Are You a Good Buyer Candidate?

You’ve paid your dues as a renter. Now, your heart is set on purchasing a property you can call your own. But before you discard that lease renewal and start shopping for home furnishings, ask yourself an important question: Do you have what it takes to buy a home, qualify for a mortgage and afford the monthly payments?

Despite your confidence, saving strategies and sacrifices made,

ERIK J. MARTIN, CTW FEATURES

you may be surprised to learn that the answer is no.

The fact is, being eligible for a mortgage loan isn’t easy. And increasingly higher home prices have thwarted many a wannabe buyer. Consequently, it’s crucial to know what to expect before you begin the process, including the minimum qualifications for buyer eligibility.

“Often, potential buyers are excited about the dream of owning their first home. However, they are often unaware and misunderstand the requirements needed when it comes to homeownership and obtaining a home loan,” says Stephen Ho, senior loan officer and mortgage lending expert at Quontic in New York City.

Greg McBride, a chief financial analyst with New York City-based Bankrate.com, agrees.

“First-time buyers commonly underestimate what’s involved in buying and owning a home. Property taxes, property insurance, closing costs, moving expenses, furniture, painting, landscaping, and other upgrades, as well as ongoing maintenance and repairs, are all costs not reflected in the home price,” says McBride. “You don’t want to bite off more than you can chew.”

To make sure you don’t, Ho explains that mortgage lenders will carefully examine four criteria to determine if you’re worth lending money to; he calls these the “4 Cs”: Collateral The type of property that the borrower secures the loan against.

Character The creditworthiness of the borrower, often determined by their credit score/credit report. Capacity The borrower’s ability to repay the loan. Capital Funds that can be put toward the down payment.

“Before a lender decides to preapprove you for a mortgage, they will look at several factors. These include your credit history, debtto-income ratio (DTI), proven employment history, and proof of income, assets, and liabilities,” says Marvin Smith, a credit coach with Atlanta-headquartered DKR Group LLC and co-author of “The Psychology of Credit.” “Think of this pre-approval process as a physical exam of your finances.”

Smith adds that you’ll also be required to furnish sufficient documentation. This includes:

• 60 days of bank statements

• 30 days of pay stubs

• W-2 tax returns from the previous two years

• Income tax returns from the past three years

• Asset account statements (retirement savings, stocks, bonds, mutual funds, etc.)

• A driver’s license or U.S. passport

• A gift letter (if you are funding your down payment with a financial gift from a relative)

“If you are self-employed, the process gets more complicated. You’ll need at least two years of filed tax returns and income statements, a schedule K-1 (form 1065), and possibly a letter from a CPA to prove your income history,” notes George Birrell, CPA, founder of Taxhub.com in New York City.

Of course, a sufficient down payment is another must. To avoid having to pay private mortgage insurance and for better rates and terms, it’s recommended that you have at least 20% of the purchase price saved up. However, many conventional loans can be had for much less than 20% down (and special loan programs offer lowto no-down-payment options, including a 3.5% down FHA loan). Having enough saved up requires cutting out unnecessary expenses and sticking to a carefully plotted budget and savings plan.

Before looking for a loan, and ensuring that you’re a good buyer candidate who can secure a mortgage, it’s smart to check your credit reports, available annually for free (at annualcreditreport.com), from the three major credit bureaus. Work to correct any errors and collection notices reported there. Additionally, strive to up your credit score, which you can likely access for free from your bank or credit card. The Federal Trade Commission offers tips to improve your score at tinyurl.com/ftcscore.

“The minimum credit score for most conventional loans is 620; the higher your credit score, the lower your interest rate and the better your loan terms,” says Birrell.

Also, aim for a low DTI (calculated by dividing your total monthly debts by your total income and multiplying by 100; scores of 45 or lower are recommended) by paying off your debts and increasing your income.

© CTW FEATURES