Buying a home is one of the biggest financial decisions you will ever make, so we want to help you be in the know before entering into this big financial commitment!
Start by determining how much home you actually need. If you have a good credit score and income, banks are willing to lend you more money. However, you may qualify for a house that is bigger than you actually need. While it may be tempting to purchase the best house in the best neighborhood that you can afford, keep in mind that other costs of homeownership scale with the price of home you're buying. Stay focused on what you actually need to help keep costs in check.
Next, you need to accumulate cash for a down payment. The larger the down payment, the better terms you'll get on your mortgage. A general rule of thumb suggests to put down 20% of the cost of the home to secure the best rates. However, you may be able to still get a mortgage, even with a smaller down payment.
Make key decisions on what kind of terms you are looking for in the mortgage. You'll get to decide the length and rate type of the loan. For instance, the most common length is 30 years and then 15 years, but there are other lengths available. In general, the shorter length of loan, the lower interest rate you'll pay. There are two different types of rates for mortgages -- fixed and adjustable.
Before qualifying for a mortgage, lenders will need to know that you are good risk before offering you money. Make sure you are in good credit standing and check your credit report. Around 20% of credit reports have errors in them due to things like clerical errors in data entry and occasionally identity theft. Should you find any errors in your report, correct them before applying for your mortgage to improve your chances of getting good terms.
Take charge of any debt that you may have outstanding and pay off whatever you can and get current on the rest. To ensure that you are not over extending yourself by taking on a mortgage, lenders will calculate your debt to income ratio. Generally speaking, banks want to see that you are putting less than 36% of your income towards debt before they approve you for a mortgage and once the mortgage is factored in, the ratio should be below 43% of your income. Also, it is important to not take on any new debt within 90 days of applying for a mortgage. Even small hits to your credit can knock you into a higher risk tier.
You will need to show proof of income, so make sure it is documented along with the source of your down payment. You can provide proof of income using a W-2 or 1099 from previous years, as well as recent pay stubs. Proof of down payment cash can be in the form of checking or savings account statements. If you have any large recent deposits, make sure to provide documentation as to where it came from -- whether it is a gift or a loan...etc.
Check around and research a select group of lenders that you would want to do business with before filling out a mortgage application. By doing research in advance, you can avoid filling out multiple applications and getting hits to your credit.
Buying a home is a big commitment, so it's important to plan ahead for it! You'll want to have a great team behind you through the whole process, so give us a call when you are ready to buy!