While mortgage rates are no longer at their all time low, overall they are still very attractive. Many people are considering purchasing a home and entering into a mortgage. For first-time home buyers, the entire process of buying a home and applying for a mortgage can be an overwhelming process. In this post, I will focus on the mortgage aspect of the home purchase, with emphasis on the first-time home buyer.
The preparation for obtaining a mortgage literally starts years before you are ready to obtain the mortgage. Beginning when you are 18 years old, you start building a credit history. A person’s credit history is one of the most important factors in being able to get a loan. Your credit score helps determine if you can be approved for a loan and can impact what your mortgage rate will be. It is important to have the best credit score possible.
As soon as you obtain credit (credit card, car loan, student loan) it is imperative that you make your payments when they are due. You also need to make sure your cell phone payments are also paid on time. If you incur medical bills, make sure they are paid in full. If you cannot pay them in full, you need to make payment arrangements. Simply making payments on your medical bill without a formal arrangement, may not be enough. If those bills are not paid on time, it can impact your ability to get a mortgage.
Mortgage lenders obtain a tri-merge credit report on you. That means they obtain a credit report for the three main credit bureaus (TransUnion, Equifax and Experian) and merge them into one report. You can obtain a free credit report every 12 months from each of he three credit reporting agencies. Obtain the report from annualcreditreport.com.
The next part of the approval process concerns the amount of your down payment. This is another area that you need to start planning for well in advance of buying a house. A homebuyer can obtain a conventional loan with as little as 3% down, an FHA loan with as little as 3.5% down, and some VA loans have no down payment requirement. If you need assistance with this, there are grant programs that can help with the down payment if you qualify. Most of those grant programs are income driven and are forgivable over time. VA loans are for those who served in the military. FHA and conventional loans do not have that restriction. However, for conventional and FHA loans, if you put down less than 20%, there is an extra cost for FHA insurance or private mortgage insurance (PMI) for a conventional loan. Basically, that is the cost to induce the lender to make a loan to you with a smaller down payment. It is typically paid monthly as part of your mortgage payment. Note that if you obtain an FHA loan and have 20% down, you will still have to pay for FHA insurance.
The last major point to consider when getting approved for a mortgage, is the debt to income ratio. That ratio compares your gross monthly income to your total monthly debt payments (auto loan, credit cards, student loans, personal debts). They do not include cell phone payments, life insurance or car insurance payments in the debt to income ratio.
Even though your ratios are good enough to qualify for a mortgage, you need to look at your whole financial picture and use your own budget to determine what you are comfortable with.
It is best to have your debt to ratio income at 45% or less. The lower the better. VA and FHA loans can be approved at a slightly higher ratio. Even though your ratios are good enough to qualify for a mortgage, you need to look at your whole financial picture and use your own budget to determine what you are comfortable with.
In summary, first-time home buyers need to plan well in advance of purchasing a house. The three areas you need to prepare for are:
- Is your credit good? Make sure you have paid your bills on time.
- Save money for a down payment, closing costs and reserves.
- Consult your budget to make sure your new mortgage payment is one you are comfortable with and can maintain for the entire length of your mortgage.
The last point is to find a mortgage lender (the person and the company) that you are comfortable with and who will look out for your best interests.
You are now ready to get your mortgage pre-approval letter and go house hunting your way!
–Dave–
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