Buying a home for the first time is always an exciting time. However, there’s a lot that goes into it: from preparing your finances, to going house shopping, to finalizing your purchase. Consider these steps to prepare for a mortgage. This checklist can help you move towards buying your first home! .
Know your credit score and keep your debt low.
Paying off or paying down debts is first on the list of what to do if you want to buy your first home. And while you’re at it, checking your credit score and credit report are musts.
Why is checking your credit score and credit report so important? If you want to qualify for a loan and get one with the best interest rate, it’s important to ensure your credit score is good. If not, this could impact whether or not you will be able to qualify to buy a house, or afford one if the interest rate is too high.
Before you do anything else, focus on paying down your credit cards, paying your bills on time and raising your credit score.
You can get a mortgage with a FICO credit score as low as 550, but 620 gives you the best chance to qualify. The higher your score, the more likely you are to get the best interest rate and terms for your mortgage.
Know your home buying budget and get pre-approved for a mortgage.
Looking to trade in your rent for a mortgage? That’s a great step in the financial game, but there’s a lot more to consider than just trading in your rent for a mortgage. You have to consider the down payment. Will you be able to afford the down payment? (Which could be as little as 3 percent of the purchase price). Additionally, you will have to look at your income and budget, including how much house you can afford before you choose a down payment, type of mortgage or house.
A mortgage pre-approval can give you a solid idea of your mortgage eligibility and how much money you could borrow. This letter also signals to sellers that your lender is on board and you’re ready to buy.
Still, keep in mind that the maximum amount you are approved for by a mortgage lender isn’t necessarily what you can afford. The right lender can’t help you identify both how much you can qualify for AND how much you can afford.
Learn about the home buying process.
Being aware of the steps in the mortgage process can be helpful. That way, you can prepare for what’s ahead. Generally, the steps are:
- Get pre-approved for a mortgage by Weber Mortgage.
- Shop for a home and make an offer.
- Secure a mortgage.
- Have the home inspected and appraised.
- Complete the mortgage underwriting process.
- Close on your new home!
Have money in the bank.
You’ll need funds not only for your down payment but also for closing costs, maintenance and repairs, and emergencies.
How much money do you really need to put down on your first home? It depends.
If a 20% down payment is out of reach or would prevent you from paying closing costs or expenses after the sale, you have options. Some government agencies and lenders offer first-time homebuyer programs that can help with down payments and closing costs. As a general rule, the more money you put down the lower your payment will be, but there are some programs that don’t require any down payment and all have options with as little as 3.5% of the purchase price.
Budget for expenses beyond your mortgage
A home loan is a long-term, monthly expense you’re taking on, and having a financial cushion after closing is key. Be prepared to make payments after a job loss or another hardship.
Good and bad times lie ahead, and you want to be covered on your mortgage either way.
Figuring out what you can afford means adding:
- Property taxes
- Homeowners insurance
- Homeowners association fees
- Potentially higher utility costs if you’re buying a larger home
- Amenity upkeep, such as a lawn or pool
A good rule of thumb is to have 6 months of expenses saved up at all times. Calculate every single expense each month (all things related to housing expenses, groceries, utilities, car insurance, health insurance, emergency savings, etc.) and leave out any “fun money”.
Decide what type of mortgage is right for you
And if you didn’t think you had enough to consider when it comes to buying a home, you now have to consider if you want to get locked up in an interest rate or play it by ear.
Even as a first-time homebuyer, you have an array of mortgage options to choose from. Do you want a government-backed or conventional mortgage? Do you prefer adjustable or fixed interest rates?
A government-backed mortgage guarantees your loan, protecting the mortgage lender from losses if you default on it. The Federal Housing Administration, U.S. Department of Veterans Affairs and the U.S. Department of Agriculture typically offer these programs.
For those who qualify, this type of loan can offer lower approval requirements than conventional mortgages and low or no minimum down payment. But conventional loans may have lower interest rates compared with government-backed mortgages.
Another big choice is between adjustable- and fixed-rate mortgages.
An adjustable-rate mortgage (ARM) has an interest rate that can fluctuate over the life of the loan along with benchmark rates. A fixed-rate mortgage, on the other hand, has an interest rate that never changes, even if rates fall.
Some homebuyers are wary of ARMs and for good reason. The rate for your ARM could adjust – and with it, your monthly mortgage payment – to well beyond what you can afford. This is not recommended for those who are planners, and most certainly not for those who don’t have at least 6 months of expenses saved up at all times. With an ARM you could run through your savings a lot quicker.
Overall, a fixed-rate mortgage can be a safer, more predictable choice for first-time buyers.
Consider the length of your home loan
Most homeowners choose between a 15- or 30-year mortgage.
Both have pros and cons. Let’s look at a 15-year loan. Immediate benefit: shorter-term loan, immediate disadvantage: higher mortgage payment each month. Versus a 30-year loan where you have a more affordable monthly payment and can choose to pay as much as a 15-year loan without being tied into it each month.
Another option you have is to pay your mortgage twice a month. Your mortgage will be split into two and you can pay it bi-weekly. The benefit to this is less interest paid down the road.
Start gathering paperwork
Applying for and closing on a mortgage requires a lot of documents, and working to get ahead can’t hurt. Dotting your i’s and crossing your t’s now will save you headaches down the road. Here are some documents needed for a mortgage:
- Federal income tax records for the past couple of years
- Recent paycheck stubs
- Canceled checks for rent or utility payments
- Also, you’ll want to gather any other documents we might want to see, such as credit card and student loan account statements.
While this may all sound daunting, we’re here to help you along the way. We are committed to earning friends for life through our relationships with our clients, employees and strategic partners. We will do all we can to help those around us grow and prosper by providing a mortgage process that frees up all involved to achieve their greatest potential through financial peace and success.