Getting Finances in Order and Saving for a Down Payment

You should have a clear understanding of your financial situation before beginning your search for a home. You'll have a much better idea of what you can afford and how much you'll need to borrow by thoroughly reviewing your debts, expenses and projected income.

Lenders will verify all your financial information. You should have records available for each person who will be an owner of the home. Before you begin to apply for a loan make certain that you'll be able to provide copies of the following important documents:

Paycheck Stubs
Remember that lenders are most interested in your average income. Not only will they want to see this month's paycheck, but also how much you've been making for the past two years. Steady employment is also more attractive to lenders, so if you've been hopping from job to job, be prepared to discuss the reasons why.

Bank Statements
Most lenders will ask you for copies of your bank statements in order to qualify for a loan. Ideally, they'd like to see a steady history of savings or at the very least, that your checks are not bouncing.

Tax Records
It's always a good idea to save copies of your tax returns, especially if you're self-employed. If you own your own business, it's important to note that lenders generally consider your income as the amount you paid taxes on and not the gross income of the business.

Dividends & Investments
When evaluating your income lenders will usually consider long-term investment dividends, as well as your investment portfolio.

Alimony and Child Support
If you receive steady payments as part of a divorce settlement or for child support, you can also include this as part of your gross income. Lenders will want to see a copy of your divorce court settlement verifying the amount of the payments.

Credit Report
Virtually every lender will want to see a copy of your credit report as part of the loan application process. The report lists all of your long-term debts, as well as your payment history. In general, they will require you to pay for the credit report.

Saving for the Down Payment
Saving funds for a down payment should be part of an overall program to get your finances in order prior to shopping for a home. This includes locating financial records, examining your spending habits, and setting a budget you can live with. Remember, too, that the down payment is not the only up-front expense. An allowance for closing costs should also be included in your savings budget.

How much is required?
The down payment is usually expressed as a percentage of the overall purchase price of the home, and varies depending on the lender, the type of financing and amount of money being lent. In the past, the typical down payment was 20%, but in recent years lenders have been willing to offer conventional financing with as little as 3% down. U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA) or the Federal Housing Administration (FHA), also require minimal down payments.

Private Mortgage Insurance
Typically, if your down payment is less than 20% of the purchase price, lenders will require you to carry PMI, or private mortgage insurance. This insurance protects the lender in case of loan default, and usually involves an up-front payment at closing, as well as a monthly premium. However, once you have paid off 20% of the loan, you can request the policy be canceled. Some lenders cancel the premium automatically, while others require you to make a request in writing.

Gifts
If you are having trouble saving enough money, many lenders will allow you to use gift funds for the down payment--as well as for related closing costs. The gift may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your house, ask your lender about their policies regarding gifts.

Earnest Money
Buyers are usually required to provide an earnest money deposit as good faith for their prospective purchase. If the offer is accepted, the earnest money will be credited to the total amount due by the Buyer. The amount of the earnest money varies, but is usually determined by local customs. In any case, be prepared from the outset to have funds earmarked for this purpose.

Don't forget Closing Costs
In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, documentary stamps, loan origination fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs.

Some buyers are surprised by the amount of the closing costs, which can easily run into the thousands of dollars. Remember, though, that closing costs can be negotiated with the seller. For example, you may agree to pay the full asking price in exchange for the seller paying all the allowable closing costs.