Buying a home is one of the most significant steps you will ever take in your life, and your home is probably the largest investment you’ll ever make. Even though a home is something everyone needs, the home buying process is far from simple. Every year, potential homebuyers find out the hard way that buying a home is a job in itself.
Believe it or not, finding the home you want to buy is probably the easiest part of the entire process. Finding a way to pay for the home is the challenging part. Continue reading to learn which three things you need to do before applying for a home loan.
1. Work on reducing your debt and improving your credit score.
If you ask experienced homeowners, they’ll tell you that the most critical aspect of getting a mortgage with reasonable interest rates is to improve your credit. In the eyes of lenders, your credit score is the ultimate measure of your trustworthiness as a borrower. Even if you have a high income, having a low credit score will hurt you when you begin applying for home loans.
Having an excellent credit score opens up a world of options when you begin looking for lenders. However, even with excellent credit, you should shop around to get the best rate on your interest.
If your credit score is only fair or poor, there are still ways you can lower your interest rate on your mortgage. With an adjusted-rate mortgage, you get a lower interest rate for the first 5-7 years of your home loan. However, after the initial fixed-rate period, your interest rate will fluctuate.
In addition to working on your credit score, you should work to decrease your debt to income ratio. While your credit score is indicative of your trustworthiness as a borrower, your debt to income ratio expresses to lenders your ability to pay your mortgage. The lower your debt to ratio is, the more likely it is that you’ll be able to afford your mortgage payments.
2. Save money for a down payment.
Saving enough money for a down payment is a critical step in getting a home loan. Mortgage lenders want to see that you’ve put work into preparing to buy a home, and they don’t want to take all the risk. When you make your down payment on your new house, you instantly get home equity, meaning you have a financial stake in the home.
The rule of thumb is that you need to save up at least 5% of the home’s value as a down payment. For instance, if you’re buying a home for $400,000, you need to save at least $20,000. However, if you get a Federal Housing Administration loan, your down payment could be as low as 3.5% of your home loan.
One way to save for a down payment without busting the budget is to figure out what you can afford to pay monthly for your mortgage payments and save that amount every month for a year. The rule of thumb is that your mortgage payments should be no higher than 1/3 of your monthly income before taxes.
3. Get all of the necessary paperwork.
Lenders do their due diligence before issuing home loans. They’ll want to see your most recent pay stubs, bank statements for the past few months, and other information like credit card debt and other forms of income. In other words, lenders want to be sure that you make enough money and are responsible enough with your money to take on a mortgage.
When buying a home, you want to do everything you can to improve your chances of getting a mortgage at a decent interest rate and expediting your process. If you work on your credit score, save wisely, and keep track of your financial records, you can significantly ease the home buying process.