subject: First Time Homebuyers Do You Know What Your Lender Is Looking For In Your Loan Application? Part 4 [print this page] If youre a first time home buyer, financing is one of the most important pieces of the first time home puzzle. For a lender to get a complete picture of your financial situation they will evaluate four areas in your financial picture.
Like the four legs of a chair, the four pillars of a loan application are mutually supportive, and require each to carry its own weight.
Previously weve discussed:
Credit History
Asset
Income
The fourth and final leg of the loan application chair is Reserves. The new catch phrase for Reserves, is your skin in the game and it refers to how much of your money you are bringing to the closing table.
Its been a long held tenant of loan underwriting, that the more skin in the game you have the less likely you will be to default on your mortgage payments.
Here are a few things you should know about Reserves:
* Funds required to close a real estate transaction fall into three categories: Down Payment, Closing Costs and Impounds (reserves for taxes and insurance). The more of these that can be paid from your skin, demonstrates to the lender that you have an ability to save and that makes them feel much better.
* How much skin you have in the game has a direct bearing on how much flexibility a lender has on your debt-to-income ratios (See Income). If your rent payment is lower than your new house payment, an ability to save indicates to a lender you will be able to continue to make your house payment, if some unexpected life event happens.
* No matter how much it might get glossed over, homeownership costs more than renting.(Read Test Drive before you buy) and having little to nothing in the bank after closing leaves you vulnerable financially if something unexpected occurs.
* Most loan programs, allow gift funds from a relative and these funds can be all or part of your cost to close, and thousands of first time home buyers have used the Bank of Mom and Dad to purchase their first home. If a gift is in your homebuying future, make sure you consult with your lender on how and when to transfer the money. Your lender will require a paper trail for all funds that show up on your bank statements., so trust what your lender has to say.
Your first time home loan, is the most important financial decision you will make in your life. It sets the table for your financial future.
Getting the right first time home buyer loan at a competitive interest rate is less expensive than the wrong loan at the lowest interest rate.
