Gone are the days when just about every John Doe off the street could qualify for a mortgage; our entire country via our economy is paying the price from that foible, no less. Buying a home is, and always has been, a huge commitment, not to be taken lightly. You should be educated and prepared before you buy. Here are some tips that may help:
1. Realistically assess what you should afford; not just what you can afford! The rule of thumb most lenders use is that your mortgage payment should be no more than 28% of your gross monthly income. Other debts, such as credit cards or other installment-type loans, when added to the mortgage payment, should not exceed 36% of your gross monthly income. But you need to go further than just these boilerplate numbers and don’t automatically assume that because a bank is willing to give you that much money, that is what you should spend. Are you buying an older home? You need to budget for fix-up and repairs. Are you the type who has to have everything new in the home? More expenditures. A good rule of thumb is to set aside $100 – $200 a month for home repair expenditures.
2. Know your credit score and keep it high. With changes in mortgage lending including widespread use of automated underwriting software, things like credit scores , which were not considered as crucial in the past, are now taken into account. How high your credit score is will directly affect how much you will be able to borrow, and at what interest rate. Utilize your ability to receive a free annual credit report each year to ensure the information on your report is accurate, and hopefully positive!
3. Enlist the help of qualified professionals. OK, I bought and sold my first several homes “by owner” and did ok with it; but now that I am a licensed realtor, I look back and wonder if I got the best deals (and thank my lucky stars I had simple transactions). Look to trusted friends and family for recommendations for a good agent. Experience is nice, but consider also that a newer agent is sometimes more motivated, still willing to learn and go the extra mile for you, and not necessary simply “commission driven”.
4. Shop around for your home loan. Local banks and credit unions are a good place to start, traditional mortgage brokers if you have less than A credit. You can do a search online using websites such as Lendingtree.com or LowerMyBills.com, where buyers submit their financial information and receive loan offers via email from lenders and brokers. Make sure you ask the pertinent questions so you can compare apples to apples: Are there prepayment penalties? (you want a resounding NO); an estimate of all associated fees (transaction, settlement, closing costs, etc.). Assume everything is negotiable. A bunch of information on this subject located here.
5. Once you decide on a Lender, get pre-approved (not just pre-qualified). With a preapproval, lenders pull a credit report, verify income, and based on the information essentially pre-underwrite the loan to determine buyer qualification. This is the most effective method to show prospective sellers that they have a qualified buyer, and you are more likely to be awarded the contract if they are convinced you are low risk for failure.
6. Consider locking in an interest rate. Most lenders will allow buyers to lock in their rate once they are approved for a loan. This will protect you if interest rates increase while the loan is being process. If rates fall, you can negotiate a compromise if possible.
Well, really we could go on and on about this subject, but these are some of the most important things to consider. Love to hear some more ideas if you have them; hey, we’re just a credit site, after all!!