Purchasing your home is likely the biggest debt you’ll create in your life. There are tax benefits, but it is still a debt. Before you take the leap towards becoming a homeowner, it’s important to understand the ins and outs of securing a mortgage. The mortgage process can sometimes be complicated and overwhelming, but if you enter the game armed with a little knowledge, you’ll be better prepared to purchase the home of your dreams while staying on track with your finances. Here are five things you must do to prepare yourself for securing a mortgage.
1. Monitor Your Credit Report
Your credit report is the main determining factor when it comes to securing a mortgage. If you have poor credit, you won’t get the best rates on loans, or you may be unable to get one at all. Your credit report shows information about the status of any credit accounts you have, and your payment information. Credit companies use this information to calculate the credit score that a mortgage lender uses to determine how likely you are to make payments towards your loan on time. The higher your credit score is, the easier it will be to get a mortgage with good interest rates, which means that you’ll end up paying less in the long term.
To see your credit report, you can contact one of the three main credit reporting companies: Equifax, Experian, or TransUnion. Checking your credit report will not hurt your credit score, but keep in mind that your free credit report won’t include your actual credit score. In fact, there are over 150 different scoring models you can access online. But the only way to see your true mortgage credit score is to get with a lender. Another important thing to remember is that credit reports can contain mistakes, so it’s important to monitor and review it closely. Look for inconsistencies or errors in the spelling of your name, an incorrect address, or employers that you didn’t work for. Also keep an eye out for any accounts you don’t recognize. Be sure to promptly report any incorrect or out of date information, because this could be impacting your credit score.
Improving your credit can take time, which can be a hindrance if you’re ready to buy a home as soon as possible. To give your credit score a boost, pay down any small debts that you can and continue to make payments to any loans or credit cards on time. Avoid any companies that promise to repair your credit by removing items from your credit score, unless referred to you by a trusted professional. There is no shortcut to building good credit.
2. Save For A Down Payment
Saving money for your down payment should be your next step towards securing a mortgage. When you’re able to set aside a good sized chunk of money, you’ll have to borrow less and will end up paying a lower monthly mortgage payment and less in interest overall. When you are able to make a larger down payment, creditors will usually offer mortgages with lower interest rates. But how much is a good amount to put towards your down payment? It all depends on the type of mortgage you are looking at and the price of the home you want to buy.
In the past, it was suggested that you put down at least 20% of the total cost of the house. Of course, it’s a smart idea to put down as much as you can afford to, but many people don’t need to set aside 20%. The United States Federal Housing Administration offers mortgages with only a 3.5% down payment (though the amount of these loans are usually capped, depending on where you live), and many banks offer mortgages starting at a 5% down payment. If you’re looking at a $250,000 home, a 3.5% down payment would be $8,750, a 5% down payment would be $12,500 and a 20% down payment would be $50,000.
Clearly, there’s a big difference between those down payments, but there are always benefits to making a higher down payment. It may be worth it to put off your home buying dreams for a few more months if it means you can put more money down. The more you put down now, the less you’ll end up paying in the long run. In addition, if you’re paying less than 20% down, you’ll also have to pay private mortgage insurance (PMI), as your mortgage lender will want insurance that you’ll pay off your loan in time.
3. Be Realistic
Buying a home is an exciting time, but it’s not a time to set unrealistic expectations. It’s important to think about your current financial state, and your financial future. Even if you can afford a mortgage right now, remember that things can change at the drop of a hat. You may lose your job, need to take a pay cut, or run into unexpected financial difficulties that make it harder for you to pay your mortgage. This sort of thing is unavoidable, but you can prepare for it by not stretching your finances too thin. Make sure that, in addition to your mortgage, you can put aside money in an emergency fund as well. Without an emergency fund, you may find yourself dipping into the money that is meant for your mortgage payment.
First, think honestly about how much of a down payment you can afford. If you really can only afford that 3.5% down payment, be upfront and honest with yourself and your loan professional. Also look at how much you can afford to pay monthly towards your mortgage payment. For example, if you’re paying $1,200 towards rent right now, you may want to look for a mortgage that is just a little less. Remember, if an appliance breaks or you need repairs, you won’t be able to call a landlord to pay for it.
The rule of thumb is to have an emergency fund of at least three months of living expenses. Take a good look at how secure your job is, if you think you’ll have increased earnings in the future, if you plan on expanding your family, and if you think you’ll have other purchases (i.e. a car) to pay off in the future. Looking for instant gratification is never a good plan when it comes to buying a home.
4. Look at Mortgage Types
In most cases, you’ll be able to choose from either a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage. These refer to how long you’ll be paying off the mortgage. In the case of a 15-year mortgage, you’ll be paying higher monthly payments, but your house will be paid off in a shorter amount of time. This means you’ll avoid paying more in interest over the years. A 30-year mortgage is a good option for someone who wants a lower monthly payment, but you’ll end up paying more in interest over the years. In some cases, a 30-year mortgage may cost more than double the price of a 15-year mortgage, but it can benefit your financial future by creating more cash flow, allowing you to pay off more of your other high-interest debts such as credit cards or car notes.
Both of these options offer interest rates and monthly payments that are fixed – this means they’ll stay the same from month to month and year to year. If you want to change interest rates or monthly payments, you’d have to refinance your mortgage. For most families, it makes more sense to choose a 30-year mortgage, as it gives them more time to pay off the balance. Remember, even if you do take out a 30-year mortgage, you can make extra payments or payments that are higher than your minimum payment, so you can pay off the loan sooner.
5. Research The Mortgage Process
Researching the mortgage process and the lenders available to you is an essential step in buying a home. When you’re more informed about the options available to you, you’ll end up making a smarter decision. Remember that a home is a huge investment, and it’s something that many people only do once or twice in their lives, so it’s important to do it right. Start putting out feelers to find out average home prices in the area you want to buy, and look at all the mortgage lenders that you can work with. Put in an application with a lender so you can get Preapproved. It’s important to do this so that the lender can review your situation, and help you determine how much home purchasing power you have. This will help you determine your budget when you begin the home shopping process. When you go to put in offers, a preapproval letter will let the seller know your offer is backed by the lender, and that you’re qualified to buy. If you’re already preapproved and looking to buy, you can use our Homescout app, which offers unfiltered access to all available properties in the MLS.
Ready to move forward in the home buying process? Let the Tuttle Group be your partner. Our expert staff is here to make securing a mortgage easier for you. To get a good idea about how much home you can afford, our handy mortgage calculator is a great place to start. We believe that buying a house should be exciting, not overwhelming. If you’re ready to become a homeowner in the Dallas area, contact us to see how we can help get you in your dream home, or simply Apply Now to get started.
