Becoming a homeowner requires a significant amount of effort, but when you do your homework, the effort pays off in a big way. You have been saving money for months. Your debts are paid and you have been eyeing a particular house for some time now. You make an offer and it gets accepted! Now you have a limited amount of time to close.
Larry White, a mortgage broker for 20 years, says first-time homeowners often don’t take the time to explore their mortgage. As a broker with Invis, White says many people spend more time comparing televisions than mortgage options. Few people wait until weeks before closing to review such details, which may not be a good idea in the long run.
Current mortgage rates are attractive but since some may have different strings attached, first-time buyers need to spend more time learning mortgage options to avoid overpaying or getting stuck with something they can’t afford.
#1 Get prepared early
Your local bank can help you get started. It can pre-approve you for a certain amount, but the process is more for preparation purposes. You will need to gather important documents for the application, such as taxes from the last 2 years, income details, outstanding debt, and your credit score.
The amount you plan to use as a down payment will also be necessary. Keep in mind, you will need additional funds to close the deal along with other things for the home, such as mortgage, and title insurance, and legal fees. Funds may be needed for utility deposits, and maintenance fees are necessary if your home is a condo.
#2 Do your homework and come up with a strategy
Talk with a reputable mortgage broker about your options. Take notes on what is needed to create a good strategy to help you obtain an affordable mortgage. Do homework independently and talk with other mortgage experts.
Mortgage brokers are usually paid by the bank; meaning, some can tell you anything that sounds good vs. telling you what you need to know. Get to know mortgage basics including differences in the fixed-rate vs. variable-rate mortgage.
If you are leaning toward one mortgage over the other, make sure to research terms in further detail. Learn features each mortgage offers. If you hear the term flexible mortgage, would you know what it means and how it is created?
#3 Know how to handle planned or unplanned changes
Think about the options best for your family. One element to consider is what happens if you break your mortgage. There are situations such as divorce, illness, death, or unexpected event that could affect your mortgage and how it is paid. There could be penalties you would suffer if your mortgage ends early.
One option to consider is having a home equity line of credit. This can help with debt obligations or home renovations. Take the time you need to educate yourself to make informed decisions. Don’t allow lenders to pressure you into a mortgage you are not comfortable with. Pay close attention to details in fine print to ensure you don’t pay more than you need to.
#4 Work with an established financial institution
This tip may echo the first one, but with more emphasis on whom you choose to work with. It is common for first-time buyers to seek a mortgage loan through their personal bank, but you don’t have to choose this option if you don’t want to. It is important to complete the mortgage process with an experienced lender.
Work with a lender that can take the information you provide and create a product based on your needs. Some do this and some don’t. Get recommendations from people you know. Learn background history and reputation of potential lenders.
Homebuyers should have financial goals in mind to help them create a plan for the best mortgage. This may include other goals to accomplish in the future such as paying for college, saving for retirement, home improvements, and so on. Knowing these things can give an idea of what you can pay toward your mortgage.
#5 First-time homebuyers have more advantage than they realize
Don’t let the aspect of a competitive mortgage market scare you. Many mortgage lenders are willing to work with you and few feel first-time buyers are highly valuable clients. Lenders are under pressure to make quotes since a decline has occurred in home sale volume. This means they are seeking new business and are willing to negotiate.
Your mortgage is important because it determines other things about you such as lending risk, net worth, and financial future. Getting the right mortgage can help you save thousands. When interest rates increase, negotiate a better rate. It can ensure you will be able to make payments consistently.
#6 Keep tabs on your credit score
First-time homebuyers may seek their credit score for the first time when preparing to buy a house. Consumers should review their credit scores beforehand even before making the decision to buy a house.
Your credit report is your history and has information including employment, current and previous addresses, payment and credit history, and more. Your credit score will be reviewed by the lender and it may be required to be a certain score before you can apply or qualify.
#7 Increase cash savings
Home mortgage lenders may require buyers to make a down payment. You may be required to pay more or less depending on your personal situation and what the lender requires.
Some home loan applications have been rejected when a borrower doesn’t put money down. Keep an eye on requirements for the lender you choose to work with as they are known to change regularly.
#8 Maintain steady employment
There are people known to have a job for a short period of time; they may have gotten a new job and decided to leave days or weeks later. Then, they learn the deal on their mortgage didn’t go through. Being employed or having a form of income during this period is vital. Changes to your income can delay your mortgage.
Lenders grant approval of the mortgage based on your ability to repay along with information you gave on the application. Your finances may need to be reevaluated to see if you are still eligible if your work hours are cut or you become self-employed.
#9 Avoid and pay down debt
You don’t have to have zero debt or $0 balances on credit cards when applying for a home loan. Mortgage lenders do need to see you are able to maintain liabilities. If you have creditors you owe money to, the account should be in good standing. The mortgage lender wants to make sure they can trust you when giving a loan.
Your debt-to-income ratio will be reviewed to make sure you don’t have too much debt that could hinder the ability to repay. If you have too much debt, the lender could reject your application. Your debt, including the mortgage, should not exceed 36 percent of your gross income. Less debt can also help you get a lower mortgage rate.
#10 Seek mortgage pre-approval
When you look at potential homes, this helps in the bidding process while reducing the risk of loving a home you can’t afford. Completing the pre-approval process is recommended by financial experts. It shows the new buyer is being financially and emotionally responsible.
The process is easy and includes a few steps. After contacting the lender, you will provide information about yourself and finances. It also helps you learn what you can pay for, the interest rate of the loan, and you get a letter of pre-approval for record-keeping. When a seller accepts your bid, you gain access to the funds.
Do you need more advice? Feel free to ask in the comments and check out what to do after your mortgage application has been denied and learn if it is wise to prepay your mortgage.