.png){kind=logo}
It’s a new year and you’re planning to purchase a new home, that’s exciting! There are a few things to keep in mind that will place you in a prime position for success. We will focus on the steps taken BEFORE you get into the homebuying process and start working with your realtor on finding the perfect property. Qualifying for a mortgage is essential unless you have piles of cash under the mattress. This process begins with optimizing credit, securing a source of down payment, and obtaining a gold-plated pre-approval from a reputable, ideally local, mortgage lender. Checking these three boxes will ensure you are well on your way to homeownership.
Get Your Credit in Order
Credit is critical. You don’t need to know your exact credit score at first, you can instead just work on optimizing it. Pay off those revolving monthly balances, the less debt in your name the better for what is called Debt to Income ratio (a key factor in your mortgage loan approval decision). Pay off credit card balances and any other relatively manageable installments that you’re carrying month to month to try and clean the slate. Everyone has access to one free credit report per year, take advantage of this! Your credit score will directly impact your interest rate and mortgage loan programs that you can qualify for, so do your best to optimize your score and put yourself in a position to succeed right away.
Continuous improvement prevails. There are a few straightforward ways to improve your credit score without making any major changes. First and foremost, do not miss a payment. On-time payments are the single most important aspect of credit history in general. Keep old accounts open and empty to increase your available credit. Do not close any credit accounts, simply stop using them if you don’t need them anymore. If you have little or no credit, you can apply for a secured credit card to get things started. Ask for credit limit increases on existing credit cards while continuing to use them wisely. Lastly, dispute any errors on your credit report that might be making an impact, those are easy points to get back if justified.
Solidify Your Down Payment
Preparation is key. Down payment on a mortgage loan is an important part of the initial steps to homeownership. The amount you have available to put down will have a direct impact on your loan program, your monthly payment, and mortgage insurance (or lack thereof). Sources of your down payment could include things like personal savings, retirement accounts, equity from another property that you own, proceeds from selling your current home, gifts from family, down payment assistance (DPA), the list goes on. The important thing here, outside of the amount, is to make sure that you have the source solidified and planned out before you even apply for a loan as this will likely be your largest out-of-pocket expense of homeownership.
Required quantity depends. It is a common misconception that you must put 20% of your purchase price down in order to qualify for a mortgage: this is simply inaccurate. Minimum down payment requirements will depend on your loan program, your credit, the property type, and your status as either a first-time homebuyer or a repeat buyer. There are some loan programs that require ZERO percent down. That’s right, no down payment and you can still purchase a home. Yes, 20% will get you away from private mortgage insurance (PMI) and will decrease your monthly mortgage payment, but not everyone has 20% of their purchase price laying around, so my point is to do what works best for your unique situation.
Get Your Pre-Approval
Knowledge is power. A mortgage pre-approval provides you with significant insight into your budget. As Author of The Mortgage Reports, Peter Warden writes:
You can then work from this number to identify what you can personally afford each month. It is not always wise to max out your pre-approval amount, but it is a great benchmark. A loan pre-approval also shows sellers that you are financially qualified to purchase a home. This can ease a seller’s mind and will be critical, almost required, in a seller’s market.
Pre-Approval reigns supreme. Arguably the most important step in preparing to purchase a home is obtaining your mortgage pre-approval. This is not only recommended as a first step but is required in most cases to even submit an offer. Most homebuyers want to start with the exciting part, house hunting. However, that will put you behind the eight ball. Working with a trusted mortgage lender will give you peace of mind in knowing that you’re getting the best financial assistance possible for one of the biggest purchases of your life. Do not compensate on the pre-approval process and do not delay this step either as it will serve multiple purposes through the early stages of homeownership.
To Wrap Things Up
Buying a home may seem like an intimidating endeavor, but with sufficient preparation it isn’t so scary. Get yourself in good standing with your credit score, solidify your source of down payment and have an idea of how much you have to contribute, and lastly but most importantly, take the first official step towards homeownership and get that pre-approval. Buying your first home does not have to be a source of anxiety and stress. Instead, it should be fun and exciting, you’re building your future! The more you know, the more you can work to optimize your preparation and set yourself up for success.
For more information or for assistance with preparing to purchase a home, visit us below!
Sources
· Bankrate