Your first home likely represents one of the most important investments of your life. Not only does homebuying impact your long-term credit and investment portfolio, but it also constitutes a decision to spend a significant amount of your life in that particular area on the chosen property.
Needless to say, you should not take any portion of the buying process lightly. One of the steps first-time home buyers frequently find themselves unprepared for is qualifying for and procuring a mortgage.
A trusted mortgage broker can help you navigate this process, but some simple preparatory steps can expedite the process. Follow these three guidelines as you prepare to purchase your first home.
1. Calculate What You Can Actually Afford
As you look through listings, you may be excited to find that you can afford predicted payments for a variety of properties. However, many first-time home buyers fail to factor in all the costs associated with buying and maintaining a property.
To get the best possible mortgage and long-term financial situation, calculate what you can really afford.
Include the following:
- Closing costs
- Down payment
- Monthly payments
- Property insurance
- Property tax
- Renovations and improvements
If you feel unsure that you’re considering all costs accurately, consult with financial and real estate experts.
If home payments will put a significant strain on your income, you should also calculate for commuting costs, utilities, and other predictable expenses. These costs won’t affect your ability to qualify for a loan, but they can have enormous impact on your ability to make payments in the future.
2. Determine Your Debt-to-Income Ratio
One characteristic that can factor heavily into whether or not you qualify for your desired mortgage is your debt-to-income ratio. Lenders use this ratio to predict whether or not you have the means to keep up with property costs for the foreseeable future.
This ratio simply refers to the amount of your mortgage loan in comparison with your income. The standard is that 28% or less of your monthly gross income should go toward housing costs.
Historically, the highest allowable debt-to-income rate is approximately 45%. However, a higher percentage ratio will make it more difficult for you to cover your mortgage payment in addition to utilities and other expenses.
Calculate the ratio early to know exactly where you stand with potential lending arrangements. The exact ratio your mortgage broker accepts may vary.
3. Know Your Credit Score
As with any other loan, your credit score also factors into your mortgage qualification. When you decide to buy a house, get a copy of your credit score. Look through the score history for any discrepancies or penalties. You’ll want to resolve these issues before you begin seriously discussing a mortgage with your lender.
Typically, securing a mortgage loan with a credit score of 620 or under is very difficult. If your credit score sits at 740 or above, on the other hand, you will likely qualify for the lowest available loan rates. If you have a low credit score, work with your financial institution to improve it before you attempt to qualify for a mortgage.
Regardless of your credit score quality, put all large credit purchases on hold during the home-buying process. These large credit changes, such as new automotive loans, can alter your debt-to-income ratio, reducing the size of the mortgage a lender may offer you.
Reach out to a mortgage broker early in the process so you stay informed on your mortgage type and rate options. Communicate clearly with your mortgage broker, real estate agent, and other real estate professionals involved in this process to ensure that everything proceeds as smoothly as possible.
Use the tips listed above to start your first home-buying experience off on the right foot!