One of the things we talk about regularly with first-time homebuyers is preparation. Purchasing a home is a huge step financially. It is best to be prepared ahead of time when it comes to knowing how much home you can comfortably afford. Once you have that number in mind, it is time to find the right mortgage product and get pre-approved so that you have the best chance of getting the home you want when you find it.
Take a Good Look at Your Finances
Before you begin your home search, it is time to take a good look at your finances. This includes taking a good look at your available cash, your cash flow (your current income minus your monthly expenses), and your credit history. Buying a house is a big deal, and can potentially put you in a difficult financial situation if you aren’t careful. Your credit report and FICO® score are especially important, as they are a large part of determining what type of loan you are eligible for. Because it can take four to six months to correct credit problems and raise your credit score, your financial assessment should be done well in advance of looking at homes or talking to a mortgage lender.
Know Your Mortgage Payment Limit
Having a sense of your monthly mortgage budget is very important. Many new homeowners make the mistake of accepting a loan that stretches their means too thin, leaving them with no room to deal with emergencies. Remember that other costs go along with owning a home, such as fire and liability insurance, mortgage insurance (usually required if you cannot make a 20% down payment), property taxes, and maintenance expenses. All of this can add up quickly and leave you in a bad place financially if you’re not careful.
When considering your payment limit, take a look at your current monthly bills such as auto loans, student loans, credit card payments, and any other personal loans as well. Anticipating these costs along with the added expenses listed above will help prevent you from accepting a mortgage that is too much for you to handle.
Find a Reputable Lender
There are so many options out there when it comes to mortgage lending and finding the best product for you. This type of work is best left to a professional who knows the ins-and-outs of available products. A professional can quickly match the best options to your specific financial needs. Be mindful, though, of what you are comfortable spending on a monthly basis. Many people qualify for more money than they should actually accept, so don’t be tempted to spend more than your budget allows.
There are many different mortgage programs available to first-time home buyers. Government-backed programs include FHA (Federal Housing Administration), VA (Veterans Administration), and RHCDS (Rural Housing and Community Development Service). Depending on your state of residence, there are likely other programs available to you as well. In all these programs, the government provides a guarantee to the bank to encourage them to lend money with lower down payments. This means the government is not the lender – the bank is, with a guarantee from the government that they will not lose money.
There are other mortgage programs out there that act more like conventional loans. These include CRA (Community Reinvestment Act) mortgages. Federally backed banks and lenders are required to reinvest a certain portion of their funds into low-to-moderate-income mortgages in their area of operation. These loans often have lower interest rates, lower down payments, down payment and closing cost grants, and more liberal qualifying requirements than other loans.
Meeting with a mortgage broker should give you the most options. A broker can collect information from dozens of lenders, knows the programs available via federal and state programs, and can help to find you the best rates and closing costs.
Get Pre-Approved for a Mortgage
Now that you know how much mortgage you can afford and have found the right lender, it is time to get pre-approved for your loan. Having a pre-approval (NOT pre-qualification) makes you a better buyer in the eyes of the seller because you have your financial ducks in a row. It lets the seller know that you have already been approved for financing, pending an appraisal on the property.
A true-mortgage pre-approval is an actual mortgage commitment subject to you getting a home under contract and having it appraised for at least the listed purchase price. This process can take 45 to 60 days, in which the seller has taken their home off the market while you finalize funding. How happy do you think the seller would be when, 45 days later, you can’t secure financing? Most sellers do not want to take that risk and will opt to contract with someone who has a pre-approval vs. some who doesn’t.
It’s not unusual for new home buyers to get pre-qualified for a loan. This is not the same as a pre-approval. A mortgage pre-qualification is a personal opinion by a mortgage professional that you could possibly get a mortgage. There is no review of your finances or credit history, which means it doesn’t mean much to the seller.
Going through a pre-approval involves an extensive credit review, a review of your bank statements and other funding sources, W2s, pay stubs, as well as verification of all the information provided, including employment.
Ready to apply for a mortgage, but don’t know which lender to use? We can help – contact us for information on lenders we like to work within your area.