When it comes to home loans, first-time home buyers should know that their credit scores and monthly cash flow are crucial factors and that mortgage lenders require income and tax documents, including two recent pay stubs, W-2s for the past two years and bank statements for the last two months, explains Bankrate. They should also determine their debt-to-income ratios and calculate a possible down payment to know the loan amount they can afford to repay.
First-time home buyers should study their credit reports to view their credit scores and discover errors or unpaid accounts, recommends Bankrate. AnnualCreditReport.com is a trusted website that provides free credit reports from the credit bureaus. Prompt payments do not always indicate high credit scores, as credit utilization ratios significantly impacts credit scores. First-time home buyers should maintain plenty of available credit to have a low utilization rate.
Home buyers should also understand that many lenders give importance to a minimum of two years of solid income history, notes Bankrate. Financial institutions generally accept loan applicants who are going to be spending less than 28 percent of their total monthly incomes for housing expenses. Lenders also prefer borrowers that spend no more than 26 percent of their incomes for all other monthly debt payments, depending on the lender. It helps to ask family members, friends and colleagues about their suggested lenders and what important advice they can share about the process of taking out a home loan for the first time.