So, you’re ready to buy a new home, or you think you may be soon. There are many important things to contemplate before getting a mortgage.
Buying a home is one of the biggest and most important purchases of your life and signing on for a 15- or 30-year mortgage payment can feel…daunting. But if you plan ahead and learn about the mortgage application process, you can be well on your way to becoming mortgage ready in no time.
Understand your finances & plan a healthy budget
When you are looking into buying a new home, a good place to start is with a budget. Understanding how much you can comfortably pay toward your mortgage each month will help set the foundation for your home search. It is important that you don’t overextend yourself and can comfortably make your payment each month. Don’t be afraid to take a pen to paper and work through different scenarios to figure out your loan goals. Make sure to account for utilities or other payments you will need to make each month. Having a good handle on your finances before you get a mortgage will set you up for success as a homeowner.
Be prepared for associated costs
Everyone knows that when you buy a house, a down payment is often part of the equation, but don’t forget about the other costs associated with buying a home. Costs for an appraisal, inspection, and taxes can easily be overlooked, and when all is said and done, closing costs can range between 2-5% of the value of your newly purchased home. Be sure to take these expenses into account and set money aside. When you do get a house, homeowners’ insurance and mortgage insurance are typically rolled into your monthly payment, so these are additional monthly expenses to consider.
Manage your Credit Score and Debt-to-Income Ratio
Two numbers that you will hear again and again the mortgage process are credit score and debt to income ratio. When you talk to your loan officer to get started in the process they will first ask you how your credit is, and then with your permission check to get the exact number. Different loan programs are available which may be a better fit for you based on your specific number.
Some credit card apps have free weekly credit score updates that will help you monitor your score. Other free apps like Mint or NerdWallet make it easy to keep an eye on all your financial information, including your credit score, and even offer suggestions about what to pay off first. Be sure not to open new lines of credit or accumulate new debt before you get a mortgage. This can affect your credit worthiness, so wait to make any big purchases until you have officially purchased your home.
A debt to income ratio is the amount of money you spend per month divided by your take home pay. Mortgage companies take your new proposed monthly mortgage payment into account to ensure it wont be too high a percentage of your take home income.
This ratio helps the lender understand how much you can afford and what a healthy mortgage payment would look like for you. DTI takes all your debt—student loans, auto loan, credit card debt, etc. and compares that to your income. If your DTI is around 36% or lower, that is healthy, but once your DTI is over 45%, your chances of getting approved decrease.
Consider your Down Payment
Another factor to think about in the mortgage process is your down payment. How much money you put down affects the type of home loan that will be best for your situation. Putting 20% down on a home is not required, in fact, the average down payment for first time homebuyers was 7% in 2019. While most loans require a down payment, many only require 3-10% down, and there are zero-down options available. However, if you put down less than 20%, you may be subject to mortgage insurance. This is tacked on to your monthly mortgage payment, but once you have 20% of your home paid off you can get rid of your PMI on certain loan. While putting more money down can save you interest long term, it is not a requirement and customers should consider their full financial pictures when choosing how much to put down on a home.
What documents you need: come prepared
It’s a good idea to have important financial documents on hand before meeting with a loan officer. Being prepared will help expedite the process and make it easier for everyone involved. Check out our documentation checklist to make sure you have everything you need.
- Social security number
- Proof of employment
- Proof of income
- Tax documents
- Place of residence information for the past few years
- Credit information
Consult a loan officer before the house hunting starts to get a better idea of your budget and the type of loan that works best for you. They can offer advice on all the elements that go into the mortgage process and securing a pre-approval letter prior to beginning your home search will set you ahead when you are ready to put in an offer. Check out the next steps here.
When it comes to getting a mortgage, there are many different options. Each person’s mortgage situation is unique, and while you don’t necessarily need to know which kind of loan is best, you should know how much you can comfortably afford to pay toward a house each month. As far as the details of the loan, a knowledgeable loan officer can help advise you about which options makes most sense for you and help get you on the right track to being mortgage ready!
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