If you’re on the market for your first home, the process may seem pretty overwhelming, especially getting your first mortgage.
Nonetheless, the more you learn about mortgages, the better prepared you are, so here are 15 things you should know that can get you ready for the application process and potentially save you thousands of dollars.
Know your credit score and what it means to your mortgage.
Your credit score can make a big difference in how much home you should afford and how much interest you end up paying.
For example, if you get a $200,000 mortgage and have a FICO score of 750, you can expect to pay $138,324 in interest over the 30-year mortgage term as of this writing.
On the other side, with a score of 650, you can expect to pay approximately $35,000 more.
MyFICO.com has an outstanding calculator to tell you the cost of your credit score. Before starting the homebuying process, it may be a good idea to check your credit report and the FICO score and, if necessary, check the damages.
Estimate how much you could borrow
For fact, borrowers use two separate debt ratios to decide how much you can borrow.
The short version is that your monthly housing payment (including taxes and insurance) should not exceed 28 per cent of your pre-tax income, and your total debt (including your mortgage payment) should not exceed 36 per cent.
The ratio of the lower payment is what the lender will use. Many lenders have more generous qualification ratios, but they are traditionally the most common.
Don’t overstretch yourself
If you have a $20,000 limit on your credit card, that doesn’t necessarily mean you should spend $20,000 on card purchases.
The same logic is true when it comes to mortgages — only because you can qualify for a certain amount of mortgages doesn’t mean you have to maximize your budget.
Be sure that your new mortgage payment not only meets the standards of your bank, but also your budget.
Get the paperwork in order
When you apply for a mortgage, you will need to document your income, employment situation, identity, and more, so it might be a good idea to start collecting the necessary documentation before you go to the lender’s office.
This is not an exhaustive list, but you should locate your last few tax returns, bank and brokerage statements, pay stubs, W-2s, driver’s license, Social Security card, marriage license (if applicable) and contact numbers for the HR department of your employer.
Here’s a more comprehensive list that can help you figure out what you’re going to need.
Get your mortgage pre-approval before you start shopping
You don’t need a pre-approval to start looking at the houses, to be clear. However, given that pre-approval is essentially the same as full mortgage approval, without a specific home in mind, it can be an extremely valuable shopping tool.
Specifically, if you submit a pre-approval along with your offer, it tells the seller that you are a serious buyer who is unlikely to encounter any difficulties in obtaining financing.
One caveat: pre-approval and pre-qualification are two things. Pre-qualification is based solely on the information you provide and is not a commitment to lend money, so it does not carry nearly as much weight.
How much of your down payment do you have?
The mortgage industry norm is a 20% down payment. Nevertheless, you may be able to get a conventional mortgage with significantly less money up front — as small as 3% of the purchase price in many situations.
Specialized types of loans, such as VA and USDA mortgages, do not require any down payments for those who qualify.
The argument is that while a higher down payment will lower your monthly housing expenses, you may be able to get to a home with less savings than you expect.
Closing costs do not have to be attributed to your out – of-pocket expenses
Generally speaking, you should estimate the closing costs to be around 2 percent-3 percent of your mortgage principal amount. Therefore, on a $200,000 mortgage, you can expect a bill of up to $6,000 to be paid when you get the keys.
Moreover, it is perfectly acceptable to deal with the seller-paid closing costs in order to reduce your out – of-pocket costs.
In other words, if you want to bid $195,000 at home, you can give $200,000 and ask the seller to pay up to $5,000 in closing costs for you.
This may be an excellent strategy for first-time buyers with minimal savings to boost their ability to get a mortgage.
Get a loan from FHA if your credit history isn’t perfect
Usually, you will need a minimum score of 620 FICO to apply for a conventional mortgage, and it may be difficult to qualify for a score that is similar to the minimum if your other credentials are not outstanding.
The alternative is the FHA mortgage, which is intended for applicants with credentials that do not meet the standards of traditional lenders.
The downside is that FHA loans can be significantly more expensive, but they can be a valuable resource for people who would otherwise not be able to qualify for a mortgage.
Mortgage insurance program, if applicable
If you’re putting less than 20% down on your mortgage, you’re probably going to have to pay for private mortgage insurance, or PMI, so be sure to budget for that when you’re shopping.
Mortgage insurance premiums can vary significantly based on your income, the length of your mortgage, the size of your down payment, and other factors.
However, you can add a significant sum to your bill, so be sure to take that into account.
Shop around for a low price
One common mistake among first-time buyers and repeat buyers is to accept the first mortgage offered.
A seemingly small difference in rates can save you thousands of dollars over the course of a 30-year mortgage, and as long as all of your mortgage applications take place within a short period of time, additional inquiries will not have an adverse effect on your credit score.
Don’t think about the smaller creditors
Don’t just test the big national mortgage lenders when you’re shopping around. Many regional or local banks can offer unique loan services, especially for first-time homebuyers.
For starters, the young couple who bought a house from me a few years ago used a 100% lending plan from Regions Financial, which included no mortgage insurance for first-time buyers with outstanding loans.
Think of a 15-year mortgage
If you can afford higher payments or are willing to buy a cheaper home, a 15-year mortgage can save you thousands of dollars in interest and allow you to own your home free and clear in half the time.
Fifteen-year interest rates are about one percentage point lower than 30-year interest rates, and you might be surprised how much the combination of a lower rate and a shorter amortization period can save you.
Set or adjustable?
For most homebuyers, a fixed-rate loan is the best option, particularly in a low-interest market like the one we’re in now.
However, if you don’t plan to be in the house you’ve been renting for more than a few years, a flexible mortgage rate can save you thousands of dollars in interest.
For starters, if you’re buying a home to stay in for four years of graduate school, an adjustable mortgage rate with a five-year introductory rate term could be a smart idea.
Wait for a few troubles before closing
In a perfect world, you might apply for a mortgage, have your house checked, then show up at the closing table a month later to wrap things up.
It happens often, but it’s rarely that fast. More often than not, there are problems along the way.
As an example, when I bought my first home, my lender contacted me three days before closing to let me know that my credit score had fallen to one point below the interest rate level.
And I would either have to take action that would automatically raise my credit score or tolerate a substantially higher interest rate.
The solution required me to pay off one of my credit cards and fax proof of it to the lender — not an impossible situation, but certainly a problem when I was told it had to be done right away and I was at work.
Once you pay, do not use your credit until you have the keys in your pocket
Continuing on my last point, it’s a good practice not to use your accounts for anything out of the ordinary between the time you’re approved for your mortgage and when you actually close your home.
Lenders would usually withdraw your credit at least twice — when you request initially and immediately before closing (as has occurred in my situation).
If there are any significant differences between the two, such as a new account or a significantly higher debt balance, this could lead to delays and could even disqualify you from the mortgage.
Be safe — just leave your credit alone until you have signed your closing papers.