Preparing for a home loan

An often overlooked first step of purchasing a house is securing a home loan. While most people who decide they are ready to own property often head straight into open houses and property viewings, local loan officers and real estate agents highly suggest buyers come to them first before they begin their search.

Jennifer Wharton, vice president of Wayland State Bank, said getting pre-approved helps people understand the amount of a loan they can qualify for. 'Getting pre-approved prior to house hunting can help narrow down the price range of homes they should be looking at. It also eliminates someone putting in an offer and then finding out they are not approved for that amount” Wharton explained.

Tammy Dunbar, a broker associate with Fairfield Real Estate, added that most real estate agencies also encourage people to work with local lenders and get preapproved before starting their house hunt.

'If someone finds a property and wants to write an offer, we already know they're approved for. We don't want to waste their time looking at homes not in their price range and we don't want to waste the seller's time either,” Dunbar explained.

Dunbar also said homebuyers should be cautious of online lenders who can be 'predatory.”

'They will quote you a really good interest rate but their closing costs may be four times what it may be working with a local lender, so we encourage people to work with local lenders as much as they can,” Dunbar added.

In terms of securing a loan, Wharton and Kerry Kreiss, a mortgage loan officer for Two Rivers Bank and Trust, said those interested in purchasing a house should begin conversations with loan officers at their local bank to complete a prequalification application.

The process evaluates a person's financial information, including credit score and income to debt ratio, which helps determine what kind of loan a person can comfortably afford.

'For debt to income ratio, we look at things like credit cards, automobiles, student loans. With a house, you're adding in new debt and some people don't realize how much they already have, which can be a hindering factor,” Kreiss explained. The mortgage loan officer added a comfortable total debt to income ratio ranges at 40%.

Wharton also noted another thing people fail to consider when looking into buying a house is their credit score, which can have a large effect on an individual's ability to be approved for a loan.

'For a lot of government programs, there is a minimum credit score an individual must meet. For example, to qualify for a FHA loan, the minimum credit score is 580.” Wharton said. Each loan program has their own minimum credit score that must be met, failure to meet these minimums will often result in an automatic decline, she added.

To build credit, Wharton said a person should have a record of paying bills consistently and on time. For younger first-time homebuyers who may not have credit built up yet, Wharton explained there are things called tradelines that can be used in place of credit such as utilities or phone bills that have been paid under their name.

'Something to show they've paid every month that's in their name that we can get in a bank statement and can see trailed out,” Wharton said.

For those looking to improve their credit, Wharton said an individual should be accessing their credit score report once a year to make sure their credit report is reporting accurately and there are no misrepresentations of past due payments or collections in addition to fraudulent activity..

'A lot of people already know to expect to save up money, but it can be helpful to get a free credit report before they come in so they are aware of where they stand,” Wharton said.

Kreiss added first-time home homebuyers often may not realize there are some upfront costs they have to pay including closing costs as well as at least a 3 to 5% in down payment.

'If someone knows they want to buy a house, I would probably suggest they start saving right away. Any money they can put toward a down payment will help them moving forward. It means they would borrow less money and pay less interest,” Kreiss said.

In general, both Kreiss and Wharton highly suggested potential homebuyers to know where they are financially when preparing to apply for a loan. Wharton suggests setting a budget and taking time to understand their monthly expenses to see where their money is going.

'It's about understanding what's important to them, so if they like to travel, they don't want to be tied so tight that they can't do that or if they like camping and have a camper they have to pay for, you have to take that into consideration. It all depends on their situation,” Wharton said.