Owning a home is still the American Dream for a lot of people, and let’s face it, with the right mortgage you could be paying less to own your home than to rent someone else’s. However, with so many options out there, the home buying process can be a little confusing, especially if this is your first time. Here are a few things you need to know when considering what could very well be the biggest purchase of your life.
The first step is knowing your credit rating and what is on your credit report. Your credit report is a record of your financial history, and what is on this report will determine if you are able to obtain a loan for buying a home, and if approved, the interest rate applied to your mortgage. You can obtain a free copy of your credit report from the top three credit bureaus: Experian, Equifax and TransUnion at www.freecreditreport.com
It is advisable to review the details of your credit report and examine it for any inaccuracies. If there are any errors on your report, you may dispute the errors directly through the credit bureau online or by mail. You may also want to consider signing up for a credit monitoring service, such as Credit Karma or LifeLock to keep close tabs on what is happening with your credit profile. To ensure approval and get the best interest rate on your mortgage, a credit score of 700 or higher is to be desired, but you can still get a mortgage with a lower score.
Paying your bills on time is obviously crucial to improving your credit score, but there are many aspects that go into it, and it would be wise to educate yourself on credit before applying for a mortgage. You will also want to avoid new credit applications and opening new accounts within six months of applying for a mortgage. Keeping your credit report clean of any late payments and collection items will be in your favor, as this will help to keep your credit score in good shape.
How Much to Borrow
Before you rush into the purchase of a fancy home that seems like it might be out of your price range, you need to accurately determine exactly what your price range is. This will require some in-depth, honest evaluation of your finances and how much you can afford to pay for a mortgage each month.
First, calculate your total income and your monthly bills including student loans. You will want to pay off as much debt as much as you can to reduce your credit to debt ratio. In addition to reducing how much money you owe each month, this will increase your chances of obtaining your mortgage and keeping your mortgage rate lower.
Next, you need to determine how much you can afford to put down. It’s best to save as much as you can to put towards your down payment. The more you are applying towards a down payment, the less you will have to finance with a mortgage lender.
Once you have a complete picture of your credit profile, your monthly budget and your down payment, you should be able to gauge how much you can afford as your mortgage payment. Remember to include the interest, taxes and insurance when calculating your mortgage payment. The total cost of this payment should not exceed 28% of your gross income.
As we stated earlier, you want to put as much as you can toward the down payment on the house. So, exactly how much do you need to save? Most mortgage lenders will require 10% of the total value of the loan as a down payment, but any amount less than 20% will automatically require you to carry private mortgage insurance (PMI). This insurance protects your mortgage lender should you foreclose prior to building sufficient equity in the property.
Decide on the maximum you want to spend before beginning the mortgage approval process. There are some real estate agents and lenders that may attempt to persuade you into buying a more expensive home than you can afford, perhaps explaining this as an investment that is e decision by reminding you that real estate is bound to appreciate. This is possible; however, it may be in your best interest take a smaller payment you can afford in good times and bad over a bigger one that you may lose in foreclosure.
Buying your first home is one of the most important moments of your life, and it is something you will remember for the rest of your life. If you go about the process correctly, you will remember it as one of your best experiences. If not, it can haunt you financially for years to come. Educate yourself on the process, determine your finances honestly, set your price range accurately and you will be in the best position to own your very first home happily. When it comes down to it, it is a lot of work. It just might be easier to call us and let the Tim Bullock Team take care of it for you. We are here to help you through the process. Let’s chat! Feel free to call us at (330) 576-4619