It’s exciting to go house shopping; learning about the loan application, pre-approval and mortgage process isn’t quite as interesting. Still, educating yourself is an essential part of getting financing for your new home. Owning a home is one of the biggest financial investments you’ll make during your lifetime, so you might be feeling a little overwhelmed by the process. Check out a few tips for first time homebuyers that will make things easier once you do find the perfect property.
Run your credit report. Even if you regularly monitor your credit rating, you should run a report in the months before you decide to start house hunting. You want to have time to correct any errors or repair negative items well before you approach lenders for a mortgage. In addition, you should review your credit report to get an understanding of your credit rating. A score of 620 or more is probably enough to qualify for a mortgage, but you’ll get better interest rates the higher your rating.
Know what you can afford as a down payment. Getting an idea of your budget for a new home involves looking at what you’ve saved up as a down payment. Lenders will typically require you to put down 10-20% minimum down payment in order to grant you a mortgage. But don’t hesitate to save up more than that amount. You may be able to avoid the requirement of mortgage insurance and can reap the benefits of a lower interest rate if you have a larger down payment.
Calculate your debt-to-income ratio. In addition to your down payment, your debt-to-income ratio (DTI) is especially important. Most lenders will only let you borrow if yours is 45% or less. You calculate DTI by taking your total debt and adding it to your monthly payment for mortgage or rent. Then, you divide that figure by your monthly income after taxes.
Get pre-approved. When you initially start house hunting, you’ll want to know what terms you qualify for as far as a mortgage. In many cases, your real estate agent will also want you to be pre-approved to show that you’re really interested in buying rather than just browsing. The pre-approval requires you to submit your credit report, bank statements, pay stubs and tax documents; however, it’s not as robust as your full mortgage application.
Lock in your mortgage loan interest rate. Your pre-approval will include the interest rate you qualify for if you completed the mortgage transaction on that date. However, rates will fluctuate from the time you get your pre-approval and when you actually find your new home. It’s important that you lock in the lowest rate you can while negotiations are taking place and the lender is underwriting your loan. By doing so, you guarantee that the interest rate will apply to your mortgage agreement.
Buying your first place is both thrilling and scary at the same time, but these first time homebuyer tips should help ease your mind as you approach the process. You can see that properly handling your finances during the years and months leading up to purchasing property is critical to obtaining the best lending arrangement. Consulting with a mortgage equity professional is also a wise move to ensure you get the best loan for your dream home.