What You Should Do Before Entering the Real Estate Market
Before you start looking for a home, you should review your financial situation. Mortgage lenders want to see that you have good credit, so checking your credit score is one of the most important factors. Before you begin your home search, review your credit report to check for errors and to understand how risky you appear in the eyes of the lender.
In addition to your credit, lenders focus on your debt-to-income ratio. Most lenders require your debt-to-income ratio to be 43% or less to approve your application. This means that your total monthly payments—your credit cards, student loans, car payment, and mortgage—should not exceed 43% of your monthly income. If you earn $6,000 a month, your total debt should be less than $2,580.
Saving for a Down Payment and Paying Down Credit Card Debt
Saving for a down payment while paying down high-interest credit card debt is a tricky balance. But the closer you get to eliminating your credit card debt to zero, the better your debt-to-income ratio can become, and your credit score will improve as well.
How much should you save for a down payment? The answer ultimately depends on the type of loan you are using to buy the home. Simply put, the larger your down payment, the greater your savings. A down payment of 20% or more can help you secure a lower interest rate, reduce your monthly payments, and avoid paying private mortgage insurance. However, you don’t have to hit that 20% mark. Instead, you can explore other options like loans that only require 3% down or a 1% down payment option from Zillow, as long as you are aware of the potential risks.
Understanding the Importance of Cash Reserves
Do not put all your money in your bank account for a down payment. In fact, most lenders prefer to see that you have a financial cushion in your account to help you cover mortgage payments in the event of an emergency, like losing a job. You should also be prepared to pay for closing costs and other fees associated with buying a home. Additionally, there may be repairs you need to pay for after you receive the keys to your new home.
Get Pre-Approved for a Home Loan
Getting pre-approved for a mortgage gives you an estimate of how much money you can borrow and verifies your creditworthiness. Most importantly, it tells sellers that you can actually afford the offer you are making on your first home. It’s a simple process that involves submitting financial documents and undergoing a credit check by the lender. With some online lenders, you may be able to get pre-approved in as little as 15 minutes, while other lenders may take longer to review your application manually.
Avoid Financing Anything New Before Buying a Home
When you are trying to secure a home loan, do not borrow money for anything else. This means postponing financing a new car, opening a new credit card, or doing anything else that might raise red flags with your mortgage lender. Buying a home should be your top priority.
Tips for Starting Your Home Search
Know what you need versus what you want. Once you have an idea of your budget, you can start searching for a home through sites like Zillow or Redfin. Searching for a home online has become something of a national pastime, but you should also attend local open houses, talk to real estate agents and brokers, and speak with neighbors who have recently purchased their first homes. At this stage, you should decide what features are important to you in a home: the number of bedrooms and bathrooms, square footage, and type of home, for example. At the same time, you should consider what you can compromise on. Generally, buying a property requires some sacrifice, so you may need to wait a while to update your kitchen or add amenities.
Find
About Finding a Suitable Real Estate Agent
After that, you will want to find a professional, experienced real estate agent with a good reputation who understands the market. Start by seeking recommendations from friends and colleagues, then reach out to local agencies and agents until you find the right person for you. Trust your instincts and ensure the agent is responsive and knowledgeable about the area you are looking in before signing any documents.
Consider New Construction as Well
Your search doesn’t have to be limited to homes that already have owners. According to Redfin, nearly a third of the homes listed for sale are brand new, with developers working to attract buyers with all kinds of incentives. Some may provide to reduce your mortgage rate for a couple of years, while others may cover some of your closing costs. And even if the developer doesn’t offer a bonus, new construction still has advantages since you won’t need to worry about upgrading anything in the home.
Tips for Choosing a Mortgage Loan
Knowing the mortgage loan options available to you can help determine the best choice for your financial situation. Here’s an overview of some common options:
- Conventional Loans: These can be fixed-rate or adjustable-rate, requiring a minimum credit score of 620 and a down payment of at least 3%.
- Federal Housing Administration (FHA) Loans: These require a down payment of 3.5% (10% if your credit score is between 500 and 579). The major downside of FHA loans is that they impose mortgage insurance premiums that usually can only be canceled if you refinance into a new loan after you have built enough equity.
- Veterans Affairs (VA) Loans: If you qualify based on military service or are a veteran or military spouse, VA loans are a great option. No down payment is needed, and many lenders will approve lower credit scores. These loans also have some of the lowest interest rates among all mortgage options.
- U.S. Department of Agriculture (USDA) Loans: If you plan to buy in a rural area, you should consider USDA loans. These loans require a credit score of 640 but do not require a down payment. In most cases, these loans are aimed at low to moderate-income borrowers.
In addition to these four most popular types of mortgages, there are many other options. Some lenders offer special programs for physicians and healthcare professionals, while others provide non-conforming loans to assist applicants with complex financing – such as freelancers and independent contractors – in purchasing a home.
Compare Interest Rates from Different Lenders
Although mortgage rates fluctuate daily based on economic conditions, it is important to compare rates to find the best prices, as they will vary from lender to lender. Obtaining multiple offers from different lenders can save money – borrowers can save an average of $1,500 over the life of the loan just by getting one additional offer and an average of $3,000 by obtaining five offers, according to Freddie Mac.
To obtain customized online quotes, you typically need to provide some basic financial information, which the lender will use to determine your eligibility for a mortgage loan. Pre-qualification doesn’t guarantee these rates but allows you to see the rates you are likely to secure based on your financial situation. This step, which differs from pre-approval for a mortgage, usually does not require a credit check.
Search
About Down Payment Assistance Options and Programs for First-Time Homebuyers
Saving for a down payment may seem like a completely impossible task. In fact, data from Bankrate indicates that 40% of prospective homebuyers believe they cannot afford the down payment and closing costs. However, do not let that discourage you from the real estate market. Conventional loans accept down payments as low as 3% of the purchase price, and there are local and state housing programs that can help low- to moderate-income buyers obtain financial assistance with their initial costs.
There are also programs for first-time buyers available at the state level, so be sure to research local programs in your area. Some of these programs are loans that allow you to borrow the money you need for a down payment, while others are grants that you will never have to repay.
Also Focus on Fees
When reviewing interest rates, you should also consider lender fees, such as analysis, processing, and points fees. If the lender charges high fees, you may actually end up paying more even if they offer a lower interest rate. Lender fees, along with interest rates, make up the annual percentage rate (APR) that you will pay on the home loan.
“Many people just shop based on the interest rate,” says Frank Jakovcic, a certified realtor at Remax Century in Philadelphia. “But fees are built into the APR. The APR gives you a true picture of the cost of that loan.”
Tips for Closing the Home Purchase
Source: https://www.cnet.com/personal-finance/mortgages/advice/tips-for-first-time-homebuyers/
Leave a Reply