Avoid Paying Too Much For a Mortgage
Home ownership is a core component in establishing and living the American Dream. For most people, the ambition to acquire their own home is their most important goal, surpassing all others, and it is the primary influence and motivation for how they conduct their business, financial, and personal lives.
Most people will have to finance their home ownership by obtaining a home mortgage from a lending institution. The purpose of this article is to guide a potential homeowner through all the steps that must be taken in order to qualify for a home mortgage loan.
1. FIND THE RIGHT HOME FOR YOU
Before a prospective homeowner can begin the quest towards purchasing a home, there are many factors to consider, most of which are determined by some basic facts and assumptions.
How big is your family? What neighborhoods are you willing to consider?
Are schools a factor? Is a single-family home a requirement or is a condo an option?
Based on your income and assets, what kind of home can you afford?
For some home buyers, living in a specific neighborhood takes precedence above all else, whereas for others, the home itself is more important. In a perfect world, you’d find the ideal home, in your neighborhood of choice, at a price you can afford, but realistically, most people will have to make some compromises.
Make a list of the features you want in a home– the number of bedrooms, a fenced yard, granite countertops, a garage, etc.–and then rank them in terms of priorities. Decide whether the house or the neighborhood matters more to you, or whether you’re willing to make a longer commute in order to own a home with a larger lot.
These kinds of decisions need to be made before beginning the search for your new home. Working with a real estate professional is a great resource to view estimated home values, school information, crime stats, and other important considerations. Based on your preferences a real estate agent can find the homes that fit your wish list saving you time, frustration and money. Finding the home you want quickly is important because in today’s market homes are selling very quickly. Don’t place too much value on the estimate” because often real-world prices are different. We are seeing multiple offers and often over “list price”.
2. SAVE FOR A DOWN PAYMENT
Nearly all mortgage loans and lenders require some amount of cash as a down payment. The amount you’ve set aside for this will determine the kind of mortgage you qualify for. It will also impact how much you can afford to borrow for a home. VA loans are usually approved with no money down. If you are or have served in the military, a VA loan is the perfect way to buy a home.
Consider Down Payment Assistance
If you’re searching for “how to buy a house” you’ve probably already put away some savings so onward to step 3.
But it’s important to note there are more than 2,400 home buyer assistance programs in the United States that offer down payment help in the form of grants, low-interest or deferred loans, forgivable loans, and other programs. Help with closing costs is also available.
3. CALCULATE WHAT YOU CAN AFFORD
Consider Your Income
Many banks will require that your monthly costs can’t exceed a percentage of your income (for example 28%).
That means if you earn $50,000 per year, your total monthly housing costs should not exceed $1166 (28% of your monthly income). But it’s more than just your income that the bank will look at…
Consider Your Debts
In addition to your income, if you have recurring debts, the total monthly payments on existing debt plus new payments for your mortgage may not be allowed to exceed a certain threshold (for example 41%).
Using the example above that would mean that if your monthly debt payments are in excess of $541 per month (bringing your total debt of $541 + $1166 = $1708 or 41% in total)
Consider The Down Payment
Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but there are loan options where you can put down less.
However, you should be aware that with a smaller down payment, you’ll likely be required to pay for mortgage insurance, and your loan application will be subject to greater scrutiny.
Here are several loan types that allow a smaller down payment amount:
FHA: The Federal Housing Administration offers 3.5% down payment mortgages through participating lenders. FHA loans are also easier to qualify for and have slightly lower rates than conventional mortgages.
GSE-backed loans: Fannie Mae and Freddie Mac are both currently insuring 97% loan-to-value loans. That enables lenders to offer 3% down payment mortgages to qualified buyers.
USDA: Home buyers in rural and suburban areas may be able to qualify for home loans offered by the U.S. Department of Agriculture. USDA loans offer low rates and 100% financing.
VA: Eligible veterans and their spouses can qualify for Veterans Administration loans. See if you qualify for a VA loan.
There are all kinds of online calculators that can help you determine what your down payment amount will be based on the type of loan, the price of your house, your location, and credit rating.
But if you don’t want to do all the math yourself, you might simply move on to step 4 which is arguably the most common step people skip!
4. COMPARE MORTGAGE LENDERS
One of the number 1 mistakes made by home buyers is NOT shopping around for a mortgage! Your Realtor knows a guy, or maybe your parents used a mortgage broker in the past.
Don’t fall into this trap. It can take some time, but you’re going to have your mortgage for the next 30 years, so it’s really worth prioritizing.
Also, don’t assume you can shop one mortgage lender today and another one next week. There is market volatility in the mortgage market so you really need to sit down and get ready to contact a few banks. If you do it now, odds are good you can lock in your rate for a while.
To expedite this process, LendingTree allows multiple banks to compete for your business.
Once you set aside some time to make a few inquiries, tell the truth. Mortgage quotes can vary based on your down payment, credit history, income, assets, and debt.
Fill out the form with honest information to get a reliable quote. They’re going to verify this information anyway so putting in misinformation won’t help you at all in the long term.
Qualifying for a mortgage loan in order to buy a home can often be a stressful and strenuous process. In the end, the pride, security, comfort, and freedom that comes from owning your own home makes all the effort worthwhile.
5. GET PRE-QUALIFIED
By this point, you should have a pretty good idea about what kind of home you’re looking for, and the neighborhood you’d like to live in.
You also know how much you’ve saved for a down payment, which in turn will determine the type of loan you should pursue. If you’ve compared a few rates you should request a pre-qualification letter.
All mortgage companies offers what they call “verified approval” after they verify your income, assets and credit which can give you the same strength of a cash buyer.
In today’s competitive housing market, it is not uncommon for a seller to receive multiple offers on their home. Having a pre-qualification letter in hand could be the difference in your ability to purchase the house you desire. It proves to the seller that you are serious and provides you with bargaining power which could give you an advantage over other buyers.
Locking Your Rate
Most lenders can lock your rate for up to 90 days while you find your new home.
What’s so powerful about locking in your rate is that in today’s market, interest rates may change between now and when you are ready to close on your home.
If you received a verified approval with a lender then once you’ve found your new house, if rates are up, your rate stays the same. If rates have dropped, you automatically get that new rate. Either way you win!