Three Steps to qualify for a mortgage and prepare to buy a home
For many homebuyers, applying for a mortgage is an essential but often confusing process. Whether you are shopping for your first home or your fifth, knowing these three key steps can make preparing you for your home-buying experience a breeze.
Step 1: Qualifying for a Mortgage
There are three major components to applying and qualifying for the mortgage:
Your Credit Score:
One of the first things you should do is check your credit score across the three major credit bureaus. Typically, the lower your credit score is, the more likely it is that your mortgage interest rate will be higher. This is because a lower score indicates a higher risk to the lender when it comes to repayment. You can obtain a free credit report once per year.
For many conventional loans, try shooting for a credit score of at least 650, though various lenders and loan types may all have different requirements.
If you need help understanding your credit report or are looking for how to increase your credit score, contact your financial institution or other trustworthy resources. Increasing your score can take some time, so it helps to start as early as you can.
The Down Payment
A down payment represents a percentage of the total purchase price and can help offset risk for the lender you’re asking to borrow from. Down payments also reduce the total amount you need to borrow to purchase the home. Generally, you’ll need to put down at least 5 percent of the home’s purchase price with a conventional loan, but first-time homebuyers may be able to put down as little as 3 percent.
Debt-to-Income Ratio
Your debt-to-income ratio shows how much of the money you earn goes towards paying debt. This ratio is calculated by taking all the monthly minimum obligations on your credit reports and adding those to the total proposed mortgage payment, including principle, interest, taxes and insurance, and then dividing that by your total monthly gross income.
As a rule of thumb, try aiming for a debt-to-income ratio of around 43%. Of course, requirements may vary across different financial institutions and some lenders will allow a higher ratio.
Step 2: Getting a Pre-approval Letter
A pre-approval letter from your lender lets you know how much money you can borrow to help narrow down what you can afford to buy. Having your pre-approval in hand before touring house shows the seller that you’re serious about buying and are ready to start making offers.
Step 3: Find a Real Estate Agent
After securing a pre-approval letter, you’re ready to begin working with a real estate agent to schedule tours and find your (in-budget) dream home! One way to find a realtor is through the HomeAdvantage® program, which can offer savings on closing costs.
Once you find “the one” and the offer your realtor submits is accepted, your lender will instruct you through the rest of the mortgage process. From there, you’re well on your way to purchasing your home!
Conclusion
Homebuying can be a complicated process filled with decisions that can cost you more money now or in the long term. That’s why it’s important to work with experts you can trust during the homebuying process. Doing so can help you save money and reduce stress during what should be one of the more exciting milestones in life.