Getting organized for a first mortgage in advance will help you immensely when its time to buy your first home. Here are some of the things that will give you a head start!
First, you’ll need your down payment. 3–5% at a minimum, however, I recommend 20% as you’ll avoid expensive private mortgage insurance (PMI). The down payment should not be borrowed, rather from your own source of funds, or perhaps as a gift from a family member.
Second, you need to know that the lender is going to look at your affordability – so its best to get organized before they do! The lender will be checking the total amount of monthly debt payments you would be able to afford. This information is obtained from the credit bureau and is typically calculated by multiplying your average monthly income by 35%.
Third, the lender will now subtract any debt payments that show up on your credit file- it gets deducted from your affordability.
For this reason, its imperative to pay off as many debts as possible before applying for a first mortgage.
Example of Barry the Borrower:
|Credit Card A – Monthly Payment||-$100.00|
|Car Loan- Monthly Payment||-$400.00|
|Net Monthly Income||$4,000.00|
|Total Monthly Debt Service Allowance (35%)||$1,400.00|
In the above example, Barry’s monthly income is $5,000/mo, and his monthly debt payments are $500/mo. When Barry starts the mortgage pre-approval process, the lender will assess that he can afford about $1400/mo for a mortgage. In this case, Barry might be approved for a $290,000 mortgage. This is why its super important to have as little debt as possible before getting the mortgage!
But again, using the above example, if the car loan were to have been paid off, Barry would now have a monthly affordability of $1,900/mo, translating to a $398,000 mortgage! That’s over $110k more!
*Pro Tip: Wait until AFTER you buy the home to buy your new Truck!
Next, you’ll want to have a few documents read and on hand. Note these may or may not be required, but in my experience, are incredibly helpful to the lender!
- 2 Years of Tax Returns
- A copy of your latest 3 bank statements (showing payroll deposits)
- A copy of any assets in a brokerage account / 401k you have
- Proof of funds for down payment
Last, the lender will look at your credit score, as it will determine your rate and whether or not the affordability calculation can be relaxed a little. If your credit score is low, you’ll pay more in interest. Even the difference of 0.25% can translate in to thousands of wasted dollars over the life of your mortgage.