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Home Buyer

5 Things You Didn’t Know You Needed to Buy a House

Ready to move out of your parents’ house? Tired of making your landlord's mortgage payment? If so, the time has arrived to start the home buying process. But getting a mortgage is a bit more complicated than renting. A landlord might not sift through your tax returns and credit report with a fine-tooth comb, but a mortgage lender will, so preparation is key.

But even if you know you’ll need to provide proof of income and employment, you might be unaware of other things required to buy a house.

1. Bank statements

Many first-time homebuyers expect to pay a down payment, but they’re sometimes caught off guard when lenders request documentation to verify the source of their down payment. It isn’t enough to “say” you have X amount of dollars available for the home purchase, your lender needs to see copies of bank statements, as well as information on retirement accounts and other assets, as proof.

2. Gift letter

If you don’t have enough in the bank for a down payment and you’re relying on the kindness of a family member, don’t think you can show up to closing with a huge check and offer no explanation of where these funds came from. 

Down payment gifts are allowed, but you also need to include a gift letter with your down payment. This letter comes from the donor, and it’s important because you’re not allowed to borrow funds for a home purchase. The gift letter must include the donor's name, their address, the amount of the gift and a statement confirming that the gift isn’t a loan. The donor may also need to submit copies of their bank statements so your lender can verify the source of funds.

3. Closing costs

You might go into the process expecting to pay a down payment, but this isn’t the only cost you’ll face when purchasing a home. Closing costs are expenses some first-time homebuyers don’t take into consideration. 

These are fees associated with acquiring the mortgage and include the title fees, attorney fees, appraisals, etc. It’s critical that you don’t overlook closing costs because the fees can range from 2% to 6% of the sale price, and they are required in addition to your down payment. If your closing costs are 2% and your down payment is 5%, you’ll need to bring about 7% of the sale price to the closing table.

4. Mortgage insurance

A low-down payment mortgage is perfect because you don’t need a 20% down payment. But if you get a mortgage that only requires 3.5% or 5% down, you’ll also need mortgage insurance. 

Mortgage insurance protects your lender in case of default, and it’s required on most mortgages with less than a 20% down payment. Mortgage insurance allows you to purchase a home with less cash out-of-pocket, but it can also increase your mortgage payment by $100-$200 or more. 

The good news is that a conventional loan waives mortgage insurance once a property acquires about 20% equity. If you get an FHA home loan with less than a 20% down payment, mortgage insurance is required for the life of the loan. Getting rid of mortgage insurance with an FHA loan requires refinancing the property once it has sufficient equity.

5. Profit and loss statement

Getting a mortgage as a self-employed borrower is challenging, but doable. You’ll have to provide at least two years of tax returns showing a profitable business. Your income must either remain roughly the same or increase over this two-year period, and as a self-employed borrower, you might have to reduce your number of business write-offs for the two years prior to getting a home loan. Write-offs reduce taxable income and could result in you qualifying for a smaller amount. 

Since your income can be irregular, you’ll likely need to submit a year-to-date profit and loss statement for your business to show your business income and expenses for the year. This statement isn’t always required, but your lender might request one if you’re applying for a mortgage more than halfway through the year.

Bottom line: Buying a home can provide stability, and depending on where you live, owning might be cheaper than renting. But the process is extremely thorough, and lenders require a lot of information from borrowers. For information on what you'll need to get a home loan, give us a call and we'll be happy to assist.