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How to Finance a Home

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Financing a home is one of the biggest investments many individuals and families make. Buying a home can be scary, especially when the economy is not all that solid or when job security is shaky. Being able to purchase a home depends upon the potential owner coming up with a down payment and being able to show a reliable income to pay back the loan extended to buy the home.

When financing a home, sit down and figure out your financial situation. Look at income and expenses, what you can cut and how much you realistically have left to pay a mortgage. Figure in unexpected situations, such as medical bills and college. The amount you can pay helps determine the size of home you can afford. It makes no sense to buy more home than you can comfortably afford. This only causes enormous stress and, if you cannot pay the mortgage, humiliation and loss of your home.

Consider sources for down payment, such as savings, help from family or taking on an extra job. Gather papers the lender will wish to see, including tax statements, proof of income, expenses, employment record and more. The more you figure out beforehand, the less work has to be done once you visit a lender. In order to get a loan, everything about your finances will need to be documented. The lender wants to make sure you have the resources to pay them back.

Your credit rating does matter. The potential lender will want to know what your credit score is and what problems they may find. The credit bureau lets the lender know if you have loans outstanding and if you have been paying them down on time. The credit report also tells the lender if you have defaulted on any loans. Continually paying bills late does count against you. A poor credit history, means a lender will be very reluctant to finance a purchase as large as a house.

Lenders use ratios to see if you qualify for a home loan. Commonly used ratios are “28″ and “36.” The “28″ ratio refers to the percentage of your before tax gross income that is available for housing expenses. This includes the cost of the mortgage, insurance and taxes. The larger ratio number has to do with the amount of your income available for all of your debts, including a mortgage and expenses. While these numbers can be confusing, you do want to know what the lender uses to evaluate your potential for a home loan.

Before seeing a lender, talk to a realtor and find a house that fits your needs and your budget. Remember that a fix-up home may take more money that your realize to repair. The more information about the house and your financial situation you provide the lender, the more quickly the application process will progress.

Work with a lender that has been in business for years and who has a good reputation in the business. Local offices mean you can talk to a lender face-to-face.

How long the process will take depends upon the completeness of your documentation, economic conditions and the intricacy involved with acquiring the mortgage. Decisions can take 30 or more days. If planning to use a government loan, such as FHA or the VA, decisions may take considerably longer.

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