Buying a home is very exciting, but it is also a daunting task. You have to deal with making sure your credit score is in good shape, down payments, and the very intricate details of the mortgage. There is so much involved in the home buying process that you have no choice but to be prepared.
The first step toward preparedness is to ensure you have a good Realtor in your corner. You need someone who knows the area you are interested in so you can find homes that meet your specific criteria. Your Realtor should also be an important player throughout the buying process. When you have all your ducks in a row, the home buying process becomes easier.
Determine How Much House You Can Buy
Knowing how much house you can afford is one of the most responsible steps toward preparedness. It is good to go to the bank and get a preapproval so you know how much buying power you have. This saves time because you only look at homes you know you can afford. This helps the Realtor out, as well.
It’s OK to shop for your mortgage because you want to get the best rate. If you are committed to a specific bank, that is fine. Many people want to go with their own financial institution.
Prepare Yourself Financially
Financial preparation is a major part of the process. First, you have to check your credit score. A good credit score is going to get you a lower interest rate and increase your chances of being approved for the loan. It’s not impossible to get approved for a loan with a mediocre credit score, but you will need a larger down payment. The bank may even require you to have more money in savings to show that you have the capacity to make at least several months of mortgage payments.
If your credit needs work, pay down credit card balances and don’t use them two months before applying for the mortgage. It is good to get your debt-to-income ratio down as much as you can. Mortgage lenders want the ratio to be down to a certain percentage, even with the new mortgage payment factored in.
You also need to save money for the down payment and other expenses. The down payment can be between 3.5 and 20 percent. Simply save the money rather than invest it. It can be tempting to invest to grow money faster, but it is a risk you don’t want to take when the desire is to buy a home.
You also have to get your financial documentation together. This includes paystubs, W2s, bank statements, and statements involving other income. Self-employed individuals will need their last two tax returns.
Prepare for the Fees
There are also fees you need to know about. Lenders charge fees. There are fees for pulling your credit report, appraising the home, and preparing the mortgage documents. These aren’t reflected in the interest rate. You can take the option to pay “points” at closing so you can receive a lower interest rate. This is considered “prepaid interest” and is a difficult decision to make. However, it can make a lot of sense if you can afford to put down the extra money and you expect to have the mortgage well into the future.
Buying your first home is filled with excitement, but there is so much to consider before you even start looking. Start with your finances and then work your way to preapproval, working with a Realtor, and getting the mortgage you need at the best possible rate.