One of the best experiences in a person’s life is buying that first house. The process can be complicated and even disappointing if a person is not prepared for financing the home purchase. Not many people can pay cash for the first house. Most of us need to secure a home mortgage to buy a home. After planning and saving for years, it is time to buy a home. But, before walking into the mortgage company offices or applying online, there are steps to take to improve the odds for approval. Don’t go looking at houses before securing a loan commitment from a lender.
Getting Your First Mortgage Takes Planning
Getting your first mortgage can be stressful and complicated. Take the stress down a level by planning in advance. When you want to purchase a home, look at your finances and know what you earn now and will be earning in the future and how much you can afford to spend each month on a mortgage and home upkeep. Then start saving money for a downpayment. The money you need for home expenses includes the monthly payment and interest, property taxes, repairs, insurance, utilities, and regular maintenance. If you want to purchase a fixer-upper to save money, you need to figure in how much home renovation might cost.
7 Steps to Get That First Mortgage
Consider these 7 steps to prepare for applying for a mortgage.
- Before contacting any mortgage company or looking at houses, take a good look at your credit scores from the three main credit bureaus. These are Equifax, Experian, and TransUnion and you can check all three at annualcreditreport.com, a website authorized by federal law to give people free credit reports one time a year. When you have these reports, look them over for mistakes and negative items. Dispute any errors.
- Now comes the hard part. Work to improve your credit score by addressing the negative items. You need a credit score of 620 up to 640 or higher to get a good home mortgage. Getting the highest score possible will net you better interest rates and a more affordable mortgage. You can improve the score by making all your payments on time and in full. Reduce the percentage of the debt you owe in relation to available credit. Stop making large purchases on credit several months before you plan to apply for a mortgage.
- Figure out how much house you can realistically affordby calculating your debt to income ratio. The family income has to cover a lot of expenses. The mortgage-related expenses should only be 28% of your income and all debt obligations including the mortgage should be under 43% of your income. If your debt ratio is too high, you will need to work on reducing it before applying for a mortgage. You also have to come up with a down-payment. You can find and use online calculators to help with this calculation. During this process decide what features, size, style, and location you want for your future home. A home within your budget that does not meet your needs is not worth buying.
- Do a little research to become familiar with different types of home loans and choose the kind of home loan that is best for you. There are conventional loans and government-backed loans such as VA or FHA. There are fixed-rate loans and variable interest rate loans. And, there are shorter-term vs longer-term home loans. All of these loans have advantages and disadvantages for the home buyer.
- Getting all the paperwork together with that lenders will want to see is an important task. Some of the documentation lenders require includes income verification, proof of assets, lists of liabilities, and other paperwork required by individual lenders. Lenders want proof that theycan afford to make the monthly payments over the time of the mortgage. Tax returns for two or more years, job verification, proof of other income such as alimony, trusts, etc. will be required.
Bank statements for checking accounts and savings accounts, identification verification, and other documentation should be gathered. Calling the lender in advance to find out what paperwork they require can be helpful.
- Shop for the best mortgage rates. Become familiar with the current trends and averages of mortgage rates. When you find a good mortgage rate, get a commitment to freeze the rate during the mortgage process.
- Visit several lenders to find one that will give you pre-approval for a certain amount. This tells you how much you can borrow for a home purchase and gives you an advantage when making an offer on a house you like. It also keeps you realistic on the price range of houses you should look at.
Mistakes to Avoid
Some mistakes to avoid include:
- Going to open houses and home showings before you are pre-approved for a mortgage or before you have taken the necessary steps to get approved for a mortgage.
- Making large purchases on credit close to purchasing a home.
- Don’t do anything that will lower your credit score such as being late with payments or taking on new debts.
- Don’t try to figure everything out without the advice of a mortgage broker, online mortgage information sources, or others.
- Don’t make big changes in your job or lifestyle close to purchasing a home. Hang on to that job until after the new home is purchased and closed on. But a promotion at work, getting a raise, or a second income stream will be a positive thing for mortgage applications.
- Don’t make big changes or large bank deposits without proper documentation. Lenders do not like unexplained changes in income, lifestyle, or bank accounts.
- Work with professionals like real estate brokers, lawyers, and mortgage brokers to avoid mistakes and complications during the home purchase process. Going it alone can cost you that perfect house, or a good mortgage rate, or cause legal problems.
Purchasing the perfect home with an affordable mortgage is possible if your expectations are reasonable, you do your homework and preparation, and work with professionals who have your interests at heart. Choose a home in the price range you can afford and don’t settle for a house you do not like. Look for the house you like best at the price you can live with.