So you’ve decided to buy a home this fall. Congratulations! There are several benefits of autumn homebuying, but before you start thumbing through online listing photos, there are a few educational and financial steps to complete to get yourself in the best shape for a mortgage and homeownership, in general.
Here’s how to get on the right track to becoming a first-time homeowner this fall.
Keep (or Get) Your Credit Score in Good Standing
Your credit score is one of the most important factors in your mortgage approval, because it’s used to determine your risk as a borrower. If you plan to buy a home in 2016, here are a few do’s and don’ts for getting mortgage-ready credit:
- Do pay all of your bills on time. Even one reported late payment can drop your score anywhere from 60 to 110 points, depending on your credit history.
- Do check for errors on your credit report. The Federal Trade Commission estimates that one in four credit reports contains a serious error.
- Don’t apply for new lines of credit or any other types of loans without consulting with your mortgage banker first. New credit inquiries can drop your score and taking on more debt can lower your mortgage affordability.
- Do keep other bills in good standing, like cell phone bills, rent and utilities. Some loan types allow borrowers to use non-traditional sources of credit if their traditional credit history is not sufficient.
- Don’t pay off any old collections until you get the go-ahead from your mortgage banker. If you pay off an old collection, the old discrepancy is brought to the present and can tank your score. Collection payments are usually made a condition to close.
- Do keep balances low on revolving credit (i.e. credit cards). Aim to keep balances less than 30% of your credit line. Less than 10% is ideal.
Even if you are eligible to purchase with a loan that finances 100%, you’re still going to need some reserves. Closing costs typically range from 3 to 5 percent of a home’s purchase price, but you may be eligible for a lender credit, which rolls all or some of your closing costs into your home financing.
Still, you may need some cash for new furniture, new appliances, paint, hiring a moving company and making immediate home improvements.
It’s also a good idea to set aside some cash for home maintenance once you actually become a homeowner, since you won’t have a landlord to call to finance and repair maintenance issues. A good rule of thumb is to set aside 1 to 3 percent of your home’s purchase price each year to cover these items.
Pay Off Some Debt
Most lenders recommend that your mortgage payment, including principal, interest, taxes and insurance (both mortgage and homeowners), be less than 28 percent of your gross monthly income.
Your mortgage banker will also analyze your debt-to-income ratio, which includes other monthly obligations like credit card payments, auto and student loans, alimony, child support, etc. along with your principal, interest, taxes and insurance. Lenders ideally want this to be at or below 36 percent of your gross monthly income.
Figure Out Your Best Loan Option
Finding the best loan option depends on your financial standing and your homeownership goals. Do you have a lot of money set aside for a down payment or will you need a loan option with a small down payment requirement? Are you wanting to buy a new home or looking for a fixer upper?
Talking to a mortgage banker once you decide you want to purchase a home is essential because of this step. Knowing your loan options and their eligibility criteria will also help you set down payment, credit score and debt pay-down goals.
Discuss Your Homebuying Budget
A home is likely the largest purchase you will make in your lifetime. While your lender will give you an amount you could be approved to borrow, you have to determine what is affordable for you. Keep in mind the costs of home maintenance, improvements and other homeownership expenditures. Budget for what you are comfortable spending now, not 10 years from now.
Meet with a Mortgage Banker
Meeting with a mortgage banker should always be the first step in homebuying. To get a pre-approval, your mortgage banker will run your credit score and compile a loan application with the information you provide regarding income, assets, employment, etc. The lender will analyze this information and issue a decision on whether or not you are eligible for a loan.
Want to get a competitive edge in a fast-moving real estate market? Talk to one of our mortgage bankers about getting a loan commitment, which gives you cash-offer power, peace of mind and the ability to streamline the financing process when you find a home to purchase.
Find a Great Real Estate Agent
The summer housing market is shaping up to be competitive as homebuyers scramble to take advantage of low mortgage rates. This is why having an experienced real estate agent is essential. Start looking for an agent by asking friends, family or your mortgage banker for a referral. Since you’re a first-time homebuyer, you’ll want to have an agent who is experienced in your location and price range.
When you find a prospective agent, ask them some questions. Is this their full-time job? How many clients are they currently working with? An agent who is only part-time may not have as much market knowledge as a full-timer, and an agent who currently has a mass of clients may not be able to give you their undivided attention.
For more information about becoming a first-time homebuyer, download our free Mortgage 101 Handbook, which includes everything you need to know about the homebuying and financing process.