You have decided to buy a house, but don't have enough money to make the purchase. Your situation isn't unique, few people have enough cash on hand to buy a home. However, banks and mortgage companies offer loans, called mortgages, which provide people with the difference between what they have saved and the price of the home they wish to purchase.
While many people find the home they want and then look for a mortgage, it's a good idea to look at your mortgage options first. It's important to know how much you'll be able to borrow before you find a house.
Check your credit score
The first place to start is reviewing your credit report and getting your credit score. Check with your bank or your credit card companies as they'll often provide these for free. And each of the three national credit rating agencies, Equifax, Experian, and TransUnion are required to provide you with one free credit report per year.
You can request a report by going to annualcreditreport.com, or by calling the credit reporting agencies. If you're planning to purchase the home with your spouse or another person, they need to request and review their credit reports as well. Review your credit reports for any incorrect information and, if you find any, contact the credit reporting agency to request a correction.
Check your credit score, which is a number between 300 and 850. A higher score not only improves your chances of getting a mortgage loan, but may also help you qualify for a lower interest rate.
Don't wait until you have found the home you want before looking for a mortgage. This will give you time to improve your credit score by reviewing your credit report for accuracy, paying your bills on time, and reducing your balances on your credit accounts.
Know your debt-to-income ratio
All of your monthly payments toward your existing and future debts should usually be less than 43% of your monthly income. However, the amount you qualify for based on this calculation may not be suitable for you. You should review your personal situation and work with a financial advisor to decide how much you can comfortably afford. We'll verify your income during the application process. To calculate your debt-to-income ratio, divide your monthly payments by your monthly gross income.
Use this formula to get an idea of your debt-to-income ratio: A/B = debt-to-income ratio:
A= Your total monthly payments (such as credit cards, student loans, car loans or leases; also include an estimated mortgage payment).
B= Your average monthly gross income (divide your annual salary by 12).
For example, if your monthly income is $5,000 and your monthly debts and future expenses are $1,000, your debt-to-income ratio would be 20%.
If your debt-to-income ratio is more than 43%, you still may be eligible for a mortgage if another person (such as a spouse, relative or someone who lives in the home) completes the application with you. We'll ask you for the co-applicant's information during the application process.
Starting the process early might give you time to pay off some credit card balances or smaller loans, which can reduce your debt-to-income ratio and possibly improve your credit score.
Your down payment
Putting a higher amount of money down may lower your interest rate and build equity in your home quicker. If your down payment on a conventional loan is less than 20%, you must pay private mortgage insurance (PMI), which covers the lender if you stop paying your mortgage and default on your loan. The yearly cost of PMI is about 1% of your outstanding loan balance and is added to your monthly mortgage payment. You can request to have PMI eliminated once your outstanding balance reaches 80% of the original loan amount.
Some loan types may require less of a down payment, such as only a 3% to 5%. Federal Housing Administration (FHA) loans require a 3.5% down payment, while the U.S. Department of Veterans Affairs (VA) loans may not require any money down.
Going to a lender to get pre-qualified
Once you feel you're ready to buy a house, getting the right mortgage is the next important decision you'll make. To be sure you're getting the best deal, talk with multiple lenders and compare their mortgage interest rates and loan options see types of mortgages.
With pre-qualification, the loan officer will ask for information about your income, job, monthly bills, amount you have available for a down payment, and possibly some other information. They will then provide you with an estimate.
Finalizing your mortgage
Once the seller has accepted your offer, you can move forward with completing the mortgage process and taking possession of your new home. The first step is to decide which lender you want to use and the type of mortgage that's best suited for you.
With a fixed-rate mortgage you'll always know what your monthly principal and interest payments will be. Fixed-rate mortgages offer 10–, 15–, 20–, 25– or 30–year terms. An adjustable-rate mortgage (ARM) can offer lower early payments than a fixed–rate mortgage. An ARM offers a 30–year term with a fixed interest rate for 5, 7 or 10 years (based on the chosen product), and becomes variable for the remaining loan term, adjusting every year thereafter.
You can save in interest over the life of your loan by choosing a 15-year term over a 30-year term. Your monthly payment, though, will be higher.
Your lender will order an appraisal to determine if the purchase price of the home is comparable to similar homes in the area. The appraiser will examine the house and then compare it to similar homes that have recently sold nearby. While waiting for closing, it is essential that you don't do anything that changes your financial situation, such as applying for new credit, changing jobs, or getting behind on your current credit payments.
Once your mortgage loan is approved, your lender will set a closing date.
Three business days before closing you'll receive a Closing Disclosure. This document itemizes all of the funds and costs paid by the buyer and seller either at or before closing. This document will show the loan amount, interest rate, loan term, origination fees, title insurance, deposits for property insurance and taxes, homeowners insurance and any other fees. Review the Closing Disclosure carefully and compare it to the Loan Estimate you received to make sure there are no surprises.
You'll receive a Final Closing Disclosure during your closing. This is the final version of the document you received 3 business days before closing. Check for any last minute changes.
The most common closing fees are:
- Appraisal fee—For the estimate of your home’s market value
- Attorney fees—For any legal representation to prepare and record documents
- Inspection fee—For examining for structural problems; also for termites, lead paint in older homes and your roof
- Origination fee—For processing and administering your loan
- Underwriting fee—For reviewing your mortgage application
- Title fees—For the search to verify there are no tax liens on the property and for insurance to protect you if a problem is discovered
Deciding to buy a home is a significant investment and not one to be taken lightly. Taking time to understand how to put yourself if the best financial position for pre-qualification and approval is an essential first step. Let us help make the buying process easier, allowing you to enjoy the home buying experience.