A happy home-buying experience hinges on getting all the details right and no nasty surprises. If you’re in the market for your first home, we’ll highlight some critical items to remember below, so your experience may be as stress-free as possible.
This knowledge will also come in handy when you shop for your home loan.
Know What Your Credit Score Is
Credit scores are a big factor in determining your interest rate. For example, let’s say you want to buy a $200,000 house with a 30-year mortgage. Your credit score is a so-so 650.
As of the end of 2020, you would likely pay about $120,000 in interest over 30 years. So you’d be putting out $320,000 for a $200,000 house.
But consider this: If you paid off $10,000 in credit-card debt, and your score might rise to 680. Now you’d shell out closer to $95,000 in interest. Congratulations! You’ll have saved yourself a cool $25,000!
Having a better credit score is like getting a Save 20% coupon from your lender. So take advantage of the lowest interest rates by raising your credit score. You can do that by:
- Paying off debt
- Paying bills on time
- Only open credit accounts you need
Determine Borrowing Limit
Mortgage lenders usually use two debt ratios to calculate how much money you can borrow.
First, your mortgage payment shouldn’t exceed 28% of your gross income per month. Second, your total debt payments per month shouldn’t exceed 36% of your gross income.
The ratio that has the lowest payment is what most lenders use. Many mortgage lenders offer higher qualification ratios so you can carry more debt. But those numbers are used most often.
Don’t Borrow Too Much
The lender may approve you for a $300,000 mortgage, but that doesn’t mean you should take the offer. Think about it: If you have a $25,000 limit on your credit card, is it smart to use it all? Not usually.
It’s essential to be certain your house payment will fit within your budget. The last thing you want with your fancy new house is to eat off the floor because you can’t afford furniture!
Put Your Documents Together
No matter where you get your mortgage, you’re going to need a bunch of financial documentation. The lender needs to see proof of your income, employment, identity, savings, investment accounts, and more.
It helps to speed things up if you collect all the documents you need before you contact lenders. Here’s what you’ll need to qualify for a loan:
- Last two years’ tax returns
- Six months of bank statements
- Two months of pay stubs
- Social Security number
- Driver’s license
- Contact information for your employer
- If you’re self-employed, you’ll need a profit-and-loss statement, bank statement, and two years of tax returns
Get a Mortgage Pre-Approval
Before you start looking at houses, it’s a good idea to know what you can afford. So obtain a mortgage pre-approval. It’s not required to get a pre-approval, but you’ll want one, anyway.
For starters, many real estate agents want to see a pre-approval before they show you houses. Agents work on commission, so they don’t want to spend their time showing properties to people who can’t get a loan.
It’s also nice to have a pre-approval letter for your peace of mind. Being pre-approved doesn’t guarantee you’ll be approved for the loan, but you’re well on your way.
Save For a Down Payment
The good news is you don’t need 20% down, though many people believe that’s the case. You will need to put some money down, of course; the days of 100% financing are long gone. But you can get a loan for as little as 3% or 5% down.
Nevertheless, it’s best to put down as much as you can so you’ll have a lower mortgage payment.
Don’t Forget Closing Costs
Every mortgage has closing costs. Typically, these average 2-3% of your loan principal. So if you borrow $200,000, expect to have to come up with $6,000 or so in closing costs.
However, you can ask the seller to pay some of your closing costs. That might happen if the property has been on the market for months or for some reason the seller needs to move it quickly.
With a little bit of homework and research, you can make sure your first-time home purchase is smooth sailing!