As the saying goes, your home is the biggest purchase you’ll ever make. This saying may be a cliché, but it’s also true. For most of us, it’s also a purchase that won’t be made with cash. The same way you likely have to obtain a loan for a new car, you’ll need to apply for a mortgage to get that dream house you’re looking for. While the purchase process will be a little bit different for every buyer, there are certain stages you should go through to ensure that you’re getting the best possible deal and that you’re not getting in over your head.
Before you even begin looking for a mortgage lender, you’ll want to get a handle on your credit reports. The mid 700’s should be a goal before looking for a lender. Paying your bills regularly, maintaining a good credit history by not opening or closing new cards, and keeping balances low are great ways to start improving your credit. If you are unable to get your score that high, FHA loans are a good option to discuss with your mortgage lender. The Federal Housing Administration, or FHA, loan program was created to help Americans buy homes following the Great Depression, and it remains a popular choice for people who need an affordable mortgage option. Mortgage lenders make FHA loans, and those loans are in turn insured by the Federal Housing Administration. This allows for more flexibility with down payment amounts, debt to income ratio, and credit ratings. For all of these reasons and more, the FHA mortgage is a popular choice for first time home buyers.
What to do next:
The next thing you should do on your journey to homeownership is sit down and figure out exactly how much house you can afford. Remember, a $300,000 home doesn’t actually cost $300,000. When you factor in interest to that initial loan amount, plus your closing costs, your monthly mortgage payment may be a good deal higher than you initially thought.
For example, if you were to put 10% down on a $300,000 home and choose a 30-year mortgage with 4.33% interest you’ll pay $213,000 in interest, making that home more than half a million dollars. Now, if instead, you chose a 15-year loan, while your monthly payment would be higher, you’d save $115,000 in interest. That’s money you could use for renovations, or to put back into the principle of the loan. So when you’re using those online mortgage calculators, remember to try different loan lengths and see just how much you could save over the life of the loan.
Before talking to a mortgage lender, it’s important to shore up your savings. Not only will having more savings make you more likely to get better mortgage rates, but it will lower your monthly debt. Why? Because if you put down less than 20% of a home’s cost initially, you will also have to pay for private mortgage insurance in case you default on the loan.
All of these activities are good ideas to help you prepare for house hunting. Whether you’re a first time home buyer or you have experience dealing with the process, preparing yourself for what’s to come by addressing your credit, figuring out what you can afford, and saving up a down-payment are all good ideas when preparing to speak to a mortgage lender and committing to improving them can really impact your bank account in the long-term.
In part two of this post, we’ll go over the process of actually getting a loan, different mortgage options, and the process you’ll go through when you actually buy a home.