be here to help you find home.
Home Buyer Help
How to “Welcome Home.”
Start saving. Ideally, you should allow at least two years to get your finances lined up. A good rule of thumb when starting to think about a mortgage is that it should take up no more than 28% of your monthly income, including taxes, fees, and insurance.
Know what to expect financially.
In addition to your down payment, expect some other expenses.
Earnest money - is money you put down to let the seller know you are serious about purchasing the home. You’ll pay this when you sign the purchase contract.
Mortgage application fee - covers quite a few different pieces such as the origination fee, recording fees, appraisal, title work, and insurance. As part of your mortgage application, you should receive a loan estimate (LE), which also shows your potential closing costs. Legally, an itemized list of closing costs must be provided to you within three business days of your mortgage application.
Closing costs - are generally 2-5% of the loan amount. Both the buyer and the seller pay closing costs, though you can negotiate with the seller to pay all or a portion of your closing costs. Before closing, you will receive a Closing Disclosure (CD) that shows your final costs.
On-going expenses - like property taxes, insurance, maintenance, and repairs should be considered.
Check your document checklist.
There are several documents you may need to provide depending on where you are in the loan approval process.
- Proof of residential address for the past two years.
- Bank account statements from the past two months for any CDs, IRAs, stocks, bonds or other securities you intend to use for your down payment.
- Current real estate holdings.
- Paycheck stubs from the last 30 days.
- W-2 or I-9 tax forms (issued by your employer) for the past two years.
- A list of any new monthly debts not listed on your credit report.
Preparing Your Finances
Get your finances in order.
It’s important to prepare all aspects of your finances and get them in order, so you’re ready when it’s time to buy. Preparing your finances includes factors like credit score, down payment, debt to income ratio, and employment and residential history.
Paying your bills on time and keeping your monthly debts low are great ways to maintain a healthy credit score. Though it is only one part of the mortgage application, your credit score is very important. A higher score could help get you a lower interest rate or lower your monthly payments.
- Payment history - Lenders want to know that you pay your bills on time – before they lend you money. Always pay at least the minimum payment by the due date, as late payments can negatively impact your score. More serious problems such as bankruptcy can stay on your credit report for years.
If you’re a Southern Bank customer, you can use bill pay inside your online banking profile to set up payment reminders or schedule payments in advance, so you never miss a due date.
- Amount owed - Includes tenant improvements, purchase, and refinance of existing properties
- Length of credit history - How long you have been using your credit accounts affects your credit score. Even if you don’t use them often, older credit accounts help increase the average length of your credit history. In most cases a longer credit history is better.
- Types of credit - If you have several different types of loans, such as credit cards, student loans and mortgages, it shows lenders you can handle multiple payments at once.
- Credit inquiries - If you apply for or open several new credit accounts in a short time period, lenders view you as a bigger risk. Avoid adding new debt (new vehicle, credit cards, store cards) right before and during the home buying process, as it triggers an inquiry and may lower your score.
If your score isn’t where it needs to be, the good news is that you can improve it over time.
A down payment is a portion of the cost of the home that is paid up-front. Saving for your down payment is an important step in the home buying process. A bigger down payment can help you get a better interest rate and lower monthly payments.
To get the lowest interest rates, you’ll probably need a down payment of 20% of the home’s purchase price. FHA, VA, or USDA loans may offer qualified buyers a lower down payment, but keep these points in mind:
- A 20% down payment can help you avoid PMI (Private Mortgage Insurance), an extra cost that tacks on to your mortgage payment as ‘insurance’ in case you don’t make payments on your loan.
- When you make a larger down payment, you borrow less money and will pay less interest over the life of the loan and have lower monthly payments.
Don’t have enough money for a down payment? A great way to start savings for a down payment and other expenses is with a First Time Home Buyer Savings Account.
Debt-to-income ratio - Your debt-to-income ratio helps lenders decide if you qualify for a mortgage. Debt-to-income ratio is the percentage of your (pre-tax) monthly income that you must spend on monthly debts, including the projected payment for your new home. Most lenders typically want your debt-to-income ratio to be less than 45%.
If your debt-to-income ratio is too high, think about how you can lower it. One way to reduce your debt-to-income ratio is by paying off credit cards or making extra payments on car or personal loans. Increasing your down payment can lower your projected monthly payment, as would choosing a less expensive home.
Employment and residence history - Be prepared to provide documentation of your residential history and W-2 or I-9 tax forms for the past two years, as well as paycheck stubs from the last 30 days showing your year-to-date earnings. A stable employment history shows lenders you have a consistent income to be able to make your payments.
The Mortgage Process
After you’ve determined how much you can afford and gotten your finances in order, the next step is to pre-qualify (optional) and begin the mortgage process.
Mortgage prequalification is a free assessment of whether your debt-to-income ratio fits mortgage guidelines and provides an estimate of the amount you may be able to borrow. Pre-qualification is optional, but it's a helpful step in the process of buying a home. You don’t want to find yourself in a situation where you have contractually agreed to purchase a home but are unable to secure a loan. Knowing your purchasing power in advance of searching for a home saves time, hassle, and disappointment.
Why you should pre-qualify:
- Helps establish a realistic price range to use when you start looking at homes.
- Keeps you from wasting time on homes that are out of your budget.
- Shows realtors that you are a serious home buyer (prequalification letters available).
- Doesn't require a commitment from you or the bank, and it’s free.
Here's what you’ll need to provide:
- Your name (and any co-borrowers' names)
- Current address
- Estimated annual household income
- Estimated monthly household debt expenses
Complete the application
You’ve pre-qualified, found the perfect home, and you are under contract with the seller. What next? Now the mortgage process begins. Your lender will have you fill out a full application and ask you for documentation regarding your income, debts, and assets.
Lock in your interest rate
Contact your lender to lock in your interest rate. Locking in your rate assures that the interest rate is guaranteed until the rate lock expiration date, meaning you won’t have to worry about rate changes between the day you apply and the day you close. Terms of the rate lock will be provided to you in writing.
Before you can celebrate your new home, you’ll need to attend the closing, a meeting between the buyer, seller, their agents, and the closing agent. At closing, you’ll have the opportunity to review all of your documents and ask any question about the terms of the agreement. You will also have to pay your down payment and any closing costs at this time. Once you’ve signed everything and paid all closing costs, you’re ready to enjoy your new home.