The Home Buying Process: How Do I Begin?

The FIRST and most important thing that a home buyer should do when beginning the home buying process is obtain mortgage pre-qualification. How can you begin your home search if you have no clue what your budget is? I have dealt with potential buyers that thought they would be approved for a specific loan amount and after they see a lender, find that they can actually afford much less. It can be very heartbreaking especially if you have found a home you love. If you know a realtor that you would like to work with, ask them for recommendations. When you speak with a loan officer, they will require some personal information from you: full name, date of birth, social security number, paycheck stubs and tax documentation (W-2s, 1099s, returns). The lender will pull your credit report, make sure that you have at least two years of credit history, no accounts in default, and a credit score in the 600s range or above.  

Ever read any of Dave Ramsey’s books or listened to his radio show? He encourages people not to open credit accounts and to pay cash for everything. There are a lot of people that operate on the belief that having no credit is much better than having debt. You will not be able to obtain a home loan unless you have at least 3 open credit lines (credit cards, student loans, auto loans, etc) that are at least 24 months old.

When you speak with a loan officer, make sure that they give you an estimated monthly housing payment estimate based on your pre-qualification amount so that you can crunch numbers and apply it to your monthly budget. A lot of times lenders will pre-qualify you for more than you are comfortable repaying on a monthly basis.

Your loan pre-qualification amount is based on your gross yearly income. The standard rule of thumb for lenders is that your monthly housing payment can be no more than 36% of your gross monthly income (this percentage can vary higher or lower based on the loan program you choose). So if you make $1,000/month, your maximum monthly housing payment would be $360. If you are self-employed and/or get paid with commissions, you will need to have 2 full years of employment history and tax documentation to back up your claimed income. The gross monthly income for self-employed borrowers is averaged over the last 2 years. So if you made $45,000 in 2011 and then $100,000 in 2012, your gross yearly income would be $72,500. Your loan pre-qualification amount will be based on $72,500, not $100,000.

A big issue I see self-employed, salary and hourly working borrowers run into is Adjusted Gross Income. Adjusted gross income or AGI is total gross income minus specific reductions. Taxable income is adjusted gross income minus allowances for personal exemptions and itemized deductions. Ever filed deductions on your taxes for gas & mileage, auto leasing, office supplies, client dinners, etc.?  It can afford you a larger tax refund or greatly reduce the amount of income taxes you are required to pay. The problem is that your loan amount is based solely on the income that you pay taxes on (taxable income). So if you made $100,000 last year and filed $30,000 in deductions, your adjusted gross income would be $70,000. Your loan amount would be based on $70,000 NOT $100,000. If you are self-employed and you know in advanced of the tax season that you will be purchasing a home in the following year, I would suggest keeping your filed deductions to a minimum.

Now, let’s review!

Step 1: Speak with a loan officer and ask to be pre-qualified for a mortgage.

Step 2: Find a price range within your pre-approval amount that matches the amount you are comfortable repaying on a monthly basis. If my client is pre-approved for a $200,000 mortgage, I always request that the lender gives an estimated monthly payment amount for $125,000, $150,000, and $175,000. It’s so easy to get wrapped up in the home search that people forget to consider the monthly sticker shock that may come with it!

Step 3: House hunt with your agent and find the perfect place to call home!