At least 7.7 million people agree that the Bay Area is a desirable place to live. From the countless job opportunities available in the tech industry, the diverse food scene, the proximity to the beach and the many amenities and outdoor activities, the Bay attracts people from all walks of life. Before applying to a Bay Area home mortgage, though, there are a few things you need to know.
To Rent or To Buy?
You may be familiar with the phrase, “Rent, don’t buy.” It’s good advice: renters in the Bay often pay the same or sometimes more than a homeowner’s monthly mortgage payment. With home ownership, you have the flexibility to embark on home improvement projects. You might even get tax benefits. Although purchasing a home is a large financial investment initially, it definitely pays off long-term compared to renting.
The Bay Area and California in general are notoriously expensive due to the highly desirable location on the coastline. With this in mind, it’s important to consider your readiness for a commitment like buying a home. Before applying for a Bay Area home mortgage, you’ll need to plan ahead by taking the following steps.
Do These Things Before Applying for a Bay Area Home Loan
Figure out your budget.
Breaking out the spreadsheet might seem tedious, but budgeting is necessary if you ever plan on purchasing a home. It’s easy to underestimate your spending, especially if you don’t have a system for tracking and adjusting it month to month. To plan an airtight budget, get honest with yourself and lay out all the numbers. What are your necessary monthly expenses? How much can you realistically plan to spend on entertainment, shopping, and nonessentials? What is the trajectory of your current job, and what can you reasonably expect to earn in the future? What is your ideal monthly mortgage payment? If you are buying a home with someone else, such as a partner, their financial plan should be included in this budget.
Gather the correct documentation.
For some, gathering all of the proper documentation can take several weeks. Before you start applying, it’s a good idea to pull together the items that you need.
- Income. The lender needs to verify that you have a steady and adequate source of income before approving a loan. Locate your paystubs, employment and earnings history, and documentation of any further income such as child support or alimony.
- Income History. Some lenders will ask for the past couple of years of your income history. They prefer lending to individuals with a history of a steady income and employment.
- Bank statements. Most lenders require at least two to three months of bank account statements.
Check Your Credit Score.
We mentioned that lenders like seeing a history of steady income and employment – credit scores are also a huge determining factor. Fixing a low credit score takes time, sometimes several years, so it’s always a good idea to be working towards a better credit score. Furthermore, a low credit score can impact the amount a lender is willing to give you and the eventual interest rate you will pay on your home loan.
- Check your credit score with one of the three major credit bureaus: TransUnion, Equifax, and Experian.
- If your credit score is lower than 620, you have some work to do before applying for a Bay Area home loan. Pay off your debts, always pay bills on time, dispute any incorrect charges, and keep aware of how much you owe compared with how much credit you have available.
Reduce Your Debt-to-Income Ratio.
A lender’s biggest concern is your ability to make mortgage payments consistently and reliably. Your debt-to-income ratio is a crucial factor in determining approval for a loan or not. To ensure you have a better chance of getting approved, reduce the ratio to 43% or less. Accomplishing this is a process that takes time, so start early. Halt all unnecessary spending for a few months prior to applying for your loan.
Getting preapproved shows sellers that you’re a serious homebuyer and that you can secure a mortgage, which makes it more likely that you will purchase a home and pay it off successfully. This step streamlines the homebuying process and can help lock down your interest rate. Essentially, pre-approval for a Bay Area home mortgage is a deep dive into your financial history. Lenders will analyze all of the documentation previously mentioned in this article. To give yourself the most time to improve your credit profile, seek out pre-approval six months to a year in advance.
Take a Targeted Approach
Whenever you apply for a loan (that includes a mortgage), it shows up on your credit report and temporarily lowers your credit score. We’ve already determined that a great credit score is essential to getting pre-approved or approved for a home loan, so take heed. However, there’s a way that you can work with the system (rather than it working against you). Applying for several mortgages in a two-week period only counts as one inquiry! To prevent doing damage to your credit score, target your hard inquiries to specific lenders during a two-week period.
Consider Your Home Buying Future
Is that quaint brownstone in the Bay Area your forever home? Based on your current situation and your career trajectory, is a 30-year fixed mortgage right for you? Or would you prefer a 15-year fixed or adjustable-rate mortgage? How long are you planning to keep the property? All of these questions can help you figure out the best loan type for you and your situation.
Buying a home can be both exciting and scary, but there are ways to make the process easier. Following the steps laid out in this article can save you a significant amount of time when preparing to apply for a Bay Area home loan.
Talk to Us
If you’re looking for a mortgage broker in your area, contact The Mortgage Genie by calling (925) 648-0981. With decades of experience and expertise, our team can help you to find and secure the right Bay Area home loan for you.