There comes a time in your life when you'll decide living with your parents or renting an apartment is no longer your best bet. There will likely be a striking moment when you realize that owning real estate is an excellent idea.
When it comes to buying a home, you want to make sure you have everything in order before you make an offer. There are a few things you can do to make sure that happens.
One of the most vital things is understanding how to get a mortgage. Maximum Real Estate Exposure provides some excellent advice on how to prepare.
Before applying for a mortgage, it makes sense to have a firm grasp of what you want. Once you have that nailed down, starting the mortgage process will be necessary.
Let's go over what you need to do before making your mortgage application so you'll be well prepared when a home you love falls into your lap.
What is A Mortgage?
Before explaining how to apply for a loan, it is crucial to understand what a mortgage is and what responsibilities you have with one.
Mortgages are loans typically provided by banks or mortgage lenders, allowing individuals to purchase a home without paying the total amount upfront.
Most home buyers require long-term financing due to the high house cost. The property itself is utilized as collateral in the loan agreement, protecting the lender should the borrower be unable to fulfill their repayment obligations.
Most mortgages require monthly payments comprising of principal, interest, property tax, homeowners insurance, and private mortgage insurance when you have less than a 20 percent down payment.
The principal is the total amount borrowed, while interest is the cost associated with borrowing money from the lender.
Steps For Getting a Mortgage
Improve Your Credit Score
One of the first steps for getting a mortgage is getting your credit scores as much as possible. Striving for a good credit score is just smart.
The first thing to do is get your credit report and see where your scores are at the current time. You're allowed one free credit report a year from each credit bureau.
Once you've got your report, it becomes crucial to check for any errors. If you find something wrong, you must contact the credit bureau to correct it.
Credit scores range between 300-850. The higher your credit score, the better off you'll be when purchasing a home.
To improve your score, take the following steps:
- Pay all of your bills promptly.
- Keep older accounts active even if they're never used.
- Don't apply for any new loans.
- Try to keep your credit utilization under 30 percent.
- Fix any credit report errors.
- Sign up at Credit Karma or Credit Sesame for free credit improvement advice.
Work on Your Debt to Income Ratio
You're likely to hear mortgage jargon called your DTI. It stands for debt-to-income ratio. If you can improve your DTI, you'll be in better shape to get a home mortgage loan.
Mortgage lenders evaluate a potential borrower's debt-to-income (DTI) ratio to measure financial stability. This ratio, which compares debt obligations to income, is a key indicator of the borrower's ability to commit to repayment of the loan.
Generally, a borrower with a lower DTI ratio is more likely to qualify for better mortgage terms.
Lenders like your DTI to be no more than 46 percent. However, you'll be much better financially if you can keep your debt-to-income around 36 percent.
Work on Saving a Down Payment
It goes with saying that having more money to put down on a house is a good thing. You'll avoid paying the lender's private mortgage insurance if you can muster at least twenty percent of the purchase price. Avoiding PMI can save a significant amount of money.
While many think you need to have 20 percent to buy a home, that is a fairy tale. There are many mortgage programs with low and no down payment options.
FHA loans are popular due to their low down payment requirement of 3.5 percent. VA and USDA loans are zero money down if you can meet their eligibility guidelines.
Get The Right Type of Mortgage For Your Needs
When buying a home, there are many mortgage options to choose from. There are conventional, government, and jumbo loans for significant purchases.
You'll also have the opportunity to choose the length of your mortgage. The two most common loan terms are 30 and 15-year mortgages.
However, there are far more available options today. You can choose how long you want to finance a mortgage, from 10-40 years.
Lastly, you will want to decide whether you want the surety of a fixed-rate mortgage or opt for a lower adjustable-rate mortgage. They both have pros and cons.
Get Pre-Approved For a Home Loan
One of the most vital steps in getting a mortgage is being pre-approved. Getting preapproval is far more preferred than a prequalification letter.
With mortgage preapproval, the lender verifies your income, employment, and credit standing.
To obtain a mortgage pre-approval, applicants must submit documentation that verifies their employment and income level, as well as other relevant financial information.
Successful pre-approval enables buyers to signal their seriousness to potential sellers and facilitates the home-buying process.
Sellers and real estate agents will expect preapproval to be taken seriously when submitting an offer.
Find a Mortgage Lender to Apply For a Mortgage
While getting a mortgage preapproval is key, it does not lock you into using that lender.
When considering a mortgage lender, it is prudent to compare options. Several potential sources of financing exist, including banks, credit unions, mortgage lenders, mortgage brokers, and online mortgage companies.
Your real estate agent should also come to the table with suggestions on who to use. Realtors have their preferred lenders they enjoy working with.
Doing comparison shopping is essential as it can make a difference in your mortgage payments and, ultimately, what you're paying for the house.
It is vital to remember that pre-approval for a mortgage loan does not guarantee final approval. Individuals should refrain from making any large purchases or opening new credit accounts between pre-approval and the application for a mortgage loan, as it may affect the potential outcome of the application.
It is also necessary to submit all required documents and undergo underwriting to be granted final approval.
You should now be in a great position to buy your first home. Lean on all the professionals you're working with for expert advice.
Buying a home can be a fun experience when you're well-prepared.