The Basics of Home Financing in 7 Easy Steps

U.S. Existing Home Sales Fell in March
Daniel Acker/Bloomberg via Getty Images
Combine low interest rates and improving household finances, and you get a housing market as hot as it ever was, especially in high-priced markets like the San Francisco Bay Area. There, it's not uncommon for a seller to receive 20 or more offers and for sale prices to end up 25 percent over asking prices.

However, since the credit crisis of 2007-09, getting home financing has become more difficult. So it pays to fully understand home financing so you can present your best offer and make sure that the loan process goes smoothly. It's also critical to find mortgage loan officers, real estate agents and financial planners you can trust.

Income, then savings. Banks qualify borrowers on income first, not savings. The general rule is that not more than 40 percent of your pretax income can go to principal, interest, taxes and insurance -- plus any monthly debt obligations such as a car loan, student loans or credit card debt. Lenders will also document that you have enough savings for the down payment, closing costs and at least two to three months of cash reserves covering your PITI plus debt obligations.

Preapproval. This process involves working with your loan officer to document your income, assets and other pertinent issues so that you don't spend time looking at houses that are out of your reach.

Credit score. As early as you can in the home-buying process, check your credit score. The general rule is that a score of 720 and over is golden. A low credit score can increase the interest rate on your loan or prevent you from getting a loan altogether. There are ways to improve your credit score such as paying down balances and checking your credit report for mistakes. Federal law gives you the right to get a free copy of your credit reports from the three major credit reporting companies by going to or calling 877-322-8228. You can also pay to get your credit scores.

Gifts. If a generous relative is willing to give you cash to help fund the down payment or closing costs, you can accept it without having to worry about anyone paying taxes now or later. Each American, as of today, has a lifetime gift tax exclusion of $5.34 million, and very few will come close to maxing out. The amount over the annual exclusion ($14,000 a person, $28,000 for couples in 2014) is reported to the Internal Revenue Service on Form 709 the year the gift is given. In addition, lenders require a gift letter from the donor.

Verifying income. Self-employment income equals net-pretax income, while income for employees is gross wages, as documented on the W-2. In both cases, lenders want to see at least two years of stable income history. If you are self-employed, be ready to produce a profit & loss statement for all quarters not covered by you last filed tax return. Employees may need to supply tax returns as well if there is large variable income such as bonuses.

Documentation of deposits. Low-document or no-document loans are a thing of the past. Lenders need documentation of your income (wages, Social Security, pension). Also be ready to give an explanation and paper trail for any non-recurring deposits over $1,000 that show up in your two most recent monthly bank statements.

Down payment requirements. Most lenders would like to see a 20 percent down payment. You can put less than 20 percent down but will pay private mortgage insurance. Veterans can qualify for a zero percent down Veterans Affairs loan. Anyone can get a Federal Housing Administration loan and put as little as 3½ percent down, but fees are higher, and there is a mortgage insurance premium.

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Prudence Rumore

I do not believe that television is on it way out. Especially the elderly who are too arthritic to use the internet or have never learned it when it first came out -- it is Greek to them. It is also physically strenuous for both elderly and young alike to have a hard day or a difficult few hours trying to learn the Internet. Sitting or stretching out in front of a television whether the screen is normal size or giant screened is for some of the elderly (& also young people) their only form of entertainment & relaxation. And we have a big obligation to take care of & make our elders happy!!! They would be so sad if TV was taken away from them!! Where are your consciences?? Don't tell me you have never lied down in front of the television with a case of the flu or bad cold or headache and simply did not feel well enough for the detailed work of a computer - internet or not. And as we get older most of our eyes get worse, so television is much easier to watch. Some of our elders cannot learn to to enlarge the print on an Internet screen. Please! Do not take television away from my elderly aunts & uncles who have never learned the Internet!!! The world and the TV Industry would not stand for it! Even the President admitted he likes to watch TV sometimes and he has some favorite programs!
I just had another thought: Many elderly people can not afford to pay for "Pay per view" or "Netflix" and similar viewing venues. My 89 year old aunt loves to watch TV & even though she was once very good at emailing and Internet searching she told me she is just too tired to use it anymore. Think of the sick and elderly -- no matter what their ages -- & think of the sick children in hospitals such as St. Jude Cancer Hospital founded by Danny Thomas and now continued by his daughter, Marlo Thomas!! Don't you think that these children have both good and bad days when they can barely watch TV but a funny movie lifts their spirits? Even sick children's spirits are very resilient -- They cheer up easier than adults when they see a funny movie on Television -- whether it is live or a DVD!! Very respectfully, please think again!

May 08 2015 at 7:13 PM Report abuse rate up rate down Reply

Submitting all my paperwork tonight. Looks to be about 500 pages (not a typo) of info they want to see. hope the underwriter has as much fun going thru it, as I did putting it together.

April 23 2014 at 5:13 PM Report abuse +3 rate up rate down Reply

it's a major pain in the azz but well worth it

April 23 2014 at 3:16 PM Report abuse +1 rate up rate down Reply

Utter perfection..

April 23 2014 at 10:02 AM Report abuse -2 rate up rate down Reply