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There are many steps involved in buying a home, but the first and most important is to meet with a lender. They’ll be able to assess the specifics of your situation and let you know how much house you can afford, and what you can do to improve your circumstances, if necessary. They can also let you know which homebuying programs you might qualify for, including the Nevada Housing Division’s (NHD) Home Is Possible (HIP) down payment assistance programs.
Being armed with this information has always been important — so you don’t risk falling in love with a home you won’t qualify for — but it’s even more critical now. In a market like Nevada is currently experiencing, a prequalification, or better yet, pre-approval letter (more on that later) lets the seller know you’ve done your due diligence and that you can follow through on your offer.
“The bottom line is that it’s a seller’s market, and the seller doesn’t have to give very much to the buyer’s side,” says Scott Reynolds, a branch manager with Evergreen Home Loans in Las Vegas. “You need to go in with your ducks in a row and assume you’re not going to have any room to negotiate.”
Getting Those Ducks in a Row
Reynolds says the prequalification process provides some much-needed context for both lender and buyer. “We want to find out if there are any circumstances that need to occur for them to be able to purchase what they want,” Reynolds says. “For example, do they have a home to sell or a financial gift from a relative they’re waiting on?”
The more information you can give a lender about your financial situation, the better they’ll be able to design a plan that allows you to move forward.
“The key to life is communication,” Reynolds says. “You want to have an open, candid conversation with your loan officer so they can help figure out the best way to help you. Whether or not there’s a reason to be concerned, let’s get the cards on the table so we can see what we’re dealing with.”
Reynolds says lenders are looking at four things:
- Qualifying income
“We’ll look at two years of work history, and we’ll need to verify all income,” Reynolds explains. “And we also want to see where you’ve lived for the past two years.”
Reynolds goes on to explain that not all income is considered qualifying income. For example, tips or other income not reported to the IRS would not be considered. They’ll also look at your credit score and debt-to-income ratio.
Following a Formula
Once they have the information, Reynolds and his team will follow this formula to determine how much house you qualify for:
(Gross monthly income x 45%) - monthly debt = maximum monthly mortgage payment
“Whatever is left over is how much of a mortgage they can potentially qualify for,” Reynolds explains. “But then we have to look at the house they want to buy, how much there is in property taxes, HOA fees or anything else that might apply.”
Reynolds says that he can do a pre-qualification letter based on the conversation, but for buyers to be fully armed, they need a pre-approval letter, which requires pulling a credit report, reviewing paperwork and doing an even deeper dive into the buyer’s situation.
“Once we have all this information confirmed, we can generate a pre-approval letter that they can use in their negotiations,” he explains, adding that a pre-approval letter is different from an approval.
“Once they find the home they want to buy, they need to contact us so we can put in specific data on the property and make sure it fits within the specific programs they want to utilize,” he says.
It’s Not Too Early to Start
Even if you don’t think you’ll be ready to go house shopping for six months or a year, it can still make sense to meet with a lender now. They’ll look at your financial situation and advise you on how much money you’ll need to save, and perhaps how to improve your credit score. The higher the credit score, the lower the interest rate, which will save you thousands of dollars over the life of a loan.
“The sooner we have the conversation, the sooner we can go through their story and get the information on the table so we can tell them what they need to do,” he says. “I’m not a credit repair expert, but if someone needs a specific FICO score, we can input the data, and give them tips on how to get there.”
This could include paying down credit cards, getting down payment money in place or finding a co-signer, things that could take 6 months or longer to achieve. Lenders can also offer advice on whether or not to buy a new car (don’t) or take that new job (depends) while you’re in the mortgage process.
“Getting people aware of their numbers is a great education for them, even if they never buy a home,” Reynolds says. “This conversation lets them move forward in their life armed with important information.”
Is It Time to Move?
When you’re ready to get started, find a lender and then start exploring your options, including which Home Is Possible program might be able to give you the extra firepower you need to get into a home of your own.